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FIRST BANCSHARES INC /MS/ - Quarter Report: 2017 September (Form 10-Q)

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2017

Commission file number: 000-22507

 

THE FIRST BANCshARES, INC.

(Exact name of Registrant as specified in its charter)

 

Mississippi 64-0862173
(State of Incorporation) (IRS Employer Identification No)

 

6480 U.S. Highway 98 West, Suite A, Hattiesburg, Mississippi 39402

(Address of principal executive offices)           (Zip Code)

 

(601) 268-8998

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  þ               No  ¨

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  þ               No  ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.

 

Large accelerated filer ¨ Accelerated filer þ
Non-accelerated filer ¨ Smaller Reporting Company ¨
(Do not check if a smaller reporting company)  

 

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ¨                No  þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common stock, $1.00 par value, 9,179,901 shares issued and 11,192,401 outstanding as of November 3, 2017.

 

 

 

   

 

 

PART I - FINANCIAL INFORMATION

 

ITEM NO. 1- FINANCIAL STATEMENTS

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ In Thousands)

 

   (Unaudited)   (Audited) 
   September 30,   December 31, 
   2017   2016 
           
ASSETS          
Cash and due from banks  $63,668   $31,719 
Interest-bearing deposits with banks   29,649    29,975 
Federal funds sold   -    425 
           
Total cash and cash equivalents   93,317    62,119 
           
Securities held-to-maturity, at amortized cost   6,000    6,000 
Securities available-for-sale, at fair value   353,035    243,206 
Other securities   9,556    6,593 
           
Total securities   368,591    255,799 
           
Loans held for sale   4,588    5,880 
Loans   1,198,193    867,054 
Allowance for loan losses   (8,175)   (7,510)
           
Loans, net   1,190,018    859,544 
           
Premises and equipment   46,203    34,624 
Interest receivable   5,787    4,358 
Cash surrender value of bank-owned life insurance   26,367    21,250 
Goodwill   20,443    13,776 
Other real estate owned   7,855    6,008 
Other assets   24,807    14,009 
           
TOTAL ASSETS  $1,787,976   $1,277,367 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Deposits:          
Noninterest-bearing  $308,050   $202,478 
Interest-bearing   1,199,941    836,713 
           
TOTAL DEPOSITS   1,507,991    1,039,191 
           
Interest payable   274    306 
Borrowed funds   94,321    69,000 
Subordinated debentures   10,310    10,310 
Other liabilities   8,100    4,033 
           
TOTAL LIABILITIES   1,620,996    1,122,840 
           
STOCKHOLDERS’ EQUITY:          
Common stock, par value $1 per share, 20,000,000 shares authorized; 9,179,901 shares issued at September 30, 2017, and 9,017,891 shares issued at December 31, 2016, respectively   9,180    9,018 
Additional paid-in capital   104,965    102,574 
Retained earnings   51,649    44,477 
Accumulated other comprehensive income (loss)   1,650    (1,078)
Treasury stock, at cost, 26,494 shares at Sept. 30, 2017 and at December 31, 2016   (464)   (464)
           
TOTAL STOCKHOLDERS’ EQUITY   166,980    154,527 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $1,787,976   $1,277,367 

 

See Notes to Consolidated Financial Statements

 

 2 

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

($ In Thousands, except earnings and dividends per share)

 

   (Unaudited)   (Unaudited) 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
                 
INTEREST INCOME:                    
Interest and fees on loans  $14,412   $9,798   $42,083   $28,146 
Interest and dividends on securities:                    
Taxable interest and dividends   1,600    982    4,742    3,110 
Tax exempt interest   579    464    1,764    1,398 
Interest on federal funds sold   117    25    337    82 
                     
TOTAL INTEREST INCOME   16,708    11,269    48,926    32,736 
                     
INTEREST EXPENSE:                    
Interest on deposits   1,375    962    3,836    2,476 
Interest on borrowed funds   398    240    1,151    663 
                     
TOTAL INTEREST EXPENSE   1,773    1,202    4,987    3,139 
                     
NET INTEREST INCOME   14,935    10,067    43,939    29,597 
                     
PROVISION FOR LOAN LOSSES   90    143    384    538 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   14,845    9,924    43,555    29,059 
                     
OTHER INCOME:                    
Service charges on deposit accounts   902    606    2,692    1,847 
Other service charges and fees   2,756    2,493    8,115    6,695 
TOTAL OTHER INCOME   3,658    3,099    10,807    8,542 
                     
OTHER EXPENSES:                    
Salaries and employee benefits   7,328    5,645    23,070    16,194 
Occupancy and equipment   1,390    1,209    4,108    3,392 
Acquisition and integration charges   48    -    6,327    - 
Other   3,122    2,562    9,551    7,144 
                     
TOTAL OTHER EXPENSES   11,888    9,416    43,056    26,730 
                     
INCOME BEFORE INCOME TAXES   6,615    3,607    11,306    10,871 
                     
INCOME TAXES   1,901    1,049    3,104    3,060 
                     
NET INCOME   4,714    2,558    8,202    7,811 
                     
PREFERRED STOCK ACCRETION AND DIVIDENDS   -    86    -    257 
                     
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS  $4,714   $2,472   $8,202   $7,554 
                     
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:                    
BASIC  $0.52   $0.46   $0.90   $1.39 
DILUTED   0.51    0.45    0.89    1.38 
DIVIDENDS PER SHARE – COMMON   0.0375    0.0375    0.1125    0.1125 

 

See Notes to Consolidated Financial Statements

 

 3 

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ In Thousands)

 

   (Unaudited)   (Unaudited) 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
                 
Net income per consolidated statements of income  $4,714   $2,558   $8,202   $7,811 
Other Comprehensive Income:                    
Unrealized holding gains/ (losses) arising during period on available-for-sale securities   (865)   189    4,391    3,016 
Less reclassification adjustment for gains included in net income   -    (129)   -    (129)
Unrealized holding gains/ (losses) arising during period on available- for-sale securities   (865)   60    4,391    2,887 
Unrealized holding gains/ (losses) on loans held for sale   42    (85)   45    1 
Income tax benefit(expense)   322    13    (1,708)   (982)
Other comprehensive income (loss)   (501)   (12)   2,728    1,906 
Comprehensive Income  $4,213   $2,546   $10,930   $9,717 

 

See Notes to Consolidated Financial Statements

 

 4 

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ In Thousands, unaudited)

 

  

Common

Stock

  

Preferred

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income(Loss)

  

Treasury

Stock

   Total 
                             
Balance, January 1, 2016  $5,403   $17,123   $44,650   $35,625   $1,099   $(464)  $103,436 
Net income   -    -    -    7,811    -    -    7,811 
Other comprehensive income   -    -    -    -    1,906    -    1,906 
Dividends on preferred stock   -    -    -    (257)   -    -    (257)
Dividends on common stock, $0.1125 per share   -    -    -    (611)   -    -    (611)
Issuance of preferred shares                  (25)             (25)
Repurchase of restricted stock for payment of taxes   (9)   -    (167)   -    -    -    (176)
Restricted stock grant   61    -    (61)   -    -    -    - 
Compensation expense   -    -    574    -    -    -    574 
Balance, Sept. 30, 2016  $5,455   $17,123   $44,996   $42,543   $3,005   $(464)  $112,658 
                                    
Balance, January 1, 2017  $9,018   $-   $102,574   $44,477   $(1,078)  $(464)  $154,527 
Net income   -    -    -    8,202    -    -    8,202 
Other comprehensive income   -    -    -    -    2,728    -    2,728 
Dividends on common stock, $0.1125 per share   -    -    -    (1,030)   -    -    (1,030)
Issuance of 89,591 common shares for GCCB acquisition   89    -    2,160    -    -    -    2,249 
Repurchase of restricted stock for payment of taxes   (12)   -    (318)   -    -    -    (330)
Restricted stock grant   85    -    (85)   -    -    -    - 
Compensation expense   -    -    634    -    -    -    634 
Balance, Sept. 30, 2017  $9,180   $-   $104,965   $51,649   $1,650   $(464)  $166,980 

 

See Notes to Consolidated Financial Statements

 

 5 

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ In Thousands)

 

   (Unaudited) 
   Nine Months Ended 
   September 30, 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES:          
NET INCOME  $8,202   $7,811 
Adjustments to reconcile net income to net cash provided by operating activities:          
Gain on sale of securities   -    (129)
Depreciation, amortization and accretion   3,455    2,520 
Provision for loan losses   384    538 
Loss on sale/writedown of ORE   743    111 
Restricted stock expense   634    573 
Increase in cash value of life insurance   (532)   (384)
Federal Home Loan Bank stock dividends   (54)   (27)
Changes in:          
Interest receivable   256    (61)
Loans held for sale, net   1,336    (5,462)
Interest payable   (50)   29 
Other, net   1,738    (2,882)
NET CASH PROVIDED BY OPERATING ACTIVITIES   16,112    2,637 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Maturities, calls and paydowns of available-for-sale and held-to-maturity securities   51,879    37,141 
Purchases of available-for-sale securities   (67,646)   (30,294)
Net purchases of other securities   (1,796)   (1,433)
Net increase in loans   (94,210)   (84,019)
Net increase in premises and equipment   (4,237)   (1,055)
Purchase of bank-owned life insurance   (469)   (5,850)
Proceeds from sale of other real estate owned   5,759    - 
Cash received in excess of cash paid for acquisitions   3,413    - 
NET CASH USED IN INVESTING ACTIVITIES   (107,307)   (85,510)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Increase in deposits   113,313    155,094 
Net increase (decrease) in borrowed funds   10,415    (42,321)
Dividends paid on common stock   (1,005)   (587)
Dividends paid on preferred stock   -    (257)
Repurchase of restricted stock for payment of taxes   (330)   (176)
Issuance of preferred shares   -    (25)
NET CASH PROVIDED BY FINANCING ACTIVITIES   122,393    111,728 
           
NET INCREASE IN CASH   31,198    28,855 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   62,119    41,259 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $93,317   $70,114 
           
SUPPLEMENTAL DISCLOSURES:          
           
CASH PAYMENTS FOR INTEREST   5,181    3,110 
CASH PAYMENTS FOR INCOME TAXES   667    4,277 
LOANS TRANSFERRED TO OTHER REAL ESTATE   836    2,498 
ISSUANCE OF RESTRICTED STOCK GRANTS   85    61 
STOCK ISSUED IN CONNECTION WITH GULF COAST COMMUNITY BANK ACQUISITION   2,249    - 

 

See Notes to Consolidated Financial Statements

 

 6 

 

 

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

 

NOTE 1 — BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2016.

 

NOTE 2 — SUMMARY OF ORGANIZATION

 

The First Bancshares, Inc., Hattiesburg, Mississippi (the "Company"), was incorporated June 23, 1995, under the laws of the State of Mississippi for the purpose of operating as a bank holding company. The Company’s primary asset is its interest in its wholly-owned subsidiary, The First, A National Banking Association (the “Bank”).

 

At September 30, 2017, the Company had approximately $1.8 billion in assets, $1.2 billion in net loans, $1.5 billion in deposits, and $167.0 million in stockholders' equity. For the nine months ended September 30, 2017, the Company reported net income of $8.2 million. After tax merger related costs of $3.9 million were expensed during the nine months ended September 30, 2017.

 

In each of the first, second, and third quarters of 2017, the Company declared and paid a dividend of $.0375 per common share.

 

NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if any change in the value, vesting conditions or classification of the award occurs. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU 2017-09 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

 7 

 

 

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Currently, entities generally amortize the premium as an adjustment of yield over the contractual life of the security. The ASU does not change the accounting for purchased callable debt securities held at a discount as the discount will continue to be accreted to maturity. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which ASU 2017-08 is adopted. The Company is currently evaluating the provisions of ASU 2017-08 to determine the potential impact the new standard will have on its Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is currently assessing the impact of ASU 2017-04 on its Consolidated Financial Statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. ASU 2016-15 is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 is not expected to have a material impact on the Company's Consolidated Financial Statements.

 

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 requires a new impairment model known as the current expected credit loss (“CECL”) which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary-impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-13 on its Consolidated Financial Statements.

 

 8 

 

 

In February 2016, the FASB issued ASU NO. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If neither risks and rewards nor control is conveyed, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures.

 

NOTE 4 – BUSINESS COMBINATIONS

 

Acquisitions

 

Iberville Bank

 

On January 1, 2017, the Company completed its acquisition of 100% of the common stock of Iberville Bank, Plaquemine, Louisiana, from A. Wilbert’s Sons Lumber and Shingle Co. (“Iberville Parent”), and immediately thereafter merged Iberville Bank (“Iberville”), the wholly-owned subsidiary of Iberville Parent, with and into The First. The Company paid a total of $31.1 million in cash. Approximately $2.5 million of the purchase price is being held in escrow as contingency for flood-related losses in the loan portfolio that may be incurred due to flooding in Iberville’s market area in the fall of 2016.

 

In connection with the acquisition, the Company recorded approximately $5.6 million of goodwill and $2.7 million of core deposit intangible. The core deposit intangible is to be expensed over 10 years.

 

The Company acquired Iberville’s $149.4 million loan portfolio at an estimated fair value discount of $0.8 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

 

Expenses associated with the acquisition were $3.5 million for the nine month period ended September 30, 2017. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.

 

The preliminary amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows:

 

($ In Thousands)    
Purchase price:     
Cash  $31,100 
Total purchase price   31,100 
      
Identifiable assets:     
Cash and due from banks   28,789 
Investments   78,613 
Loans   148,516 
Core deposit intangible   2,688 
Personal and real property   4,603 
Other assets   9,330 
Total assets   272,539 
      
Liabilities and equity:     
Deposits   243,656 
Borrowed funds   456 
Other liabilities   2,928 
Total liabilities   247,040 
Net assets acquired   25,499 
Goodwill resulting from acquisition  $5,601 

 

 9 

 

 

Valuation adjustments have been made to securities, personal and real property, and core deposit intangible since initially reported.

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at September 30, 2017, are as follows ($ In Thousands):

 

Outstanding principal balance  $132,277 
Carrying amount   131,535 

 

The following unaudited supplemental pro forma information is presented to show the Company’s estimated results assuming Iberville was acquired as of January 1, 2016. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisition as of January 1, 2016 and should not be considered as representative of future operating results. Pro forma information for 2017 is not necessary because Iberville Bank is included in the Company’s results for the entire nine and three months ended September 30, 2017.

 

  For the Three   For the Nine 
($ In Thousands)  Months Ended   Months Ended 
Performance Measures (pro forma, unaudited)  Sept. 30, 2016   Sept. 30, 2016 
         
Net interest income  $12,428   $36,479 
Net income available to common shareholders   2,667    8,366 
Diluted earnings per common share   0.49    1.53 

 

Gulf Coast Community Bank

 

Also on January 1, 2017, the Company completed the merger of Gulf Coast Community Bank (“GCCB”), Pensacola, Florida, with and into The First. The Company issued to GCCB’s shareholders shares of the Company’s common stock which, for purposes of the GCCB acquisition, were valued through averaging the trading price of the Company’s common stock price over a 30 day trading period ending on the fifth business day prior to the closing of the acquisition. Fractional shares were acquired with cash. The consideration was approximately $2.3 million.

 

In connection with the acquisition, the Company recorded approximately $1.1 million of goodwill and $1.0 million of core deposit intangible. The core deposit intangible is to be expensed over 10 years.

 

The Company acquired GCCB’s $91.0 million loan portfolio at a fair value discount of approximately $2.2 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

 

Expenses associated with the acquisition were $2.8 million for the nine month period ended September 30, 2017. These costs included systems conversion and integrating operations charges, as well as legal and consulting expenses, which have been expensed as incurred.

 

 10 

 

  

The preliminary amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows:

 

($ In Thousands)    
Purchase price:     
Cash and stock  $2,258 
Total purchase price   2,258 
      
Identifiable assets:     
Cash and due from banks   5,733 
Investments   13,805 
Loans   88,801 
Core deposit intangible   953 
Personal and real property   4,739 
Other real estate   7,393 
Deferred tax asset   6,693 
Other assets   468 
Total assets   128,585 
      
Liabilities and equity:     
Deposits   111,993 
Borrowed funds   14,450 
Other liabilities   950 
Total liabilities   127,393 
Net assets acquired   1,192 
Goodwill resulting from acquisition   1,066 

 

Valuation adjustments have been made to securities, core deposit intangible, and other real estate since initially reported. Also, certain amounts have been reclassified to conform to the classifications of the Company.

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at September 30, 2017, are as follows ($ In Thousands):

 

Outstanding principal balance  $67,225 
Carrying amount   67,275 

 

NOTE 5 – PREFERRED STOCK AND WARRANT

 

On December 6, 2016, the Company repurchased all 17,123 shares of its CDCI Preferred Shares at fair market value $15,925,000, which equated to a discount of 7% to par, or $1,198,000.

 

NOTE 6 — EARNINGS APPLICABLE TO COMMON STOCKHOLDERS

 

Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock outstanding, such as restricted stock grants.

 

   For the Three Months Ended 
   September 30, 2017 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $4,714,000    9,152,674   $0.52 
                
Effect of dilutive shares:               
Restricted stock grants        71,807      
                
Diluted per share  $4,714,000    9,224,481   $0.51 

 

 11 

 

 

   For the Nine Months Ended 
   September 30, 2017 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $8,202,000    9,140,375   $0.90 
                
Effect of dilutive shares:               
Restricted stock grants        71,807      
                
Diluted per share  $8,202,000    9,212,182   $0.89 

 

   For the Three Months Ended 
   September 30, 2016 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $2,472,000    5,429,349   $0.46 
                
Effect of dilutive shares:               
Restricted stock grants        50,218      
                
Diluted per share  $2,472,000    5,479,567   $0.45 

 

   For the Nine Months Ended 
   September 30, 2016 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $7,554,000    5,425,567   $1.39 
                
Effect of dilutive shares:               
Restricted stock grants        50,218      
                
Diluted per share  $7,554,000    5,475,785   $1.38 

 

The Company granted 73,827 shares of restricted stock in the first quarter of 2017, 9,709 shares during the second quarter of 2017, and 750 shares during the third quarter of 2017.

 

NOTE 7 – COMPREHENSIVE INCOME

 

As presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive income. The Company’s sources of other comprehensive income are unrealized gains and losses on available-for-sale investment securities and loans held for sale. Gains or losses on investment securities that were realized and reflected in net income of the current period, which had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose, are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.

 

 12 

 

 

NOTE 8 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. At September 30, 2017, and December 31, 2016, these financial instruments consisted of the following:

 

($ In Thousands)  September 30, 2017   December 31, 2016 
Commitments to extend credit  $265,233   $220,252 
Standby letters of credit   8,204    1,742 

 

NOTE 9 – FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

 

FASB’s standards on financial instruments, and on fair value measurements and disclosures, require all entities to disclose in their financial statement footnotes the estimated fair values of financial instruments for which it is practicable to estimate fair values. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities which are classified as available-for-sale and our equity securities that have readily determinable fair values be measured and reported at fair value in our Consolidated Financial Statements. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any of those financial instruments.

 

Fair value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:

 

·Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

·Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

 

·Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

 

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. The estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to realized gains and losses could have a significant effect on fair value estimates but have not been considered in those estimates. Because no active market exists for a significant portion of our financial instruments, fair value disclosures are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. The estimates are subjective and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly alter the fair values presented. The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at September 30, 2017 and December 31, 2016:

 

 13 

 

 

·Cash and cash equivalents and fed funds sold: The carrying amount is estimated to be fair value.

 

·Securities (available-for-sale and held-to-maturity): Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for specific securities are not readily available.

 

·Loans and leases: For variable-rate loans and leases that re-price frequently with no significant change in credit risk or interest rate spread, fair values are based on carrying values. Fair values for other loans and leases are estimated by discounting projected cash flows at interest rates being offered at each reporting date for loans and leases with similar terms, to borrowers of comparable creditworthiness. The carrying amount of accrued interest receivable approximates its fair value.

 

·Loans held for sale: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are held on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.

 

·Collateral-dependent impaired loans: Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

 

·Bank-owned life insurance: Fair values are based on net cash surrender policy values at each reporting date.

 

·Other securities: Certain investments for which no secondary market exists are carried at cost and the carrying amount for those investments typically approximates their estimated fair value, unless an impairment analysis indicates the need for adjustments.

 

·Deposits (noninterest-bearing and interest-bearing): Fair values for non-maturity deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

 

·FHLB and other borrowings: Current carrying amounts are used as an approximation of fair values for federal funds purchased, overnight advances from the Federal Home Loan Bank (“FHLB”), borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days of the reporting dates. Fair values of other short-term borrowings are estimated by discounting projected cash flows at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

·Long-term borrowings: Fair values are estimated using projected cash flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

·Subordinated debentures: Fair values are determined based on the current market value for like instruments of a similar maturity and structure.

 

 14 

 

 

·Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.

 

Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:

 

As of September 30, 2017
($ In Thousands)

           Fair Value Measurements 
 

Carrying

Amount

  

Estimated

Fair
Value

  

Quoted Prices

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
                     
Financial Instruments:                         
Assets:                         
Cash and cash equivalents  $93,317   $93,317   $93,317   $-   $- 
Securities available-for-sale   353,035    353,035    931    349,770    2,334 
Securities held-to-maturity   6,000    7,388    -    7,388    - 
Other securities   9,556    9,556    -    9,556    - 
Loans, net   1,194,606    1,222,370    -    -    1,222,370 
Bank-owned life insurance   26,367    26,367    -    26,367    - 
                          
Liabilities:                         
Noninterest-bearing deposits  $308,050   $308,050   $-   $308,050   $- 
Interest-bearing deposits   1,199,941    1,198,411    -    1,198,411    - 
Subordinated debentures   10,310    10,310    -    -    10,310 
FHLB and other borrowings   94,321    94,321    -    94,321    - 

 

 15 

 

 

As of December 31, 2016
($ In Thousands)

           Fair Value Measurements 
 

Carrying

Amount

  

Estimated

Fair
Value

   Quoted
 Prices
(Level 1)
  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
                     
Financial Instruments:                         
Assets:                         
Cash and cash equivalents  $62,119   $62,119   $62,119   $-   $- 
Securities available-for-sale   243,206    243,206    940    240,025    2,241 
Securities held-to-maturity   6,000    7,394    -    7,394    - 
Other securities   6,593    6,593    -    6,593    - 
Loans, net   865,424    883,161    -    -    883,161 
Bank-owned life insurance   21,250    21,250    -    21,250    - 
                          
Liabilities:                         
Noninterest- bearing deposits  $202,478   $202,478   $-   $202,478   $- 
Interest-bearing deposits   836,713    835,658    -    835,658    - 
Subordinated debentures   10,310    10,310    -    -    10,310 
FHLB and other borrowings   69,000    69,000    -    69,000    - 

 

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 of the valuation hierarchy, and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities include U. S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

 

Assets measured at fair value on a recurring basis are summarized below:

 

September 30, 2017

($ In Thousands)

 

       Fair Value Measurements Using 
      

Quoted Prices

in

Active
Markets

For

Identical
Assets

  

Significant

Other

Observable

Inputs

 

Significant

Unobservable

Inputs

 
  Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Obligations of U. S. Government Agencies  $6,505   $-   $6,505   $- 
Municipal securities   135,155    -    135,155    - 
Mortgage-backed securities   193,039    -    193,039    - 
Corporate obligations   17,405    -    15,071    2,334 
Other   931    931    -    - 
Total  $353,035   $931   $349,770   $2,334 

 

 16 

 

 

December 31, 2016

($ In Thousands)

 

       Fair Value Measurements Using 
      

Quoted Prices

in

Active
Markets

For

Identical
Assets

  

Significant

Other

Observable

Inputs

  

Significant

Unobservable

Inputs

 
  Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Obligations of U. S. Government Agencies  $9,045   $-   $9,045   $- 
Municipal securities   98,822    -    98,822    - 
Mortgage-backed securities   114,289    -    114,289    - 
Corporate obligations   20,110    -    17,869    2,241 
Other   940    940    -    - 
Total  $243,206   $940   $240,025   $2,241 

 

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information.

 

($ In Thousands)

 

   Bank-Issued
Trust
Preferred
Securities
 
  2017   2016 
Balance, January 1  $ 2,241   $ 2,557 
Transfers into Level 3   -    - 
Transfers out of Level 3   -    - 
Other-than-temporary impairment loss included in earnings (loss)   -    - 
Unrealized gain (loss) included in comprehensive income   93    (316)
Balance at September 30, 2017 and December 31, 2016  $2,334   $2,241 

 

The following table presents quantitative information about recurring Level 3 fair value measurements (in thousands):

 

Trust Preferred
Securities
  Fair Value   Valuation
Technique
  Significant
Unobservable
Inputs
  Range of
Inputs
September 30, 2017  $2,334   Discounted cash flow  Probability of default  1.87% - 3.50%
December 31, 2016  $2,241   Discounted cash flow  Probability of default  1.50% - 3.34%

 

Following is a description of the valuation methodologies used for assets measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

 17 

 

 

Impaired Loans

 

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

 

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, or premium or discount existing at origination or acquisition of the loan. Impaired loans are classified within Level 2 of the fair value hierarchy.

 

Other Real Estate Owned

 

Other real estate owned acquired through loan foreclosure is initially recorded at fair value less estimated costs to sell, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense. Other real estate owned measured at fair value on a non-recurring basis at September 30, 2017, amounted to $7.9 million. Other real estate owned is classified within Level 2 of the fair value hierarchy.

 

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at September 30, 2017 and December 31, 2016.

 

($ In Thousands) 

September 30, 2017

 

       Fair Value Measurements Using 
      

Quoted

Prices in

Active

Markets

For

Identical

Assets

  

Significant

Other

Observable

Inputs

  

Significant

Unobservable

Inputs

 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                     
Impaired loans  $9,885   $-   $9,885   $- 
Other real estate owned   7,855    -    7,855    - 

 

 18 

 

 

December 31, 2016

 

       Fair Value Measurements Using 
      

Quoted

Prices in

Active

Markets

For

Identical

Assets

  

Significant

Other

Observable

Inputs

  

Significant

Unobservable

Inputs

 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Impaired loans  $6,128   $-   $6,128   $- 
Other real estate owned   6,008    -    6,008    - 

 

NOTE 10 - SECURITIES

 

The following disclosure of the estimated fair value of financial instruments is made in accordance with authoritative guidance. The estimated fair value amounts have been determined using available market information and valuation methodologies that management believes are appropriate. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at September 30, 2017 and December 31, 2016, follows:

 

($ In Thousands)

   September 30, 2017 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Estimated

Fair

Value

 
Available-for-sale securities:                    
Obligations of U.S. Government agencies  $6,494   $14   $3   $6,505 
Tax-exempt and taxable obligations of states and municipal subdivisions   132,323    3,069    237    135,155 
Mortgage-backed securities   191,869    1,712    542    193,039 
Corporate obligations   18,368    69    1,032    17,405 
Other   1,255    -    324    931 
   $350,309   $4,864   $2,138   $353,035 
Held-to-maturity securities:                    
Taxable obligations of states and municipal subdivisions  $6,000   $1,388   $-   $7,388 

 

 19 

 

 

   December 31, 2016 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Estimated

Fair

Value

 
Available-for-sale securities:                    
Obligations of U.S. Government agencies  $9,023   $28   $6   $9,045 
Tax-exempt and taxable obligations of states and municipal subdivisions   98,328    1,678    1,184    98,822 
Mortgage-backed securities   114,991    602    1,304    114,289 
Corporate obligations   21,274    66    1,230    20,110 
Other   1,256    -    316    940 
   $244,872   $2,374   $4,040   $243,206 
Held-to-maturity securities:                    
Taxable obligations of states and municipal subdivisions  $6,000   $1,394   $-   $7,394 

 

NOTE 11 – LOANS

 

Loans typically provide higher yields than the other types of earning assets, and, thus, one of the Company's goals is for loans to be the largest category of the Company's earning assets. For the quarters ended September 30, 2017 and December 31, 2016, average loans accounted for 74.1% and 73.8% of average earning assets, respectively. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

 

Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual:

 

September 30, 2017

($ In thousands)  

  

Past Due

30 to 89

Days

  

Past Due

90 Days

or More

and Still

Accruing

   Non-
Accrual
  

Total

Past Due

and

Non-

Accrual

  

Total

Loans

 
                     
Real Estate-construction  $497   $105   $98   $700   $171,609 
Real Estate-mortgage   1,630    180    2,733    4,543    377,307 
Real Estate-non farm non-residential   759    -    1,764    2,523    456,110 
Commercial   115    1,151    211    1,477    164,577 
Lease Financing Rec.   -    -    -    -    2,008 
Obligations of states and subdivisions   -    -    -    -    5,892 
Consumer   140    -    46    186    20,690 
Total  $3,141   $1,436   $4,852   $9,429   $1,198,193 

 

 20 

 

 

December 31, 2016

($ In Thousands)  

  

Past Due

30 to 89

Days

  

Past Due

90 Days

or More

and

Still

Accruing

   Non-
Accrual
  

Total

Past Due

and

Non-

Accrual

  

Total

Loans

 
                     
Real Estate-construction  $204   $96   $658   $958   $109,394 
Real Estate-mortgage   2,745    102    1,662    4,509    289,640 
Real Estate-non farm non residential   269    -    909    1,178    314,359 
Commercial   9    -    2    11    129,423 
Lease Financing Rec.   -    -    -    -    2,204 
Obligations of states and subdivisions   -    -    -    -    6,698 
Consumer   22    -    33    55    15,336 
Total  $3,249   $198   $3,264   $6,711   $867,054 

 

In connection with our acquisition of BCB Holding Company, Inc. in 2014, we acquired loans with deteriorated credit quality. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected.

 

The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the BCB acquisition as of July 1, 2014, the closing date of the transaction:

 

($ In Thousands)

 

  

Commercial,

financial

and

agricultural

  

Mortgage-

Commercial

  

Mortgage-

Residential

  

Commercial

and other

   Total 
Contractually required payments  $1,519   $29,648   $7,933   $976   $40,076 
Cash flows expected to be collected   1,570    37,869    9,697    1,032    50,168 
Fair value of loans acquired   1,513    28,875    7,048    957    38,393 

 

 21 

 

 

Total outstanding acquired impaired loans were $2.1 million as of September 30, 2017 and $2.2 million as of December 31, 2016. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.

 

Changes in the carrying amount and accretable yield for acquired impaired loans were as follows at September 30, 2017 and December 31, 2016:

 

($ In Thousands) 

   September 30, 2017   December 31, 2016 
  

Accretable

Yield

  

Carrying

Amount of

Loans

  

Accretable

Yield

  

Carrying

Amount of

Loans

 
Balance at beginning of period  $894   $1,305   $1,219   $1,821 
Accretion   (43)   43    (325)   325 
Payments received, net   -    (139)   -    (841)
Balance at end of period  $851   $1,209   $894   $1,305 

 

The following tables provide additional detail of impaired loans broken out according to class as of September 30, 2017 and December 31, 2016. The recorded investment included in the following tables represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at September 30, 2017 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

 

September 30, 2017

($ In Thousands) 

               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
                     
Impaired loans with no related allowance:                         
Commercial installment  $15   $15   $-   $45   $- 
Commercial real estate   4,383    4,504    -    3,358    89 
Consumer real estate   2,235    2,437    -    1,826    63 
Consumer installment   29    29    -    14    - 
Total  $6,662   $6,985   $-   $5,243   $152 
                          
Impaired loans with a related allowance:                         
Commercial installment  $195   $195   $101   $115   $- 
Commercial real estate   2,499    2,499    237    2,786    80 
Consumer real estate   506    506    136    490    12 
Consumer installment   23    23    17    24    - 
Total  $3,223   $3,223   $491   $3,415   $92 
                          
Total Impaired Loans:                         
Commercial installment  $210   $210   $101   $160   $- 
Commercial real estate   6,882    7,003    237    6,144    169 
Consumer real estate   2,741    2,943    136    2,316    75 
Consumer installment   52    52    17    38    - 
Total Impaired Loans  $9,885   $10,208   $491   $8,658   $244 

 

 22 

 

 

As of September 30, 2017, the Company had $1.0 million of foreclosed residential real estate property obtained by physical possession and $0.2 million of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

 

December 31, 2016

($ In Thousands)

 

               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
                     
Impaired loans with  no related allowance:                         
Commercial installment  $-   $-   $-   $-   $- 
Commercial real estate   2,324    2,570    -    4,368    37 
Consumer real estate   329    329    -    291    1 
Consumer installment   14    14    -    9    - 
Total  $2,667   $2,913   $-   $4,668   $38 
                          
Impaired loans with  a related allowance:                         
Commercial installment  $153   $153   $10   $244   $9 
Commercial real estate   2,726    2,726    343    2,832    127 
Consumer real estate   556    669    308    733    14 
Consumer installment   26    27    21    32    - 
Total  $3,461   $3,575   $682   $3,841   $150 
                          
Total Impaired Loans:                         
Commercial installment  $153   $153   $10   $244   $9 
Commercial real estate   5,050    5,296    343    7,200    164 
Consumer real estate   885    998    308    1,024    15 
Consumer installment   40    41    21    41    - 
Total Impaired Loans  $6,128   $6,488   $682   $8,509   $188 

 

The following table represents the Company’s impaired loans at September 30, 2017, and December 31, 2016.

 

   Sept. 30,   December 31, 
   2017   2016 
   ($ In Thousands) 
Impaired Loans:          
Impaired loans without a valuation allowance  $6,662   $2,667 
Impaired loans with a valuation allowance   3,223    3,461 
Total impaired loans  $9,885   $6,128 
Allowance for loan losses on impaired loans at period end   491    682 
           
Total nonaccrual loans   4,852    3,264 
           
Past due 90 days or more and still accruing   1,436    198 
Average investment in impaired loans   8,658    8,509 

 

 23 

 

 

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans:

 

($ In Thousands) 

Three Months

Ended

Sept. 30, 2017

  

Nine Months

Ended

Sept. 30, 2017

 
         
Interest income recognized during  impairment   -    - 
Cash-basis interest income recognized   60    244 

 

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the three months and nine months ended September 30, 2017 was $90,000 and $243,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at September 30, 2017 and December 31, 2016.

 

If the Company grants a concession to a borrower in financial difficulty, the loan is classified as a troubled debt restructuring (“TDR”). The following tables provide detail of TDRs at Sept. 30, 2017.

 

For the Three Months Ending September 30, 2017

($ In Thousands)

 

        Outstanding         
    Outstanding    Recorded           
    Recorded    Investment         Interest 
    Investment     Post-    Number of    Income 
    Pre-Modification    Modification    Loans    Recognized 
                     
Commercial installment  $-   $-    -   $- 
Commercial real estate   -    -    -    - 
Consumer real estate   -    -    -    - 
Consumer installment   -    -    -    - 
Total  $-   $-    -   $- 

 

 24 

 

 

For the Nine Months Ending September 30, 2017

($ In Thousands)

 

       Outstanding         
   Outstanding   Recorded         
   Recorded   Investment       Interest 
   Investment   Post-   Number of   Income 
   Pre-Modification   Modification   Loans   Recognized 
                 
Commercial installment  $-   $-    -   $- 
Commercial real estate   -    -    -    - 
Consumer real estate   152    149    2    5 
Consumer installment   -    -    -    - 
Total  $152   $149    2   $5 

 

There were no TDRs modified during the three month period ended September 30, 2017. The balance of TDRs was $7.3 million at September 30, 2017 and $4.1 million at December 31, 2016, respectively, calculated for regulatory reporting purposes. There was $0.2 million allocated in specific reserves established with respect to these loans as of September 30, 2017. As of September 30, 2017, the Company had no additional amount committed on any loan classified as TDR.

 

The following tables set forth the amounts and past due status for the Bank TDRs at September 30, 2017 and December 31, 2016:

 

($ In Thousands)

   September 30, 2017 
  

Current

Loans

  

Past Due

30-89

  

Past Due

90 days

and still

accruing

  

Non-

accrual

  

Total

 

 
                     
Commercial installment  $-   $-   $-   $308   $308 
Commercial real estate   3,461    267    -    1,047    4,775 
Consumer real estate   1,099    88    -    1,011    2,198 
Consumer installment   5    -    -    19    24 
Total  $4,565   $355   $-   $2,385   $7,305 
Allowance for loan losses  $107   $14   $-   $122   $243 

 

 25 

 

  

($ In Thousands)

   December 31, 2016 
   Current
Loans
   Past Due
30-89
   Past Due
90 days
and still
accruing
   Non-
accrual
   Total 
                     
Commercial installment  $151   $-   $-   $-   $151 
Commercial real estate   2,463    -    -    1,102    3,565 
Consumer real estate   154    90    -    122    366 
Consumer installment   6    -    -    23    29 
Total  $2,774   $90   $-   $1,247   $4,111 
Allowance for loan losses  $125   $-   $-   $40   $165 

 

Internal Risk Ratings

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:

 

Special Mention.    Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

 

Substandard.    Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

As of September 30, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk categories of loans by class of loans (excluding mortgage loans held for sale) were as follows:

 

 26 

 

 

September 30, 2017

($ In Thousands)

 

  

Real

Estate

Commercial

  

Real

Estate

Mortgage

  

Installment

and

Other

  

Commercial,

Financial and

Agriculture

   Total 
                     
Pass  $746,097   $223,995   $28,184   $164,373   $1,162,649 
Special Mention   9,619    825    -    3,127    13,571 
Substandard   16,743    4,172    89    1,892    22,896 
Doubtful   95    -    -    26    121 
Subtotal   772,554    228,992    28,273    169,418    1,199,237 
Less:                         
Unearned discount   750    59    -    235    1,044 
Loans, net of unearned discount  $771,804   $228,933   $28,273   $169,183   $1,198,193 

 

December 31, 2016

($ In Thousands)

 

  

Real

Estate

Commercial

  

Real

Estate

Mortgage

  

Installment

and

Other

  

Commercial,

Financial and

Agriculture

   Total 
                     
Pass  $522,949   $174,325   $21,278   $134,235   $852,787 
Special Mention   376    237    -    618    1,231 
Substandard   11,873    1,336    79    208    13,496 
Doubtful   -    200    -    40    240 
Subtotal   535,198    176,098    21,357    135,101    867,754 
Less:                         
Unearned discount   378    60    -    262    700 
Loans, net of unearned discount  $534,820   $176,038   $21,357   $134,839   $867,054 

 

Activity in the allowance for loan losses for the period was as follows:

 

($ In Thousands)        
   Three Months   Nine Months 
   Ended   Ended 
   Sept. 30, 2017   Sept. 30, 2017 
         
Balance at beginning of period  $8,070   $7,510 
Loans charged-off:          
Real Estate   (39)   (259)
Installment and Other   (21)   (63)
Commercial, Financial and Agriculture    ( -)   (1)
Total   (60)   (323)
           
Recoveries on loans previously charged-off:          
Real Estate   45    498 
Installment and Other   23    67 
Commercial, Financial and Agriculture   7    39 
Total   75    604 
Net recoveries   15    281 
Provision for Loan Losses   90    384 
Balance at end of period  $8,175   $8,175 

 

 27 

 

 

The following tables represent how the allowance for loan losses is allocated to a particular loan type, as well as the percentage of the category to total loans at September 30, 2017 and December 31, 2016.

 

Allocation of the Allowance for Loan Losses

 

   September 30, 2017 
   ($ In Thousands) 
   Amount  

% of loans

in each category

to total loans

 
         
Commercial Non Real Estate  $1,557    14.1%
Commercial Real Estate   4,662    64.4 
Consumer Real Estate   1,510    19.1 
Consumer   174    2.4 
Secondary market reserve   180    - 
Unallocated   92    - 
Total  $8,175    100%

 

   December 31, 2016 
   ($ In Thousands) 
   Amount  

% of loans

in each category

to total loans

 
         
Commercial Non Real Estate  $1,118    15.6%
Commercial Real Estate   4,071    61.6 
Consumer Real Estate   1,589    20.3 
Consumer   155    2.4 
Unallocated   577    0.1 
 Total  $7,510    100%

 

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of September 30, 2017 and December 31, 2016. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses. See Item No. 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Provision for Loan and Lease Losses” for a description of our methodology.

 

 28 

 

 

September 30, 2017

(In thousands)

       Installment   Financial     
   Real Estate  

and

Other

  

and

Agriculture

   Total 
                 
Loans                    
Individually evaluated  $9,623   $52   $210   $9,885 
Collectively evaluated   991,115    28,222    168,971    1,188,308 
Total  $1,000,738   $28,374   $169,181   $1,198,193 
                     
Allowance for Loan Losses                    
Individually evaluated  $373   $17   $101   $491 
Collectively evaluated   5,978    249    1,457    7,684 
Total  $6,351   $266   $1,558   $8,175 

 

December 31, 2016

(In thousands)

 

           Commercial,     
       Installment   Financial     
   Real Estate   and
Other
   and
Agriculture
   Total 
                 
Loans                    
Individually evaluated  $5,935   $40   $153   $6,128 
Collectively evaluated   704,923    21,317    134,686    860,926 
Total  $710,858   $21,357   $134,839   $867,054 
                     
Allowance for Loan Losses                    
Individually evaluated  $651   $21   $10   $682 
Collectively evaluated   5,009    711    1,108    6,828 
Total  $5,660   $732   $1,118   $7,510 

 

NOTE 12 – SUBSEQUENT EVENTS/OTHER

 

Subsequent events have been evaluated by management through the date the financial statements were issued.

 

On October 24, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Southwest Banc Shares, Inc., an Alabama corporation (“Southwest”), whereby Southwest will be merged with and into the Company. Pursuant to and simultaneously with entering into the Merger Agreement, The First, and Southwest’s wholly owned subsidiary bank, First Community Bank (“First Community Bank”), entered into a Plan of Bank Merger whereby First Community Bank will be merged with and into The First immediately following the merger of SWBS with and into the Company. At September 30, 2017, First Community Bank had total assets of approximately $391.6 million.

 

On October 31, 2017, the Company completed a sale of an aggregate of 2,012,500 shares of its common stock in a public offering. Net proceeds after underwriting discounts and estimated expenses were approximately $55.2 million. The Company intends to use the net proceeds from the offering to fund the cash portion of the purchase price for the Company’s previously announced acquisition of Southwest, to fund other potential future acquisitions, and for general corporate purposes, including the repayment of debt and to support organic growth.

 

NOTE 13 – RECLASSIFICATION

 

Certain amounts in the 2016 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

 

 29 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM NO. 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “will,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the Company’s present expectations. Factors that might cause such differences include, but are not limited to: competitive pressures among financial institutions increasing significantly; economic conditions, either nationally or locally, in areas in which the Company conducts operations being less favorable than expected; legislation or regulatory changes which adversely affect the ability of the consolidated Company to conduct business combinations or new operations; and risks related to the proposed acquisition of Southwest Banc Shares, Inc., including the risk that the proposed transaction does not close when expected or at all because required regulatory or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all, the terms of the proposed transaction may need to be modified to satisfy such approvals or conditions, and the risk that anticipated benefits from the proposed transaction are not realized in the time frame anticipated or at all as a result of changes in general economic and market conditions. The Company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Further information on The First Bancshares, Inc. is available in its filings with the Securities and Exchange Commission, available at the SEC’s website, http://www.sec.gov.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.

 

Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the Company’s critical accounting policies deal with the following areas: the establishment of the allowance for loan and lease losses, as explained in detail in Note 11 to the Consolidated Financial Statements and in the “Provision for Loan and Lease Losses” and “Allowance for Loan and Lease Losses” sections of this Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; the valuation of impaired loans and foreclosed assets, as discussed in Note 11 to the Consolidated Financial Statements; income taxes and deferred tax assets and liabilities, especially with regard to the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and goodwill and other intangible assets, which are evaluated annually for impairment and for which we have determined that no impairment exists, as discussed in the “Other Assets” section of this Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations. Critical accounting policies are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations with regard to those areas.

 

 30 

 

 

OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

RESULTS OF OPERATIONS SUMMARY

 

Third quarter 2017 compared to third quarter 2016

 

The Company reported net income available to common shareholders of $4.7 million for the three months ended September 30, 2017, compared with net income available to common shareholders of $2.5 million for the same period last year.

 

Net interest income increased to $14.9 million, or 48.4% for the three months ended September 30, 2017, compared to $10.1 million for the same period in 2016. Quarterly average earning assets at September 30, 2017, increased $486.2 million, or 43.7% and quarterly average interest-bearing liabilities increased $368.7 million or 39.9% when compared to September 30, 2016.

 

Noninterest income for the three months ended September 30, 2017, was $3.7 million compared to $3.1 million for the same period in 2016, reflecting an increase of $0.6 million or 18.0%. This increase was composed of increases in service charges and interchange fee income.

 

The provision for loan losses was $90,000 for the three months ended September 30, 2017, compared with $143,000 for the same period in 2016. The allowance for loan losses of $8.2 million at September 30, 2017 (approximately 0.68% of total loans and 1.16% of loans including valuation accounting adjustments on acquired loans) is considered by management to be adequate to cover losses inherent in the loan portfolio.  See “Provision for Loan and Lease Losses” in this Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation.

 

Noninterest expense increased by $2.5 million or 26.3% for the three months ended September 30, 2017, when compared with the same period in 2016. The largest increase was related to salaries and benefits of $1.7 million of which $1.4 million was attributable to increased employment associated with the acquisitions of Iberville and GCCB.

 

First nine months of 2017 compared to first nine months of 2016

 

The Company reported net income  available to common shareholders of $8.2 million for the nine months ended September 30, 2017, compared with net income available to common shareholders of $7.8 million for the same period last year. After tax merger related costs of $3.9 million were expensed during the first nine months of 2017.

 

Net interest income increased to $43.9 million or 48.5% for the nine months ended September 30, 2017, compared to $29.6 million for the same period in 2016. Average earning assets at September 30, 2017, increased $461.3 million, or 42.1% and average interest-bearing liabilities increased $360.0 million or 39.6% when compared to the first nine months of 2016.

 

Noninterest income for the nine months ended September 30, 2017, was $10.8 compared to $8.5 million for the same period in 2016, reflecting an increase of $2.3 million or 26.5%. This increase consists of $0.2 million of increased mortgage income, increased service charges of $0.8 million and increased interchange fee income of $0.8 million.

 

The provision for loan losses was $0.4 million for the nine months ended September 30, 2017, compared with $0.5 million for the same period in 2016. The allowance for loan losses of $8.2 million at September 30, 2017 (approximately 0.68% of total loans and 1.16% of loans including valuation accounting adjustments on acquired loans) is considered by management to be adequate to cover losses inherent in the loan portfolio.  See “Provision for Loan and Lease Losses” in this Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation.

 

 31 

 

 

Noninterest expense increased by $16.3 million or 61.1% for the nine months ended September 30, 2017, when compared with the same period in 2016. $6.9 million of the increase was attributable to salaries and benefits, of which $5.4 million relates to the acquisition, and also includes $6.3 million in one-time merger related charges.

 

FINANCIAL CONDITION

 

The First represents the primary asset of the Company. The First reported total assets of $1.8 billion at September 30, 2017 compared to $1.3 billion at December 31, 2016, an increase of $0.5 billion. Loans increased $331.1 million to $1.2 billion or 38.2%, during the first nine months of 2017. Deposits at September 30, 2017, totaled $1.5 billion compared to $1.0 billion at December 31, 2016. The First acquired loans of $237.3 million and deposits of $355.6 million as a result of the acquisitions of Iberville and GCCB during the first quarter of 2017. See Note 4 – Business Combinations.

 

For the nine month period ended September 30, 2017, The First reported net income of $9.7 million compared to $8.7 million for the nine months ended September 30, 2016. Merger charges net of tax equaled $3.4 million for the first nine months of 2017.

 

NONPERFORMING ASSETS AND RISK ELEMENTS

 

Diversification within the loan portfolio is an important means of reducing inherent lending risks. At September 30, 2017, The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas, which include Mississippi, Louisiana, Alabama and Florida.

 

At September 30, 2017, The First had loans past due as follows:

 

  

($ In Thousands)

 
     
Past due 30 through 89 days  $3,141 
Past due 90 days or more and still accruing   1,436 

 

The accrual of interest is discontinued on loans which become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans totaled $4.9 million at September 30, 2017, an increase of $1.6 million from December 31, 2016.

 

Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $7.9 million at September 30, 2017.

 

A loan is classified as a restructured loan when the following two conditions are present: First, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower’s financial difficulties. At September 30, 2017, the Bank had $7.3 million in loans that were modified as troubled debt restructurings, of which $4.7 million were performing as agreed with modified terms.

 

EARNINGS PERFORMANCE

 

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is non-interest income, which primarily consists of customer service charges and fees as well as mortgage income but also comes from non-customer sources such as bank-owned life insurance. The majority of the Company’s non-interest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.

 

 32 

 

 

Net interest income AND NET INTEREST MARGIN

 

Net interest income increased by $4.9 million, or 48.4%, for the third quarter of 2017 relative to the third quarter of 2016. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on non-accrual status during the reporting period, and the recovery of interest on loans that had been on non-accrual and were paid off, sold or returned to accrual status.

 

The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.

 

Average Balances, Tax Equivalent Interest and Yields/Rates

 

   Three Months Ended   Three Months Ended 
   September 30, 2017   September 30, 2016 
   Avg.  

Tax

Equivalent

   Yield/   Avg.  

Tax

Equivalent

   Yield/ 
($ In Thousands)  Balance   interest   Rate   Balance   interest   Rate 
                         
Earning Assets:                              
Taxable                              
securities  $280,441   $1,601    2.28%  $177,154   $965    2.18%
Tax exempt securities   93,716    876    3.74%   77,073    704    3.65%
Total investment securities   374,157    2,477    2.65%   254,227    1,669    2.63%
Fed funds sold   36,591    113    1.24%   10,356    25    0.97%
Interest bearing deposits in other banks   3,463    3    0.35%   11,961    16    0.54%
Loans   1,185,493    14,412    4.86%   836,931    9,798    4.68%
Total earning assets   1,599,704    17,005    4.25%   1,113,475    11,508    4.13%
Other assets   172,698              119,559           
Total assets  $1,772,402             $1,233,034           
                               
Interest-bearing liabilities:                              
Deposits  $1,204,614   $1,375    0.46%  $850,442   $962    0.45%
Repo   4,891    38    3.11%   5,000    49    3.92%
Fed funds purchased   3,816    19    1.99%   1,926    5    1.04%
FHLB and FTN   68,041    300    1.76%   55,337    106    0.77%
Subordinated debentures   10,310    41    1.59%   10,310    80    3.10%
Total interest-bearing liabilities   1,291,672    1,773    0.55%   923,015    1,202    0.52%
Other liabilities   316,275              198,889           
Stockholders’ equity   164,455              111,130           
                               
Total liabilities and stockholders’ equity  $1,772,402             $1,233,034           
Net interest income (FTE)*       $15,232    3.70%       $10,306    3.61%
Net interest Margin (FTE)*             3.81%             3.70%

 

*See reconciliation of Non-GAAP financial measures.

 

 33 

 

 

Average Balances, Tax Equivalent Interest and Yields/Rates

 

   YTD September 30, 2017   YTD September 30, 2016 
   Avg.  

Tax

Equivalent

   Yield/   Avg.  

Tax

Equivalent

   Yield/ 
($ In Thousands)  Balance   interest   Rate   Balance   interest   Rate 
                         
Earning Assets:                              
Taxable securities  $265,320   $4,742    2.38%  $184,313   $3,055    2.21%
Tax exempt securities   92,040    2,668    3.87%   77,385    2,118    3.65%
Total investment securities   357,360    7,410    2.76%   261,698    5,173    2.64%
Fed funds sold   42,372    330    1.04%   2,377    82    4.60%
Interest bearing deposits in other banks   4,356    7    0.21%   23,626    56    0.32%
Loans   1,153,694    42,083    4.86%   808,821    28,146    4.64%
Total earning assets   1,557,782    49,830    4.26%   1,096,522    33,457    4.07%
Other assets   190,337              116,252           
Total assets  $1,748,119             $1,212,774           
                               
Interest-bearing liabilities:                              
Deposits  $1,188,919   $3,836    0.43%  $824,065   $2,476    0.40%
Repo   4,892    134    3.65%   5,000    145    3.87%
Fed funds purchased   2,211    29    1.75%   1,867    15    1.07%
FHLB and FTN   63,094    817    1.73%   68,170    342    0.67%
Subordinated debentures   10,310    171    2.21%   10,310    162    2.10%
Total interest- bearing liabilities   1,269,426    4,987    0.52%   909,412    3,140    0.46%
Other liabilities   319,451              196,289           
Stockholders’ equity   159,242              107,073           
                               
Total liabilities and stockholders’ equity  $1,748,119             $1,212,774           
Net interest income (FTE)*       $44,842    3.74%       $30,317    3.61%
Net interest Margin (FTE)*             3.84%             3.69%

 

*See reconciliation of Non-GAAP financial measures.

 

Interest Rate Sensitivity – September 30, 2017

 

   Net Interest
Income at Risk
   Market Value of Equity 
Change in
Interest
Rates
  % Change
from Base
   Policy Limit   % Change
from Base
   Policy Limit 
                     
Up 400 bps   17.9%   -20.0%   31.8%   -40.0%
Up 300 bps   13.6%   -15.0%   26.2%   -30.0%
Up 200 bps   9.1%   -10.0%   19.2%   -20.0%
Up 100 bps   4.6%   -5.0%   10.7%   -10.0%
Down 100 bps   -6.4%   -5.0%   -13.6%   -10.0%
Down 200 bps   -9.0%   -10.0%   -13.1%   -20.0%

 

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LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2017, cash and cash equivalents were $93.3 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately $373.1 million at September 30, 2017. Approximately $265.2 million in loan commitments could fund within the next three months and other commitments, primarily standby letters of credit, totaled $8.2 million at September 30, 2017.

 

On October 31, 2017, the Company completed a sale of an aggregate of 2,012,500 shares of its common stock in a public offering. Net proceeds after underwriting discounts and estimated expenses were approximately $55.2 million. The Company intends to use the net proceeds from the offering to fund the cash portion of the purchase price for the Company’s previously announced acquisition of Southwest, to fund other potential future acquisitions, and for general corporate purposes, including the repayment of debt and to support organic growth.

 

Total consolidated equity capital at September 30, 2017, was $167.0 million, or approximately 9.3% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies. The Company’s capital ratios as of September 30, 2017, were as follows:

 

Tier 1 leverage   8.6%
Tier 1 risk-based   11.0%
Total risk-based   11.6%
Common equity Tier 1   10.3%

 

On June 30, 2006, The Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, The Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the authoritative guidance, the trusts are not included in the consolidated financial statements.

 

PROVISION FOR LOAN AND LEASE LOSSES

 

The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions which it believes to be reasonable, but which may not prove to be accurate, particularly given the Company’s growth and the economy. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

 

 35 

 

 

The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance regarding contingencies. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the prior seven years is utilized in determining the appropriate allowance. Historical loss factors are determined by risk rated loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio. These factors require judgment upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committee, and data and guidance received or obtained from the Company’s regulatory authorities.

 

The second part of the allowance is determined in accordance with authoritative guidance regarding loan impairment. Impaired loans are determined based upon a review by internal loan review and senior management.

 

The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

Impairment is measured on a loan by loan basis, and a specific allowance is assigned to each loan determined to be impaired. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if, in the Company’s opinion, the ultimate source of repayment will be generated from the liquidation of collateral.

 

The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

 

 36 

 

 

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

 

The following table provides details on the Company’s non-interest income and non-interest expense for the three month and nine month period ended September 30, 2017 and 2016:

 

($ In Thousands)  Three Months Ended   Nine Months Ended 
EARNINGS STATEMENT  9/30/17  

% of

Total

   9/30/16  

% of

Total

   9/30/17  

% of

Total

   9/30/16  

% of

Total

 
Non-interest income:                                        
Service charges on deposit accounts  $902    24.7%  $606    19.6%  $2,692    24.9%  $1,847    21.6%
Mortgage income   1,276    34.9%   1,399    45.1%   3,400    31.5%   3,228    37.8%
Interchange fee income   935    25.6%   666    21.5%   2,797    25.9%   1,991    23.3%
Gain (loss) on securities, net   -         -    -    -         129    1.5%
Other charges and fees   545    14.8%   428    13.8%   1,918    17.7%   1,347    15.8%
Total non-interest income  $3,658    100%  $3,099    100%  $10,807    100%  $8,542    100%
                                         
Non-interest expense:                                        
Salaries and employee benefits  $7,327    61.6%  $5,645    60.0%  $22,577    52.4%  $16,194    60.6%
Occupancy expense   1,390    11.7%   1,209    12.8%   4,108    9.5%   3,392    12.7%
FDIC premiums   355    3.0%   254    2.7%   887    2.1%   755    2.8%
Marketing   50    0.4%   76    0.8%   218    0.5%   280    1.0%
Amortization of core deposit intangibles   160    1.3%   100    1.1%   491    1.1%   294    1.1%
Other professional services   320    2.7%   461    4.9%   1,201    2.8%   1,013    3.8%
Other non-interest expense   2,238    18.8%   1,671    17.7%   7,247    16.8%   4,802    18.0%
Acquisition and integration charges   48    0.5%   -    -    6,327    14.8%   -    - 
Total non-interest expense  $11,888    100%  $9,416    100%  $43,056    100%  $26,730    100%

 

Noninterest income increased $0.6 million, or 18.0% as compared to third quarter 2016. The largest increases in noninterest income were increases in service charges and interchange fee income. Third quarter 2017 noninterest expense increased $2.5 million, or 26.3% as compared to third quarter 2016. The largest increase in noninterest expense, other than acquisition charges, was related to salaries and benefits of $1.7 million of which $1.4 million is related to increased employment as a result of the acquisitions.

 37 

 

 

Noninterest expense increased $16.3 million in year-over-year comparison consisting of increases in salaries and benefits of $6.9 million of which $5.4 million relates to the acquisitions.

 

PROVISION FOR INCOME TAXES

 

The Company sets aside a provision for income taxes on a monthly basis. The amount of the provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits if applicable. Permanent differences include but are not limited to tax-exempt interest income, bank-owned life insurance cash surrender value income, and certain book expenses that are not allowed as tax deductions.

 

The Company’s provision for income taxes was $3.1 million for the year through September 30, 2017, and remained unchanged when compared to same period of 2016.

 

BALANCE SHEET ANALYSIS

 

EARNING ASSETS

 

The Company’s interest-earning assets are comprised of investments and loans, and the composition, growth characteristics, and credit quality of both are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.

 

INVESTMENTS

 

The Company’s investments can at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. Surplus FRB balances and fed funds sold to correspondent banks represent the temporary investment of excess liquidity. The Company’s investments serve several purposes: 1) they provide liquidity to even out cash flows from the loan and deposit activities of customers; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with maturity and interest rate characteristics that can be changed more readily than the loan portfolio, to better match changes in the deposit base and other funding sources of the Company; 4) they are another interest-earning option for surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. Total securities, excluding other securities, totaled $359.0 million, or 20.1% of total assets at September 30, 2017, compared to $249.2 million, or 19.5% of total assets at December 31, 2016.

 

We had no fed funds sold at September 30, 2017 and $0.4 million of fed funds sold at December 31, 2016; and interest-bearing balances at other banks decreased to $29.6 million at September 30, 2017 from $30.0 million at December 31, 2016 primarily due to a decrease in our Federal Reserve Bank account. The Company’s investment portfolio increased $92.4 million due to acquisitions to a total fair market value of $360.4 million at September 30, 2017, reflecting an increase of $109.8 million, or 43.8%, for the first nine months of 2017. The Company carries investments principally at their fair market values. The Company holds a small amount of “held-to-maturity” investments with a fair market value of $7.4 million at September 30, 2017 as compared to $7.4 million at December 31, 2016. All other investment securities are classified as “available-for-sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

 

 38 

 

 

Refer to table shown in NOTE 10 - SECURITIES for information on the Company’s amortized cost and fair market value of its investment portfolio by investment type.

 

LOAN AND LEASE PORTFOLIO

 

The Company’s gross loans and leases, excluding the associated allowance for losses and including loans held for sale, totaled $1.203 billion at September 30, 2017, an increase of $329.8 million, or 37.8%, since December 31, 2016. The acquisitions accounted for approximately $237.3 million of the increase. At September 30, 2017, the company had direct energy related loans of $20.2 million, representing 1.7% of the total loan portfolio. A majority of the outstanding are secured by marine assets that operate in the Gulf of Mexico, which are under term contracts to major operators tied primarily to oil and gas production.

 

A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances shown are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs.

 

The following table shows the composition of the loan portfolio by category:

 

Composition of Loan Portfolio

 

   Sept. 30, 2017   December 31, 2016 
   Amount  

Percent
of

Total

   Amount  

Percent

of
Total

 
   ($ In Thousands) 
Mortgage loans held for sale  $4,588    0.4%  $5,880    0.6%
Commercial, financial and agricultural   164,577    13.7    129,423    14.8 
Real Estate:                    
Mortgage-commercial   456,110    37.9    314,359    36.0 
Mortgage-residential   377,307    31.4    289,640    33.2 
Construction   171,609    14.3    109,394    12.5 
Lease financing receivable   2,008    0.2    2,204    0.3 
Obligations of states and subdivisions   5,892    0.5    6,698    0.8 
Consumer and other   20,690    1.6    15,336    1.8 
Total loans   1,202,781    100%   872,934    100%
Allowance for loan losses   (8,175)        (7,510)     
Net loans  $1,194,606        $865,424      

 

In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes that the risk elements of its loan portfolio have been reduced through strategies that diversify the lending mix.

 

Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.

 

 39 

 

 

NONPERFORMING ASSETS

 

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and OREO. If the Company grants a concession to a borrower in financial difficulty, the loan falls into the category of a troubled debt restructuring (“TDR”). TDRs may be classified as either nonperforming or performing loans depending on their accrual status. The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:

 

Nonperforming Assets and Performing Troubled Debt Restructurings

($ In Thousands)

 

NON-ACCRUAL LOANS            
Real Estate:  9/30/17   12/31/16   9/30/16 
1-4 family residential construction  $-   $300   $- 
Other construction/land   98    358    2,788 
1-4 family residential revolving/open-end   61    200    317 
1-4 family residential closed-end   2,672    1,463    1,652 
Nonfarm, nonresidential, owner-occupied   625    587    598 
Nonfarm, nonresidential, other nonfarm nonresidential   1,139    322    336 
TOTAL REAL ESTATE   4,595    3,230    5,691 
Commercial and industrial   211    2    72 
Loans to individuals - other   46    33    36 
TOTAL NON-ACCRUAL LOANS   4,852    3,265    5,799 
Other real estate owned   7,855    6,008    4,670 
TOTAL NON-PERFORMING ASSETS  $12,707   $9,273   $10,469 
Performing TDRs  $4,676   $2,774   $2,903 
Total non-performing assets as a % of total loans & leases net of unearned income   1.06%   1.06%   1.21%
Total non-accrual loans as a % of total loans & leases net of unearned income   0.40%   0.37%   0.67%

 

Nonperforming assets totaled $12.7 million at September 30, 2017, compared to $9.3 million at December 31, 2016. The increase of $3.4 million is attributable to the acquisitions with associated fair value marks. The ALLL/total loans ratio was 0.68% at September 30, 2017 and .87% at December 31, 2016. Including valuation accounting adjustments on acquired loans, the total valuation plus ALLL was 1.16% of loans at September 30, 2017. The ratio of annualized net charge-offs (recoveries) to total loans was (0.005)% for the quarter ended September 30, 2017 compared to (0.04)% for the quarter ended September 30, 2016. As noted in our first quarter 2015 10-Q, the Company had been notified that a recovery of $941,000 was more likely than not expected during 2015. We received the first installment during the second quarter of 2015 which totaled $481,000 and the second installment during the third quarter of 2015 which totaled $241,000. The remaining balance of $219,000 was received in 2016.

 

 40 

 

 

ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The allowance for loan and lease losses is established through a provision for loan and lease losses. It is maintained at a level that management believes is adequate to absorb probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off.

 

The table that follows summarizes the activity in the allowance for loan and lease losses for the noted periods:

 

Allowance for Loan and Lease Losses

($ In Thousands)

 

   3 months
ended
   3 months
ended
   9 months
ended
   9 months
ended
   For the
Year
Ended
 
   9/30/17   9/30/16   9/30/17   9/30/16   12/31/16 
Balances:                         
Average gross loans & leases outstanding during period:  $1,185,493   $836,931   $1,153,694   $808,821   $820,881 
Gross Loans & leases outstanding at end of period   1,202,781    863,803    1,202,781    863,803    872,934 
                          
Allowance for Loan and Lease Losses:                         
Balance at beginning of period  $8,070   $7,259   $7,510   $6,747   $6,747 
Provision charged to expense   90    143    384    538    625 
Charge-offs:                         
Real Estate-                         
1-4 family residential construction   -    -    32    -    - 
Other construction/land   39    -    111    67    274 
1-4 family revolving, open-ended   -    -    67    -    134 
1-4 family closed-end   -    130    49    219    219 
Nonfarm, nonresidential, owner-occupied   -    -    -    -    - 
Total Real Estate   39    130    259    286    627 
Commercial and industrial   -    -    1    6    71 
Credit cards   -    -    -    1    6 
Automobile loans   12    20    30    29    37 
Loans to individuals - other   -    -    -    -    - 
All other loans   9    6    33    25    30 
Total   60    156    323    347    771 
Recoveries:                         
Real Estate-                         
1-4 family residential construction   -    -    -    -    - 
Other construction/land   24    108    274    191    229 
1-4 family revolving, open-ended   -    3    51    17    17 
1-4 family closed-end   16    105    160    194    502 
Nonfarm, nonresidential, owner-occupied   5    1    13    6    7 
Total Real Estate   45    217    498    408    755 
Commercial and industrial   7    3    39    83    84 
Credit cards   -    1    -    1    2 
Automobile loans   4    -    11    1    1 
Loans to individuals - other   7    5    21    10    12 
All other loans   12    9    35    40    55 
Total   75    235    604    543    909 
Net loan charge offs (recoveries)   (15)   (79)   (281)   (196)   (138)
Balance at end of period  $8,175   $7,481   $8,175   $7,481   $7,510 
                          
RATIOS                         
Net Charge-offs (recoveries) to average Loans & Leases(annualized)   (0.005)%   (0.04)%   (0.03)%   (0.03)%   (0.02)%
Allowance for Loan Losses to gross Loans & Leases at end of period   0.68%   0.87%   0.68%   0.87%   0.86%
Net Loan Charge-offs (recoveries) to   provision for loan losses   (16.67)%   (55.24)%   (73.18)%   (36.43)%   (22.08)%

 

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OFF-BALANCE SHEET ARRANGEMENTS

 

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. Unused commitments to extend credit totaled $265.2 million at September 30, 2017 and $220.3 million at December 31, 2016, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 22.1% of gross loans outstanding at September 30, 2017 and 25.2% at December 31, 2016, with the increase due in part to higher commitments in commercial and industrial loans. The Company also had undrawn letters of credit issued to customers totaling $8.2 million at September 30, 2017 and $1.7 million at December 31, 2016. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments. For more information regarding the Company’s off-balance sheet arrangements, see NOTE 8 to the consolidated financial statements.

 

In addition to unused commitments to provide credit, the Company is utilizing a $82.0 million letter of credit issued by the Federal Home Loan Bank (“FHLB”) on the Company’s behalf as security as of September 30, 2017. That letter of credit is backed by loans which are pledged to the FHLB by the Company.

 

OTHER ASSETS

 

The Company’s balance of non-interest earning cash and due from banks was $63.7 million at September 30, 2017 and $31.7 million at December 31, 2016. The balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the level of cash maintained on hand at our branches, and our reserve requirement among other things, and is subject to significant fluctuation in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to and borrowings from correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, the Company will let brokered deposits or other wholesale borrowings roll off as they mature, or might invest excess liquidity in higher-yielding, longer-term bonds.

 

 42 

 

 

Total equity securities increased $3.0 million due to an increase in FHLB stock and federal reserve stock. The Company’s net premises and equipment at September 30, 2017 was $46.2 million and $34.6 million at December 31, 2016; the result being an increase of $11.6 million, or 33.4% for the first nine months of 2017. Included in the acquisition of Iberville was $4.0 million in bank-owned life insurance, creating a balance of $26.4 million at September 30, 2017. Bank-owned life insurance is also discussed above in the “Non-Interest Income and Non-Interest Expense” section. Goodwill increased by $6.7 million during the period, as a result of the acquisitions, ending the first nine months of 2017 with a balance of $20.4 million. Other intangible assets, consisting primarily of the Company’s core deposit intangible, increased by $3.1 million due to the acquisitions. The Company’s goodwill and other intangible assets are evaluated annually for potential impairment, and pursuant to that analysis management has determined that no impairment exists as of September 30, 2017.

 

Other real estate owned increased $1.8 million, or 30.7% during the first nine months of 2017. This increase comes from the acquisition of GCCB. See Note 4 – Business Combinations.

 

DEPOSITS AND INTEREST BEARING LIABILITIES

 

DEPOSITS

 

Deposits are another key balance sheet component impacting the Company’s net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type for the three-month periods ended September 30, 2017 and 2016 is included in the Average Balances and Rates tables appearing above, in the section titled “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits showing the balance and percentage of total deposits by type is presented for the noted periods in the following table.

 

Deposit Distribution        
($ In Thousands)  Sept. 30, 2017   December 31, 2016 
Non-interest bearing demand deposits  $308,050   $202,478 
NOW accounts and Other   639,802    430,903 
Money Market accounts   157,219    113,253 
Savings accounts   135,373    69,540 
Time Deposits of less than $250,000   209,714    162,797 
Time Deposits of $250,000 or more   57,833    60,220 
Total deposits  $1,507,991   $1,039,191 
           
Percentage of Total Deposits          
           
Non-interest bearing demand deposits   20.4%   19.5%
NOW accounts and other   42.4%   41.5%
Money Market accounts   10.5%   10.9%
Savings accounts   9.0%   6.7%
Time Deposits of less than $250,000   13.9%   15.6%
Time Deposits of $250,000 or more   3.8%   5.8%
Total   100%   100%

 

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OTHER INTEREST-BEARING LIABILITIES

 

The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

 

Total non-deposit interest-bearing liabilities increased by $25.3 million, or 31.9%, in the first nine months of 2017, due to an increase in notes payable to the FHLB. Repurchase agreements decreased $5.0 million. The Company had junior subordinated debentures totaling $10.3 million at September 30, 2017 and December 31, 2016, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

 

OTHER NON-INTEREST BEARING LIABILITIES

 

Other liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities increased by $4.0 million, or 100.8%, during the first nine months of 2017, due to the increase in other accrued but unpaid expenses.

 

liquidity and market RisK MANAGEMENT

 

LIQUIDITY

 

Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by management on a monthly basis, with various scenarios applied to assess our ability to meet liquidity needs under adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored and we are focused on maintaining adequate liquidity resources to draw upon should unexpected needs arise.

 

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances via FHLB lines of credit, or solicit brokered deposits if deposits are not immediately obtainable from local sources. The net availability on lines of credit from the FHLB totaled $414.1 million at September 30, 2017. Furthermore, funds can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cash for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As of September 30, 2017, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $95.6 million of the Company’s investment balances, compared to $101.2 million at December 31, 2016. The increase in unpledged securities from September, 2017 compared to December 2016 is primarily due to an increase in portfolio assets. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding fed funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans that are pledged to the FHLB by the Company, totaled $82.0 million at September 30, 2017. Management is of the opinion that available investments and other potentially liquid assets, along with the standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.

 

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The Company’s liquidity ratio as of September 30, 2017 was 14.1%, as compared to internal policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines:

 

   Sept. 30, 2017  

Policy

Maximum

  

Policy

Compliance

Loans to Deposits (including FHLB advances)   75.0%   90.0%  In Policy
Net Non-core Funding Dependency Ratio   6.0%   20.0%  In Policy
Fed Funds Purchased / Total Assets   0.0%   10.0%  In Policy
FHLB Advances / Total Assets   4.4%   20.0%  In Policy
FRB Advances / Total Assets   0.0%   10.0%  In Policy
Pledged Securities to Total Securities   72.0%   90.0%  In Policy

 

Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.

 

The holding company’s primary uses of funds are ordinary operating expenses and stockholder dividends, and its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations. Management anticipates that the Bank will have sufficient earnings to provide dividends to the holding company to meet its funding requirements for the foreseeable future. Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

INTEREST RATE RISK MANAGEMENT

 

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.

 

To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios every month. The model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).

 

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We use seven standard interest rate scenarios in conducting our 12-month net interest income simulations: “static,” upward shocks of 100, 200, 300 and 400 basis points, and downward shocks of 100, and 200 basis points. Pursuant to policy guidelines, we typically attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock. As of September 30, 2017, the Company had the following estimated net interest income sensitivity profile, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

 

September 30, 2017  Net Interest Income at Risk – Sensitivity Year 1 
($ In Thousands)  -200 bp   -100 bp   STATIC   +100 bp   +200 bp   +300 bp   +400 bp 
Net Interest Income  $53,060   $54,580   $58,067   $59,791   $61,432   $63,091   $64,615 
Dollar Change   -5,007    -3,487         1,724    3,365    5,024    6,548 
NII @ Risk - Sensitivity Y1   -8.6%   -6.0%        3.0%   5.8%   8.7%   11.3%

 

If there were an immediate and sustained downward adjustment of 200 basis points in interest rates, all else being equal, net interest income over the next twelve months would likely be approximately $5.0 million lower than in a stable interest rate scenario, for a negative variance of 8.6%. The unfavorable variance increases if rates were to drop below 200 basis points, due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts, for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This effect would be exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While management believes that further interest rate reductions are highly unlikely, the potential percentage drop in net interest income exceeds our internal policy guidelines in declining interest rate scenarios and we will continue to monitor our interest rate risk profile and take corrective action as deemed appropriate.

 

Net interest income would likely improve by $3.4 million, or 5.8%, if interest rates were to increase by 200 basis points relative to a stable interest rate scenario, with the favorable variance expanding the higher interest rates rise. The initial increase in rising rate scenarios will be limited to some extent by the fact that some of our variable-rate loans are currently at rate floors, resulting in a re-pricing lag while base rates are increasing to floored levels, but the Company still appears well-positioned to benefit from a material upward shift in the yield curve.

 

The Company’s one year cumulative GAP ratio is approximately 220.3%, which means that there are more assets repricing than liabilities within the first year. The Company is “asset-sensitive.” These results are based on cash flows from assumptions of assets and liabilities that reprice (maturities, likely calls, prepayments, etc.) Typically, the net interest income of asset-sensitive companies should improve with rising rates and decrease with declining rates.

 

In addition to the net interest income simulations shown above, we run stress scenarios modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the Company in the most recent economic cycle, and potential unfavorable movement in deposit rates relative to yields on earning assets. Even though net interest income will naturally be lower with no balance sheet growth, the rate-driven variances projected for net interest income in a static growth environment are similar to the changes noted above for our standard projections. When a greater level of non-maturity deposit runoff is assumed or unfavorable deposit rate changes are factored into the model, projected net interest income in declining rate and flat rate scenarios does not change materially relative to standard growth projections. However, the benefit we would otherwise experience in rising rate scenarios is minimized and net interest income remains relatively flat.

 

 46 

 

 

The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate risk. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at projected replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time as the characteristics of the Company’s balance sheet evolve and interest rate and yield curve assumptions are updated.

 

The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates. The table below shows estimated changes in the Company’s EVE as of September 30, 2017, under different interest rate scenarios relative to a base case of current interest rates:

 

   Balance Sheet Shock 
($ In Thousands)  -200 bp   -100 bp   STATIC
(Base)
   +100 bp   +200 bp   +300 bp   +400 bp 
Market Value of Equity  $389,176   $387,021   $447,973   $495,850   $533,964   $565,223   $590,236 
Change in EVE from base   -58,797    -60,952         47,877    85,991    117,250    142,263 
% Change   -13.1%   -13.6%        10.7%   19.2%   26.2%   31.8%
Policy Limits   -20.0%   -10.0%        -10.0%   -20.0%   -30.0%   -40.0%

 

The table shows that our EVE will generally deteriorate in declining rate scenarios, but should benefit from a parallel shift upward in the yield curve. As noted previously, however, Management believes that the potential for a significant rate decline is low. We also run stress scenarios for EVE to simulate the possibility of higher loan prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular.

 

CAPITAL RESOURCES

 

At September 30, 2017 the Company had total stockholders’ equity of $167.0 million, comprised of $9.2 million in common stock, less than $0.1 million in treasury stock, $105.0 million in surplus, $51.6 million in undivided profits, $1.7 million in accumulated comprehensive income for available-for-sale securities. Total stockholders’ equity at the end of 2016 was $154.5 million. The increase of $12.5 million, or 8.1%, in stockholders’ equity during the first nine months of 2017 is comprised of capital added via net earnings of $8.2 million, $2.7 million increase in accumulated comprehensive income for available-for-sale securities, and 2.2 million of common stock issued for the purchase of GCCB, offset by $1.0 million in cash dividends paid.

 

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The Company uses a variety of measures to evaluate its capital adequacy, including risk-based capital and leverage ratios that are calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of the dates indicated.

 

Regulatory Capital Ratios

The First, ANBA

 

  

Sept. 30,

2017

   December 31,
2016
  

Minimum

Required to be

Well

Capitalized

 
Common Equity Tier 1 Capital Ratio   12.1%   16.2%   6.5%
Tier 1 Capital Ratio   12.1%   16.2%   8.0%
Total Capital Ratio   12.7%   17.0%   10.0%
Tier 1 Leverage Ratio   9.5%   13.1%   5.0%

 

Regulatory Capital Ratios

The First Bancshares, Inc.

 

  

Sept. 30,

2017

   December 31,
2016
  

Minimum

Required to be

Well

Capitalized

 
Common Equity Tier 1 Capital Ratio*   10.3%   13.8%   6.5%
Tier 1 Capital Ratio**   11.0%   14.7%   8.0%
Total Capital Ratio   11.6%   15.5%   10.0%
Tier 1 Leverage Ratio   8.6%   11.9%   5.0%

 

* The numerator does not include Preferred Stock and Trust Preferred.

** The numerator includes Trust Preferred.

 

Regulatory capital ratios slightly decreased from December 31, 2016 to September 30, 2017 as asset growth outpaced capital formation. Our capital ratios remain very strong relative to the median for peer financial institutions, and at September 30, 2017 were well above the threshold for the Company and the Bank to be classified as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.

 

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Reconciliation of Non-GAAP Financial Measures

 

We report net interest income and net interest margin on a fully tax equivalent, or FTE, basis, which calculations are not in accordance with generally accepted accounting principles, or GAAP. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 34% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and believes it enhances the comparability of income and expenses arising from taxable and nontaxable sources. Net interest income and net interest margin on a fully tax equivalent basis should not be viewed as a substitute for net interest income or net interest margin provided in accordance with GAAP. See reconciliation of net interest income (FTE) to net interest income calculated in accordance with GAAP and net interest margin (FTE) to net interest margin calculated in accordance with GAAP below:

 

Net Interest Income Fully Tax Equivalent

 

($ In Thousands)  Three Months   Three Months 
   Ended   Ended 
   Sept. 30, 2017   Sept. 30, 2016 
         
Net interest income  $14,935   $10,067 
Tax exempt investment income   (579)   (465)
Taxable investment income   876    704 
Net interest income fully tax equivalent  $15,232   $10,306 
Net interest income fully tax equivalent  $15,232   $10,306 
Average earning assets  $1,599,704   $1,113,475 
Net interest margin fully tax equivalent   3.81%   3.70%

 

($ In Thousands)        
   YTD   YTD 
   Sept. 30, 2017   Sept. 30, 2016 
         
Net interest income  $43,939   $29,597 
Tax exempt investment income   (1,765)   (1,398)
Taxable investment income   2,668    2,118 
Net interest income fully tax equivalent  $44,842   $30,317 
Net interest income fully tax equivalent  $44,842   $30,317 
Average earning assets  $1,557,782   $1,096,522 
Net interest margin fully tax equivalent   3.84%   3.69%

 

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PART I - FINANCIAL INFORMATION

 

ITEM NO. 3

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”

 

PART I - FINANCIAL INFORMATION

 

ITEM NO. 4

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2017, (the “Evaluation Date”), we carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e)and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, as of the Evaluation Date, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

 

Changes in Internal Controls

 

There have been no changes, significant or otherwise, in our internal controls over financial reporting that occurred during the quarter ended September 30, 2017, that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1: LEGAL PROCEEDINGS

 

The Company is involved in various legal proceedings in the normal course of business. Management does not believe, based on currently available information, that the outcome of any such proceedings will have a material adverse effect on our financial condition or results of operations.

 

ITEM 1A: RISK FACTORS

 

There were no material changes in the Company’s risk factors since December 31, 2016, other than as set forth below:

 

Shareholder approval for the proposed merger of Southwest with and into the Company may not be received and regulatory consents or approvals may not be received, may take longer than expected or impose conditions that are not presently anticipated.

 

Before the merger may be completed, Southwest’s shareholders must approve the transaction and such shareholder approval may not be received. In addition, various approvals or consents must be obtained from the Federal Reserve, the OCC, and other bank, securities, antitrust and other regulatory authorities. These regulators may impose conditions on consummation of the merger or require changes to the terms of the merger. Although we do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying the effective time of the merger or imposing additional costs on or limiting our revenues following the merger. Furthermore, such conditions or changes may constitute a burdensome condition that may allow us to terminate the merger agreement and we may exercise our right to terminate the merger agreement. There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed.

 

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We may fail to realize the anticipated cost savings and other financial benefits of the proposed acquisition of Southwest on the anticipated schedule, if at all.

 

The Company and Southwest have historically operated independently. The success of the merger of Southwest with and into The Company will depend, in part, on our ability to successfully combine our businesses. To realize the anticipated benefits of the merger, after the effective time of the merger, we expect to integrate Southwest’s business into our own. We may face significant challenges in integrating Southwest’s operations in a timely and efficient manner and in retaining personnel from these two banks that we consider to be key personnel. We anticipate that we will achieve cost savings from the merger when the two companies have been fully integrated, however achieving the anticipated cost savings and financial benefits of the mergers will depend, in part, on whether we can successfully integrate these businesses. Actual growth and cost savings, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. In addition, integration efforts following the mergers will require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day business of the combined company. Any inability to realize the full extent of, or any of, the anticipated cost savings and financial benefits of the mergers, as well as any delays encountered in the integration process, could have an adverse effect on the business and results of operations of the combined company, which may affect the market price of our common stock.

 

We will incur significant transaction and merger-related costs in connection with the proposed acquisition of Southwest.

 

We have incurred and expect to incur a number of non-recurring costs associated with the proposed acquisition of Southwest. These costs and expenses include fees paid to financial, legal and accounting advisors, severance, retention bonus and other potential employment-related costs, filing fees, printing expenses and other related charges. Some of these costs are payable by us regardless of whether the acquisition is completed. There are also a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the merger and the integration of the two companies’ businesses. While we have assumed that a certain level of expenses would be incurred in connection with the acquisition, there are many factors beyond our control that could affect the total amount or the timing of the integration and implementation expenses.

 

There may also be additional unanticipated significant costs in connection with the acquisition that we may not recoup. These costs and expenses could reduce the realization of efficiencies, strategic benefits and additional income we expect to achieve from the acquisition. Although we expect that these benefits will offset the transaction expenses and implementation costs over time, the net benefit may not be achieved in the near term or at all.

 

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For additional information on risk factors, refer to Part I, Item 1A. “Risk Factors” of the Annual Report on Form 10-K of The First Bancshares, Inc., filed with the Securities and Exchange Commission on March 16, 2017.

 

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Not applicable

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

 

Not applicable

 

ITEM 4: (REMOVED AND RESERVED)

 

Item 5: Other Information

 

Not applicable

 

ITEM 6: EXHIBITS -

 

(a) Exhibits

 

Exhibit No.   Description
     
3.1   Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on July 28, 2016).
     
3.2   Amended and Restated Bylaws of The First Bancshares, Inc. effective as of March 17, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on March 18, 2016).
     
4.1   Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement No. 333-220491 on Form S-3 filed on 9-15-2017.
     
10.1   Agreement and Plan of Merger by and between The First Bancshares, Inc. and Southwest Banc Shares, Inc., dated October 24, 2017.
     
31.1   Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of principal executive officer pursuant to 18 U. S. C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2  

Certification of principal financial officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    THE FIRST BANCSHARES, INC.
    (Registrant)
     
    /s/ M. RAY (HOPPY) COLE, JR.
November 9, 2017   M. Ray (Hoppy) Cole, Jr.
(Date)   Chief Executive Officer
     
   

/s/ DONNA T. (DEE DEE) LOWERY 

November 9, 2017   Donna T. (Dee Dee) Lowery, Executive
(Date)   Vice President and Chief Financial Officer

 

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