Annual Statements Open main menu

FIRST BANCSHARES INC /MS/ - Quarter Report: 2020 March (Form 10-Q)

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $1.00 FBMS The Nasdaq Stock Market

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes x No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ 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 x

 

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, 21,593,396 shares issued and 21,398,714 outstanding as of May 7, 2020.

 

 

 

 

 

 The First Bancshares, Inc.

Form 10-Q

Quarter Ended March 31, 2020

Index

 

Part I. Financial Information  
     
Item 1. Financial Statements 3
  Consolidated Balance Sheets—Unaudited at March 31, 2020 3
  Consolidated Statements of Income—Unaudited 4
  Consolidated Statements of Comprehensive Income—Unaudited 5
  Consolidated Statements of Changes in Stockholders’ Equity - Unaudited 6
  Consolidated Statements of Cash Flows—Unaudited 7
  Notes to Consolidated Financial Statements—Unaudited 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
Item 4. Controls and Procedures 46
     
Part II. Other Information  
     
Item 1. Legal Proceedings 47
Item 1A.  Risk Factors 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
Item 3. Defaults Upon Senior Securities 49
Item 4. Mine Safety Disclosures 49
Item 5. Other Information 49
Item 6. Exhibits 49
Signatures 50

 

2

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands)

 

   (Unaudited) 
   March 31,   December 31, 
   2020   2019 
ASSETS          
           
Cash and due from banks  $107,252   $89,736 
Interest-bearing deposits with banks   179,507    79,128 
Total cash and cash equivalents   286,759    168,864 
           
Securities available-for-sale, at fair value   762,977    765,087 
Other securities   25,911    26,690 
Total securities   788,888    791,777 
           
Loans held for sale   13,288    10,810 
Loans   2,602,288    2,600,358 
Allowance for loan losses   (20,804)   (13,908)
Loans, net   2,594,772    2,597,260 
           
Interest receivable   14,943    14,802 
Premises and equipment   108,013    104,980 
Cash surrender value of bank-owned life insurance   65,713    59,572 
Goodwill   158,572    158,572 
Other real estate owned   6,974    7,299 
Other assets   37,167    38,737 
TOTAL ASSETS  $4,061,801   $3,941,863 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Deposits:          
Noninterest-bearing  $340,606   $723,208 
Interest-bearing   2,937,188    2,353,325 
TOTAL DEPOSITS   3,277,794    3,076,533 
           
Interest payable   2,885    2,508 
Borrowed funds   116,180    214,319 
Subordinated debentures   80,717    80,678 
Other liabilities   28,299    24,167 
TOTAL LIABILITIES   3,505,875    3,398,205 
           
STOCKHOLDERS’ EQUITY:          
Common stock, par value $1 per share, 40,000,000 shares authorized;
19,046,637 shares issued  at March 31, 2020, and
18,996,948 shares issued at December 31, 2019, respectively
   19,047    18,997 
Additional paid-in capital   409,855    409,805 
Retained earnings   116,886    110,460 
Accumulated other comprehensive gain   15,831    10,089 
Treasury stock, at cost, 194,682 shares at March 31, 2020 and
194,682 shares at December 31, 2019
   (5,693)   (5,693)
TOTAL STOCKHOLDERS’ EQUITY   555,926    543,658 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $4,061,801   $3,941,863 

 

See Notes to Consolidated Financial Statements

 

3

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except earnings and dividends per share)

 

   (Unaudited) 
   Three Months Ended 
   March 31, 
   2020   2019 
INTEREST INCOME:          
Interest and fees on loans  $36,005   $28,804 
Interest and dividends on securities:          
Taxable interest and dividends   4,034    3,591 
Tax exempt interest   1,360    758 
Interest on federal funds sold and interest bearing deposits in other banks   199    120 
TOTAL INTEREST INCOME   41,598    33,273 
           
INTEREST EXPENSE:          
Interest on deposits   5,414    4,363 
Interest on borrowed funds   2,119    1,779 
TOTAL INTEREST EXPENSE   7,533    6,142 
           
NET INTEREST INCOME   34,065    27,131 
           
PROVISION FOR LOAN LOSSES   7,102    1,123 
NET INTEREST INCOME AFTER          
PROVISION FOR LOAN LOSSES   26,963    26,008 
           
NON-INTEREST INCOME:          
Service charges on deposit accounts   1,914    1,831 
Gain on sale of securities   174    38 
Other service charges and fees   4,386    3,685 
TOTAL NON-INTEREST INCOME   6,474    5,554 
           
NON-INTEREST EXPENSES:          
Salaries and employee benefits   13,228    10,697 
Occupancy and equipment   2,918    2,447 
Acquisition and integration charges   740    3,179 
Other   6,553    5,570 
TOTAL NON-INTEREST EXPENSES   23,439    21,893 
INCOME BEFORE INCOME TAXES   9,998    9,669 
INCOME TAXES   1,687    2,034 
NET INCOME  $8,311   $7,635 
           
BASIC EARNINGS PER SHARE  $0.44   $0.49 
DILUTED EARNINGS PER SHARE   0.44    0.48 

 

See Notes to Consolidated Financial Statements

 

4

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

 

   (Unaudited) 
   Three Months Ended 
   March 31, 
   2020   2019 
Net income per consolidated statements of income  $8,311   $7,635 
           
Other Comprehensive Income:          
           
Unrealized holding gains arising during period on available-for-sale securities   8,629    7,966 
           
Reclassification adjustment for (gains) included in net income   (174)   (38)
           
Unrealized holding gains arising during period on available-for-sale securities   8,455    7,928 
           
Income tax (expense)   (2,713)   (2,006)
           
Other comprehensive income   5,742    5,922 
           
Comprehensive Income  $14,053   $13,557 

 

See Notes to Consolidated Financial Statements

 

5

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in thousands except per share data, unaudited)

 

  Common Stock  

Additional
Paid-in 

   Retained  

Accumulated Other
Comprehensive

   Treasury Stock    
  Shares   Amount   Capital   Earnings   Income (Loss)   Shares   Amount   Total 
 .Balance, January 1, 2019   14,857,092   $14,857   $278,659   $71,998   $(1,796)   (26,494)  $(464)  $363,254 
Net income   -    -    -    7,635    -    -    -    7,635 
Other comprehensive income   -    -    -    -    5,922    -    -    5,922 
Dividends on common stock, $0.07 per share   -    -    -    (1,039)   -    -    -    (1,039)
Issuance of common shares for FPB acquisition   2,377,501    2,378    75,842    -    -    -    -    78,220 
Restricted stock grant   66,132    66    (66)   -    -    -    -    - 
Restricted stock grant forfeited   (1,500)   (2)   2    -    -    -    -    - 
Compensation expense   -    -    355    -    -    -    -    355 
 Balance, March 31, 2019   17,299,225   $17,299   $354,792   $78,594   $4,126    (26,494)  $(464)  $454,347 
                                         
Balance, January 1, 2020   18,996,948   $18,997   $409,805   $110,460   $10,089    (194,682)  $(5,693)  $543,658 
Net income   -    -    -    8,311    -    -    -    8,311 
Other comprehensive income   -    -    -    -    5,742    -    -    5,742 
Dividends on common stock, $0.10 per share   -    -    -    (1,885)   -    -    -    (1,885)
Restricted stock grant   60,680    61    (61)   -    -    -    -    - 
Repurchase of restricted stock for payment of taxes   (10,991)   (11)   (367)   -    -    -    -    (378)
Compensation expense   -    -    478    -    -    -    -    478 
Balance, March 31, 2020   19,046,637   $19,047   $409,855   $116,886   $15,831    (194,682)  $(5,693)  $555,926 

 

6

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

 

  (Unaudited) 
  Three months ended 
  March 31, 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
NET INCOME  $8,311   $7,635 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   1,308    677 
Provision for loan losses   7,102    1,123 
Loss on sale/writedown of ORE   293    295 
Securities gain   (174)   (38)
Gain on sale/writedown of premises and equipment   8    - 
Restricted stock expense   478    355 
Increase in cash value of life insurance   (328)   (297)
Federal Home Loan Bank stock dividends   (53)   - 
Payments on right-of-use assets   (382)   (122)
Residential loans originated and held for sale   (55,076)   (30,078)
Proceeds from sale of residential loans held for sale   51,828    28,632 
Changes in:          
Interest receivable   (141)   (283)
Interest payable   377    434 
Other, net   450    (630)
NET CASH PROVIDED BY OPERATING ACTIVITIES   14,001    7,703 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Maturities, calls and paydowns of available-for-sale and held-to-maturity securities   46,192    19,445 
Proceeds from sales of securities available-for-sale   -    20,291 
Purchases of available-for-sale securities   (36,277)   (46,599)
Redemptions of other securities   832    2,712 
Net increase in loans   (925)   (29,961)
Net increase in premises and equipment   (1,413)   (1,548)
Proceeds from sale of other real estate owned   532    385 
Purchase of bank-owned life insurance   (5,800)   - 
Cash received in excess of cash paid for acquisitions   -    14,743 
NET CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES   3,141    (20,532)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Increase in deposits   201,122    144,318 
Net decrease in borrowed funds   (98,139)   (41,000)
Dividends paid on common stock   (1,852)   (1,020)
Repurchase of restricted stock for payment of taxes   (378)   - 
NET CASH PROVIDED BY FINANCING ACTIVITIES   100,753    102,298 
           
NET INCREASE IN CASH   117,895    89,469 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   168,864    159,107 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $286,759   $248,576 
           
SUPPLEMENTAL DISCLOSURES:          
Cash payments for interest   5,567    4,297 
Loans transferred to other real estate   504    946 
Issuance of restricted stock grants   61    66 
Stock issued in connection with FPB acquisition   -    78,220 
Dividends on restricted stock grants   33    19 
Lease liabilities arising from obtaining right-of-use assets   2,419    3,595 

 

See Notes to Consolidated Financial Statements

 

7

 

 

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020

 

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 three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2019.

 

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” or “The First”).

 

At March 31, 2020, the Company had approximately $4.062 billion in assets, $2.595 billion in net loans, $3.278 billion in deposits, and $555.9 million in stockholders' equity. For the three months ended March 31, 2020, the Company reported net income of $8.3 million. After-tax merger-related costs of $576 thousand were expensed during the three months ended March 31, 2020.

 

On February 21, 2020, the Company paid a cash dividend in the amount of $0.10 per share to shareholders of record as of the close of business on Friday, February 7, 2020.

 

NOTE 3 -- ACCOUNTING STANDARDS

 

During the three month ended March 31, 2020, there were no significant accounting pronouncements applicable to the Company that became effective.

 

New Accounting Standards That Have Not Yet Been Adopted

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes.” ASU 2019-12 removes specific exceptions to the general principles in Topic 740. This update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The ASU also improves financial statement preparers’ application for income tax-related guidance, simplifies GAAP for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will be effective on January 1, 2021 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

8

 

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The FASB issued new guidance (Topic 326) to replace the incurred loss model for loans and other financial assets with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases recognized by a lessor. In addition, the amendments in Topic 326 require credit losses on available-for-sale debt securities to be presented as a valuation allowance rather than as a direct write-down. The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years. For calendar year-end SEC filers, it is effective for March 31, 2020 interim financial statements. For debt securities with other-than-temporary impairment (“OTTI”), the guidance will be applied prospectively. Existing purchased credit impaired (“PCI”) assets will be grandfathered and classified as purchased credit deteriorated (“PCD”) assets at the date of adoption. The assets will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective.

 

The Company’s Allowance for Credit Loss Committee (“ACL Committee”), made up of executive and senior management from corporate administration, accounting, risk management, and credit and portfolio administration, have reviewed and approved the methodology and initial setup of the CECL Model. All historical data used in the model’s calculation, the mathematical accuracy of that calculation, and any inputs provided externally that affect the calculation have been independently validated. Internal controls necessary in maintaining accuracy to estimate an adequate reserve have been designed but not tested for operating effectiveness. The Company had finalized the formal review and approval process and the results of its CECL estimate as of year-end but has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (“CARES Act”), until the date on which the national emergency related to the novel coronavirus (“COVID-19”) outbreak is terminated or December 31, 2020 whichever occurs first. The delayed adoption will allow extra time to document and test controls over this standard and will allow us time to provide consistent, high-quality financial information to our investors and other stakeholders. Upon adoption of ASU 2016-13, the Company has determined that the impact to the allowance for credit losses will be an increase under the new standard due to the life of loan loss estimation methodology, as well as the requirement to record an allowance on acquired loans previously recorded at fair value. As disclosed previously, it can be reasonably expected that a probable range in the reserve as a percentage of total loans after adoption of this guidance to be between 0.68% and 1.39% as of January 1, 2020.

 

Upon adopting ASU 2016-13, the Company will not record an allowance as of January 1, 2020 with respect to its available-for-sale debt securities as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). The Company has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (“CARES Act”), until the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020 whichever occurs first. The Company has elected to utilize the five-year CECL transition. The adoption of ASU 2016-13 is not expected to have a significant impact on the Company’s regulatory capital ratios.

 

In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU makes narrow-scope improvements to various aspects of the financial instruments guidance, including the current expected credit losses (CECL) standard issued in 2016. ASU 2016-13 and subsequent ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This amendment is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective.

 

9

 

 

NOTE 4 – BUSINESS COMBINATIONS

 

Acquisitions

 

First Florida Bancorp, Inc.

 

On November 1, 2019, the Company completed its acquisition of First Florida Bancorp, Inc. (“FFB”), and immediately thereafter merged its wholly-owned subsidiary, First Florida Bank with and into The First. The Company paid a total consideration of $89.5 million to the FFB shareholders as consideration in the merger, which included 1,682,889 shares of Company common stock and approximately $34.1 million in cash.

 

In connection with the acquisition, the Company recorded approximately $40.0 million of goodwill and $3.7 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

 

The Company acquired the $248.9 million loan portfolio at an estimated fair value discount of $1.7 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

 

Expenses associated with the FFB acquisition were $443 thousand for the three months ended March 31, 2020. These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

 

The assets acquired and liabilities assumed and consideration paid in the acquisition of FFB were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through November 1, 2020 in respect of FFB, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

 

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed on November 1, 2019 ($ in thousands):

 

Purchase price:    
Cash and stock  $89,520 
     Total purchase price   89,520 
      
Identifiable assets:     
Cash and due from banks   50,169 
Investments   122,084 
Loans   247,263 
Core deposit intangible   3,745 
Personal and real property   4,991 
Other assets   2,283 
     Total assets   430,535 
      
Liabilities and equity:     
Deposits   373,908 
Borrowed funds   5,527 
Other liabilities   1,619 
     Total liabilities   381,054 
Net assets acquired   49,481 
Goodwill resulting from acquisition  $40,039 

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of acquisition and at March 31, 2020, are as follows ($ in thousands):

 

   November 1, 2019   March 31, 2020 
Outstanding principal balance  $248,916   $233,392 
Carrying amount   247,263    232,082 

 

PCI loans are discussed more fully in Note 10 – “Loans” of this report.

 

10

 

 

FPB Financial Corp.

 

On March 2, 2019, the Company completed its acquisition of FPB Financial Corp., (“FPB”), and immediately thereafter merged its wholly-owned subsidiary, Florida Parishes Bank with and into The First. The Company paid a total consideration of $78.2 million to the FPB shareholders, which included 2,377,501 shares of Company common stock and $5 thousand in cash.

 

In connection with the acquisition, the Company recorded approximately $28.8 million of goodwill and $6.6 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

 

The Company acquired the $247.8 million loan portfolio at an estimated fair value discount of $3.1 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

 

Expenses associated with the FPB acquisition were $63 thousand for the three months March 31, 2020. These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

 

The following table summarizes the finalized fair values of the assets acquired and liabilities assumed on March 2, 2019 ($ in thousands):

 

       Measurement     
   As Initially   Period     
   Reported   Adjustments   As Adjusted 
Identifiable assets:               
  Cash and due from banks  $14,748   $-   $14,748 
  Investments   93,604    -    93,604 
  Loans   244,665    -    244,665 
  Bank owned life insurance   7,312    -    7,312 
  Core deposit intangible   4,793    1,804    6,597 
  Personal and real property   17,358    -    17,358 
  Other assets   1,430    (278)   1,152 
     Total assets   383,910   $1,526    385,436 
                
Liabilities and equity:               
  Deposits   312,453    -    312,453 
  Borrowed funds   17,250    -    17,250 
  Other liabilities   6,291    -    6,291 
     Total liabilities   335,994    -    335,994 
  Net assets acquired   47,916    1,526    49,442 
  Consideration paid   78,225    -    78,225 
  Goodwill resulting from acquisition  $30,309   $1,526   $28,783 

 

Valuation adjustments have been made to core deposit intangible and other assets since initially reported.

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of acquisition and at March 31, 2020, are as follows ($ in thousands):

 

   March 2, 2019   March 31, 2020 
Outstanding principal balance  $247,774   $180,070 
Carrying amount   244,665    178,186 

 

PCI loans are discussed more fully in Note 10 – “Loans” of this report.

 

11

 

 

Supplemental Pro-Forma Financial Information

 

The following unaudited pro-forma financial data for the three months ended March 31, 2020 and 2019 presents supplemental information as if the FPB and FFB acquisitions had occurred on January 1, 2019. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

 

($ in thousands)  Pro-Forma   Pro-Forma 
  

Three months ended
March 31, 2020

  

Three months ended
March 31, 2019

 
   (unaudited)   (unaudited) 
           
Net interest income  $34,065   $34,705 
Non-interest income   6,474    6,313 
Total revenue   40,539    41,018 
Income before income taxes   10,739    18,002 

 

Supplemental pro-forma earnings were adjusted to exclude acquisition costs incurred.

 

Non-credit impaired loans acquired in the acquisitions were accounted for in accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs. PCI loans acquired in the FPB and FFB acquisitions were accounted for in accordance with ASC 310-30 Accounting for Purchased Loans with Deteriorated Credit Quality.

 

NOTE 5 – 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. There were no anti-dilutive common stock equivalents excluded in the calculations.

 

The following tables disclose the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common stockholders ($ in thousands, except per share amount):

 

   For the Three Months Ended 
   March 31, 2020 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic earnings per share  $8,311    18,818,115   $0.44 
                
Effect of dilutive shares:               
  Restricted stock grants        124,014      
                
Diluted earnings per share  $8,311    18,942,129   $0.44 

 

   For the Three Months ended 
   March 31, 2019 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic earnings per share  $7,635    15,646,476   $0.49 
                
Effect of dilutive shares:               
  Restricted stock grants        124,146      
                
Diluted earnings per share  $7,635    15,770,622   $0.48 

 

The Company granted 60,680 shares of restricted stock in the first quarter of 2020 and 66,132 shares of restricted stock in the first quarter of 2019.

 

12

 

 

NOTE 6 – 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 securities, which are also recognized as separate components of equity.

 

NOTE 7 – 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 March 31, 2020, and December 31, 2019, these financial instruments consisted of the following:

 

($ in thousands)  March 31, 2020   December 31, 2019 
   Fixed Rate   Variable Rate   Fixed Rate   Variable Rate 
Commitments to make loans  $39,351   $5,723   $42,774   $5,676 
Unused lines of credit   120,335    180,732    137,966    208,728 
Standby letters of credit   2,425    9,917    3,648    8,475 

 

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 0.5% to 18.0% and maturities ranging from approximately 1 year to 30 years.

 

NOTE 8 – FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the assets or liability in an orderly transaction between market participants on the measurement date. There are 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.

 

The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at March 31, 2020 and December 31, 2019:

 

·Investment Securities: The fair value for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

 

·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.

 

·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. 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. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment.

 

·Other Real Estate Owned: Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals of the collateral less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Due to the subjective nature of establishing the fair value when the asset is acquired, 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 other non-interest income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recorded in other non-interest income. Other real estate owned is classified within Level 3 of the fair value hierarchy.

 

13

 

 

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

 

As of March 31, 2020   Fair Value Measurements 
($ in thousands)  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  $286,759   $286,759   $286,759   $-   $- 
Securities available-for-sale:                         
U.S. Treasury   5,308    5,308    5,308           
Obligations of U.S. government agencies and sponsored entities   72,880    72,880    -    72,880    - 
Municipal securities   274,163    274,163    -    254,981    19,182 
Mortgage-backed securities   382,900    382,900    -    382,900    - 
Corporate obligations   27,726    27,726    -    27,215    511 
Loans, net   2,594,772    2,573,942    -    -    2,573,942 
Accrued interest receivable   14,943    14,943    -    3,995    10,948 
Liabilities:                         
Non-interest-bearing deposits  $340,606   $340,606   $-   $340,606   $- 
Interest-bearing deposits   2,937,188    2,946,069    -    2,946,069    - 
Subordinated debentures   80,717    69,037    -    -    69,037 
FHLB and other borrowings   116,180    116,180    -    116,180    - 
Accrued interest payable   2,885    2,885    -    2,885    - 

 

As of December 31, 2019      Fair Value Measurements 
($ in thousands)  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  $168,864   $168,864   $168,864   $-   $- 
Securities available-for-sale:                         
U.S. Treasury   4,894    4,894    4,894           
Obligations of U.S. Government agencies and sponsored entities   77,950    77,950    -    77,950    - 
Municipal securities   258,982    258,982    -    248,637    10,345 
Mortgage-backed securities   395,315    395,315    -    395,315    - 
Corporate obligations   27,946    27,946    -    27,538    408 
Loans, net   2,597,260    2,560,668    -    -    2,560,668 
Accrued interest receivable   14,802    14,802    -    4,246    10,556 
                          
Liabilities:                         
Non-interest-bearing deposits  $723,208   $723,208   $-   $723,208   $- 
Interest-bearing deposits   2,353,325    2,339,537    -    2,339,537    - 
Subordinated debentures   80,678    80,330    -    -    80,330 
FHLB and other borrowings   214,319    214,319    -    214,319    - 
Accrued interest payable   2,508    2,508    -    2,508    - 

 

14

 

 

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

 

March 31, 2020

 

($ 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) 
Available-for-sale                    
U.S. Treasury  $5,308   $5,308   $-   $- 
Obligations of U.S. Government agencies and sponsored entities   72,880    -    72,880    - 
Municipal securities   274,163    -    254,981    19,182 
Mortgage-backed securities   382,900    -    382,900    - 
Corporate obligations   27,726    -    27,215    511 
Total available-for-sale  $762,977   $5,308   $737,976   $19,693 

 

December 31, 2019

 

($ 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) 
Available-for-sale                    
U.S. Treasury  $4,894   $4,894   $-   $- 
Obligations of U.S. Government agencies and sponsored entities   77,950    -    77,950    - 
Municipal securities   258,982    -    248,637    10,345 
Mortgage-backed securities   395,315    -    395,315    - 
Corporate obligations   27,946    -    27,538    408 
Total available-for-sale  $765,087   $4,894   $749,440   $10,753 

 

15

 

 

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable inputs (Level 3) information.

 

($ in thousands)  Bank-Issued Trust
Preferred Securities
 
   2020   2019 
Balance, January 1  $408   $874 
Unrealized (loss)/gain included in comprehensive income   103    (466)
Balance at March 31, 2020 and December 31, 2019  $511   $408 

 

($ in thousands)  Municipal Securities 
   2020   2019 
Balance, January 1  $10,345   $7,574 
Unrealized (loss)/gain included in comprehensive income   8,837    2,771 
Balance at March 31, 2020 and December 31, 2019  $19,182   $10,345 

 

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019. The following tables present quantitative information about recurring Level 3 fair value measurements ($ in thousands):

 

Trust Preferred Securities  Fair Value   Valuation Technique  Significant Unobservable Inputs  Range of Inputs
March 31, 2020  $511   Discounted cash flow  Probability of default  1.74% - 3.30%
December 31, 2019  $408   Discounted cash flow  Probability of default  2.73% - 4.15%

 

Municipal Securities  Fair Value   Valuation Technique  Significant Unobservable Inputs  Range of Inputs
March 31, 2020  $19,182   Discounted cash flow  Discount Rate  1.85% - 3.50%
December 31, 2019  $10,345   Discounted cash flow  Discount Rate  1.50% - 4.40%

 

The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements were classified at March 31, 2020 and December 31, 2019.

 

March 31, 2020

($ 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) 
                 
Impaired loans  $11,124   $-   $-   $11,124 
                     
Other real estate owned   6,974    -    -    6,974 

 

16

 

 

December 31, 2019

($ 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) 
                 
Impaired loans  $11,337   $-   $-   $11,337 
                     
Other real estate owned   7,299    -    -    7,299 

 

NOTE 9 – 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 required to interpret market data to develop the estimates of fair value. 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, fair value of available-for-sale securities at March 31, 2020 and December 31, 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

 

($ in thousands)  March 31, 2020 
  

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

 

Fair

Value

 
Available-for-sale securities:                    
  U.S. Treasury  $4,969   $339   $-   $5,308 
   Obligations of U.S. government                     
      agencies and sponsored entities   70,726    2,216    62    72,880 
   Tax-exempt and taxable obligations of                    
      states and municipal subdivisions   270,385    5,369    1,591    274,163 
   Mortgage-backed securities - residential   251,134    10,993    80    262,047 
   Mortgage-backed securities - commercial   115,974    4,976    97    120,853 
   Corporate obligations   27,838    242    354    27,726 
         Total  $741,026   $24,135   $2,184   $762,977 

 

($ in thousands)  December 31, 2019 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 
Available-for-sale securities:                    
    U.S. Treasury  $4,967   $-   $73   $4,894 
   Obligations of U.S. government                    
      agencies sponsored entities   76,699    1,475    224    77,950 
   Tax-exempt and taxable obligations of                    
      states and municipal subdivisions   253,527    5,602    147    258,982 
   Mortgage-backed securities - residential   263,229    4,726    107    267,848 
   Mortgage-backed securities - commercial   125,292    2,398    223    127,467 
   Corporate obligations   27,877    218    149    27,946 
        Total  $751,591   $14,419   $923   $765,087 

 

17

 

 

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

($ in thousands)  March 31, 2020   December 31, 2019 
   Available-for-Sale   Available-for-Sale 
   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
 
Due less than one year  $28,094   $28,210   $30,141   $30,303 
Due after one year through five years   86,142    87,617    80,119    81,372 
Due after five years through ten years   147,047    150,671    143,811    148,085 
Due greater than ten years   112,635    113,579    108,999    110,012 
Mortgage-backed securities - residential   251,134    262,047    263,229    267,848 
Mortgage-backed securities - commercial   115,974    120,853    125,292    127,467 
         Total  $741,026   $762,977   $751,591   $765,087 

 

The details concerning securities classified as available-for-sale with unrealized losses as of March 31, 2020 and December 31, 2019 were as follows:

 

($ in thousands)

   March 31, 2020     
   Losses < 12 Months   Losses 12 Months or >   Total 
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross Unrealized
Losses
   Fair
Value
   Gross Unrealized
Losses
 
U.S. Treasury  $-   $-   $-   $-   $-   $- 
Obligations of U.S government agencies and sponsored entities   -    -    5,371    62    5,371    62 
Tax-exempt and taxable obligations of state and municipal subdivisions   2,571    5    45,504    1,586    48,075    1,591 
Mortgage-backed securities - residential   -    -    4,017    80    4,017    80 
Mortgage-backed securities - commercial   4,293    4    12,532    93    16,825    97 
Corporate obligations   4,494    6    9,820    348    14,314    354 
Total  $11,358   $15   $77,244   $2,169   $88,602   $2,184 

 

($ in thousands)

   December 31, 2019     
   Losses < 12 Months   Losses 12 Months or >   Total 
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 
U.S. Treasury  $-   $-   $4,894   $73   $4,894   $73 
Obligations of U.S government agencies and sponsored entities   -    -    22,987    224    22,987    224 
Tax-exempt and taxable obligations of state and municipal subdivisions   -    -    28,235    147    28,235    147 
Mortgage-backed securities - residential   -    -    29,930    107    29,930    107 
Mortgage-backed securities - commercial   9,306    16    19,130    207    28,436    223 
Corporate obligations   500    -    10,572    149    11,072    149 
Total  $9,806   $16   $115,748   $907   $125,554   $923 

 

At March 31, 2020 and December 31, 2019, the Company’s securities portfolio consisted of 195 and 156 securities, respectively, which were in an unrealized loss position. The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”), with attention given to securities in a continuous loss position of at least ten percent for over twelve months. Management believes that none of the losses on available-for-sale securities noted above constitutes an OTTI. The noted losses are considered temporary due to market fluctuations in available interest rates. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. No OTTI losses were recognized during the three months ended March 31, 2020 or the year ended December 31, 2019.

 

18

 

 

NOTE 10 – LOANS

 

The Company uses four different categories to classify loans in its portfolio based on the underlying collateral securing each loan. The loans grouped together in each category have been determined to share similar risk characteristics with respect to credit quality. Those four categories are commercial, financial and agriculture, commercial real estate, consumer real estate, installment and other;

 

Commercial, financial and agriculture – Commercial, financial and agriculture loans include loans to business entities issued for commercial, industrial, or other business purposes. This type of commercial loan shares a similar risk characteristic in that unlike commercial real estate loans, repayment is largely dependent on cash flow generated from the operation of the business.

 

Commercial real estate – Commercial real estate loans are grouped as such because repayment is mainly dependent upon either the sale of the real estate, operation of the business occupying the real estate, or refinance of the debt obligation. This includes both owner-occupied and non-owner occupied CRE secured loans, because they share similar risk characteristics related to these variables.

 

Consumer real estate – Consumer real estate loans consist primarily of loans secured by 1-4 family residential properties and/or residential lots. This includes loans for the purpose of constructing improvements on the residential property, as well as home equity lines of credit.

 

Installment and other – Installment and other loans are all loans issued to individuals that are not for any purpose related to operation of a business, and not secured by real estate. Repayment on these loans is mostly dependent on personal income, which may be impacted by general economic conditions.

 

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 nonaccrual including PCI loans.

 

($ in thousands)

   March 31, 2020 
  

 

Past Due

30 to 89 Days and Accruing

  

Past Due

90 Days or More and Still Accruing

  

 

 

 

Nonaccrual

   PCI  

Total

Past Due,

Nonaccrual and PCI

  

 

 

 

Total

Loans

 
Commercial, financial and agriculture  $1,385   $23   $1,989   $80   $3,477   $327,979 
Commercial real estate   9,664    582    22,123    3,498    35,867    1,388,925 
Consumer real estate   10,960    1,772    2,128    7,704    22,564    821,432 
Consumer installment   328    15    224    5    572    42,208 
Lease financing receivable   -    -    -    -    -    3,526 
Obligations of states and subdivisions   -    -    -    -    -    18,218 
Total  $22,337   $2,392   $26,464   $11,287   $62,480   $2,602,288 

 

($ in thousands)

   December 31, 2019 
  

 

 

Past Due

30 to 89 Days

  

Past Due 90 Days or More and

Still Accruing

  

 

 

 

Nonaccrual

   PCI  

Total

Past Due,

Nonaccrual and PCI

  

 

Total

Loans

 
Commercial, financial and agriculture  $515   $61   $2,137   $97   $2,810   $332,600 
Commercial real estate   2,447    1,046    22,441    3,844    29,778    1,387,207 
Consumer real estate   4,569    1,608    1,902    8,148    16,227    814,282 
Consumer installment   226    -    260    6    492    42,458 
Lease financing receivable   -    -    -    -    -    3,095 
Obligations of states and subdivisions   -    -    -    -    -    20,716 
Total  $7,757   $2,715   $26,740   $12,095   $49,307   $2,600,358 

 

19

 

 

We acquired loans with deteriorated credit quality in 2014, 2017, 2018 and 2019. 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 (purchased credit impaired loans). Acquired loans are considered to be impaired if it is probable, based on current available information, that the Company will be unable to collect all cash flows as expected. If expected cash flows cannot reasonably be estimated as to what will be collected, there will not be any interest income recognized on these loans.

 

The following presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of PCI loans acquired in the acquisitions from 2019.

 

($ in thousands)  FPB   FFB   Total 
Contractually required payments at acquisition  $4,715   $947   $5,662 
Cash flows expected to be collected at acquisition   4,295    955    5,250 
Fair value of loans at acquisition   3,916    809    4,725 

 

Total outstanding purchased credit impaired loans were $13.1 million and the related purchase accounting discount was $3.6 million as of March 31, 2020, and $14.6 million and $3.3 million as of December 31, 2019, respectively. 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 purchased credit impaired loans were as follows at March 31, 2020 and 2019 ($ in thousands):

   March 31,
2020
   March 31,
2019
 
   Accretable
Yield
   Accretable
Yield
 
Balance at beginning of period  $3,417   $3,835 
Additions, including transfers from non-accretable   337    427 
Accretion   (148)   (275)
Balance at end of period  $3,606   $3,987 

 

The following tables provide detail of impaired loans broken out according to class as of March 31, 2020 and December 31, 2019. The following tables do not include PCI loans. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. 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.

 

March 31, 2020

                
($ in thousands)              Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 

Impaired loans with no related allowance:

                         
Commercial, financial and agriculture  $262   $265   $-   $160   $- 
Commercial real estate   13,089    13,210    -    13,322    1 
Consumer real estate   704    760    -    623    2 
Consumer installment   12    12    -    17    - 
Total  $14,067   $14,247   $-   $14,122   $3 
                          

Impaired loans with a related allowance:

                         
Commercial, financial and agriculture  $2,238   $2,238   $1,011   $2,336   $5 
Commercial real estate   12,007    12,076    2,845    12,217    30 
Consumer real estate   682    707    114    661    4 
Consumer installment   232    232    65    246    - 
Total  $15,159   $15,253   $4,035   $15,460   $39 
                          
Total impaired loans:                         
Commercial, financial and agriculture  $2,500   $2,503   $1,011   $2,496   $5 
Commercial real estate   25,096    25,286    2,845    25,539    31 
Consumer real estate   1,386    1,467    114    1,284    6 
Consumer installment   244    244    65    263    - 
Total Impaired Loans  $29,226   $29,500   $4,035   $29,582   $42 

 

20

 

 

As of March 31, 2020, the Company had $1.3 million of foreclosed residential real estate property obtained by physical possession and $1.6 million of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

 

December 31, 2019

                
($ in thousands)              Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 

Impaired loans with no related allowance:

                         
Commercial, financial and agriculture  $59   $62   $-   $294   $7 
Commercial real estate   13,556    13,671    -    10,473    591 
Consumer real estate   542    594    -    2,173    - 
Consumer installment   21    21    -    23    - 
Total  $14,178   $14,348   $-   $12,963   $598 
                          

Impaired loans with a related allowance:

                         
Commercial, financial and agriculture  $2,434   $2,434   $1,182   $2,039   $13 
Commercial real estate   12,428    12,563    3,021    10,026    49 
Consumer real estate   639    657    141    560    3 
Consumer installment   260    260    80    164    2 
Total  $15,761   $15,914   $4,424   $12,789   $67 
                          
Total impaired loans:                         
Commercial, financial and agriculture  $2,493   $2,496   $1,182   $2,333   $20 
Commercial real estate   25,984    26,234    3,021    20,499    640 
Consumer real estate   1,181    1,251    141    2,733    3 
Consumer installment   281    281    80    187    2 
Total Impaired Loans  $29,939   $30,262   $4,424   $25,752   $665 

 

The cash basis interest earned in the chart above is materially the same as the interest recognized during impairment for period ended March 31, 2020 and December 31, 2019.

 

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 ended March 31, 2020, was $377 thousand. The Company had no loan commitments to borrowers in nonaccrual status at March 31, 2020 and December 31, 2019.

 

Troubled Debt Restructuring

 

If the Company grants a concession to a borrower in financial difficulty, the loan is classified as a troubled debt restructuring (“TDR”).

 

The following table presents loans by class modified as troubled debt restructurings (TDRs) that occurred during the three months ended March 31, 2020 and 2019 ($ in thousands, except for number of loans).

 

   Three Months Ended March 31, 
       Outstanding
Recorded
   Outstanding Recorded 
2020 

Number of

Loans

  

Investment

Pre-Modification

  

Investment

Post-Modification

 
Commercial, financial and agriculture   1   $12   $12 
Commercial real estate   2    738    734 
Residential real estate   -    -    - 
Consumer installment   -    -    - 
Total   3   $750   $746 
                
2019               
Commercial, financial and agriculture   1   $175   $175 
Commercial real estate   1    10    10 
Residential real estate   1    81    80 
Consumer installment   -    -    - 
Total   3   $266   $265 

 

The TDRs presented above increased the allowance for loan losses $37 thousand and $47 thousand and resulted in no charge-offs for the quarter ended March 31, 2020 and 2019, respectively.

 

The balance of TDRs decreased $900 thousand to $31.1 million at March 31, 2020 compared to $32.0 million at December 31, 2019. As of March 31, 2020, the Company had no additional amount committed on any loan classified as TDR.

 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification ($ in thousands, except for number of loans).

 

21

 

 

   March 31, 2020   March 31, 2019 
Troubled Debt Restructurings  Number of   Recorded   Number of   Recorded 
That Subsequently Defaulted:  Loans   Investment   Loans   Investment 
                     
Commercial, financial and agriculture   10   $15,841    13   $4,339 

 

The modifications described above included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these nor were any of these loans written down. The TDRs presented above increased the allowance for loan losses and resulted in no charge-offs for the quarter ended March 31, 2020 and 2019.

 

The following tables represents the Company’s TDRs at March 31, 2020 and December 31, 2019:

 

           Past Due 90         
March 31, 2020  Current   Past Due   days and still         
($ in thousands)  Loans   30-89   accruing   Nonaccrual   Total 
Commercial, financial and agriculture  $129   $454   $-   $1,494   $2,077 
Commercial real estate   4,314    99    109    19,569    24,091 
Consumer real estate   1,693    274    58    2,864    4,889 
Consumer installment   35    -    -    -    35 
          Total  $6,171   $827   $167   $23,927   $31,092 
Allowance for loan losses  $124   $-   $-   $2,247   $2,371 

 

           Past Due 90         
December 31, 2019  Current   Past Due   days and still         
($ in thousands)  Loans   30-89   accruing   Nonaccrual   Total 
Commercial, financial and agriculture  $583   $64   $-   $1,062   $1,709 
Commercial real estate   4,299    809    109    19,991    25,208 
Consumer real estate   1,905    112    58    2,940    5,015 
Consumer installment   37    -    -    -    37 
          Total  $6,824   $985   $167   $23,993   $31,969 
Allowance for loan losses  $128   $-   $-   $1,997   $2,125 

 

Credit Quality Indicators

 

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:

 

Pass: Loan classified as pass are deemed to possess average to superior credit quality, requiring no more than normal attention.

 

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.

 

22

 

 

As of March 31, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:

 

March 31, 2020  Commercial,                 
   Financial and   Commercial   Consumer   Consumer     
($ in thousands)  Agriculture   Real Estate   Real Estate   Installment   Total 
Pass  $330,739   $1,646,868   $496,926   $36,033   $2,510,566 
Special Mention   3,351    11,399    1,001    19    15,770 
Substandard   10,499    53,517    13,052    379    77,447 
Doubtful   13    75    -    -    88 
Subtotal  $344,602   $1,711,859   $510,979   $36,431   $2,603,871 
Less:                         
Unearned Discount   -    1,583    -    -    1,583 
                          
Loans, net of  unearned discount  $344,602   $1,710,276   $510,979   $36,431   $2,602,288 

 

December 31, 2019  Commercial,                 
   Financial and   Commercial   Consumer   Consumer     
($ in thousands)  Agriculture   Real Estate   Real Estate   Installment   Total 
Pass  $327,205   $1,645,496   $499,426   $41,008   $2,513,135 
Special Mention   3,493    8,876    1,194    21    13,584 
Substandard   10,972    50,554    13,244    397    75,167 
Doubtful   16    77    -    -    93 
Subtotal  $341,686   $1,705,003   $513,864   $41,426   $2,601,979 
Less:                         
Unearned Discount   -    1,621    -    -    1,621 
Loans, net of  unearned                         
discount  $341,686   $1,703,382   $513,864   $41,426   $2,600,358 

 

Allowance for Loan Losses

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the quarter ended March 31, 2020 and 2019:

 

($ in thousands)  Three months ended March 31, 2020 
   Commercial, Financial and Agriculture   Commercial Real Estate   Consumer Real Estate   Installment and Other   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance  $3,043   $8,836   $1,694   $296   $39   $13,908 
Provision for loan losses   1,446    4,523    1,106    66    (39)   7,102 
Loans charged-off   (99)   (333)   (9)   (59)   -    (500)
Recoveries   76    69    49    100    -    294 
Total ending allowance balance  $4,466   $13,095   $2,840   $403   $-   $20,804 

 

($ in thousands)  Three months ended March 31, 2019 
   Commercial, Financial and Agriculture   Commercial Real Estate   Consumer Real Estate   Installment and Other   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance  $2,060   $6,258   $1,743   $201   $(197)  $10,065 
Provision for loan losses   (490)   1,003    (1,516)   1,929    197    1,123 
Loans charged-off   (4)   -    (42)   (29)   -    (75)
Recoveries   13    10    19    80    -    122 
Total ending allowance balance  $1,579   $7,271   $204   $2,181   $-   $11,235 

 

23

 

 

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 March 31, 2020 and December 31, 2019. 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.

 

March 31, 2020  Commercial,           Installment         
   Financial and   Commercial   Consumer   and         
   Agriculture   Real Estate   Real Estate   Other   Unallocated   Total 
Loans                              
  Individually evaluated  $2,500   $25,095   $1,386   $244   $-   $29,225 
  Collectively evaluated   341,933    1,729,239    449,052    36,156    -    2,556,380 
   PCI Loans   169    9,575    6,908    31    -    16,683 
Total  $344,602   $1,763,909   $457,346   $36,431   $-   $2,602,288 
                               
Allowance for Loan Losses                              
  Individually evaluated  $1,010   $2,845   $114   $65   $-   $4,034 
  Collectively evaluated   3,456    10,250    2,726    338    -    16,770 
Total  $4,466   $13,095   $2,840   $403   $-   $20,804 

 

December 31, 2019  Commercial,           Installment         
   Financial and   Commercial   Consumer   and         
   Agriculture   Real Estate   Real Estate   Other   Unallocated   Total 
Loans                              
  Individually evaluated  $2,493   $25,984   $1,181   $281   $-   $29,939 
  Collectively evaluated   339,003    1,773,934    398,471    41,112    -    2,552,520 
   PCI Loans   191    10,471    7,204    33    -    17,899 
Total  $341,687   $1,810,389   $406,856   $41,426   $-   $2,600,358 
                               
Allowance for Loan Losses                              
  Individually evaluated  $1,182   $3,021   $141   $80   $-   $4,424 
  Collectively evaluated   1,861    5,815    1,553    216    39    9,484 
Total  $3,043   $8,836   $1,694   $296   $39   $13,908 

 

24

 

 

NOTE 11 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within non-interest income.  The guidance does not apply to revenue associated with financial instruments, including loans and investment securities that are accounted for under other GAAP, which comprise a significant portion of our revenue stream. A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

 

Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services.  Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.  Overdraft fees are recognized at the point in time that the overdraft occurs.  Service charges on deposits are withdrawn from the customer’s account balance.

 

Interchange Income: The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided by the cardholder.

 

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.  When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction prices is probable.  Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

 

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following table presents the Company’s sources of non-interest income revenue, by operating segments, for the three months ended March 31, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.

 

($ in thousands)  Three Months Ended March 31, 2020   Three Months Ended March 31, 2019 
   Commercial/   Mortgage           Commercial/   Mortgage         
   Retail   Banking   Holding       Retail   Banking   Holding     
   Bank   Division   Company   Total   Bank   Division   Company   Total 
Non-interest income                                        
   Service charges on deposits                                        
       Overdraft fees  $1,055   $-   $-   $1,055   $974   $-   $-   $974 
       Other   859    1    -    860    857    1    -    858 
Interchange income   1,986    -    -    1,986    1,652    -    -    1,652 
Investment brokerage fees   102    -    -    102    9    -    -    9 
Net gains (losses) on OREO   (224)   -    -    (224)   (10)   -    -    (10)
Net gains (losses) on sales of                                        
  securities (a)   174    -    -    174    (38)   -    -    (38)
Other   939    1,566    16    2,521    956    908    245    2,109 
                                         
     Total non-interest income  $4,891   $1,567   $16   $6,474   $4,400   $909   $245   $5,554 

 

(a)Not within scope of ASC 606

 

NOTE 12 – LEASES

 

The Company enters into leases in the normal course of business primarily for financial centers, back office operations locations and business development offices. The Company’s leases have remaining terms ranging from 1 to 11 years.

 

The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.

 

Leases are classified as operating or finance leases at the lease commencement date. Leases in which we are the lessee are recorded as a right-of-use assets and lease liabilities, which are included in premises and equipment and other liabilities, respectively, on our consolidated balance sheets. Lease expense for leases and short-term leases is recognized on a straight-line basis over the lease term, and is recorded in net occupancy and equipment expense in the consolidated statements of income and other comprehensive income. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date and based on the estimated present value of lease payments over the lease term.

 

25

 

 

The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company’s incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors.

 

Right-of-use assets and lease liabilities relating to the Company’s operating and finance leases are as follows at March 31, 2020 and 2019 ($ in thousands).

 

   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Right-of-use assets:          
  Operating leases  $6,141   $3,595 
   Finance leases   2,841    - 
Total right-of-use assets  $8,952   $3,595 
Lease liabilities:          
     Operating lease  $6,141   $3,595 
     Finance lease   2,419    - 
Total lease liabilities  $8,560   $3,595 

 

The table below summarizes our net lease costs ($ in thousands):

 

   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Operating lease cost  $378   $122 
Finance lease cost:        - 
     Interest on lease liabilities   2    - 
     Amortization of right-of-use   2    - 
Net lease cost  $382   $122 

 

The table below summarizes other information related to our operating leases:

 

   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Weighted average remaining lease term          
    Operating leases   4.9 years    6.5 years 
     Finance leases   11.7 years    - 
Weighted average discount rate          
    Operating leases   2.5%   3.1%
     Finance leases   2.3%   - 

 

The table below summarizes the maturity of remaining lease liabilities at March 31, 2020 and 2019 ($ in thousands):

 

   Three months ended March 31, 2020 
   Operating Leases   Finance Leases 
Remaining 2020  $1,222   $143 
2021   1,527    175 
2022   1,359    220 
2023   844    220 
2024   631    220 
Thereafter   985    1,698 
Total lease payments  $6,568    2,676 
Less:  Interest   (427)   (257)
Present value of lease liabilities  $6,141   $2,419 

 

26

 

 

   Three months ended March 31, 2019 
   Operating Leases   Finance Leases 
Remaining 2019  $562    - 
2020   715    - 
2021   584    - 
2022   541    - 
2023   513    - 
Thereafter   1,088    - 
Total lease payments  $4,003    - 
Less:  Interest   (408)   - 
Present value of lease liabilities  $3,595    - 

 

NOTE 13 – SUBSEQUENT EVENTS/OTHER

 

On April 3, 2020, the Company completed its acquisition of Southwest Georgia Financial Corporation (“SWG”), and immediately thereafter merged its wholly-owned subsidiary, Southwest Georgia Bank, with and into The First. The Company paid total consideration of approximately $47.9 million to the former SWG shareholders including 2,546,967 shares of the Company’s common stock and approximately $2 thousand in cash. At March 31, 2020, SWG had $555.3 million in total assets, $391.1 million in loans and $472.9 million in deposits.

 

The COVID-19 pandemic is having, and will likely continue to have, significant effects on global markets, supply chains, businesses and communities. COVID-19 is likely to impact the Company’s future financial condition and result of operations including but not limited to additional credit loss reserves, additional collateral and/or modifications to debt obligations, liquidity, limited dividend payouts or potential shortages of personnel. The following estimates are particularly subject to change in the near term due to the impact of COVID-19: the allowance for loan losses and valuation of goodwill. As of April 24, 2020, we have approximately 1,660 PPP loans approved through the SBA for $199.3 million and have processed payment modifications on 926 loans with principal balances of $401.5 million, representing 15% of total portfolio dollars.

 

Management continues to take appropriate actions to mitigate the negative impact the virus has on the Company, including restricting employee travel, directing employees to work remotely, cancelling in-person meetings and implementing our business continuity plans and protocols to the extent necessary. However, the full impact of COVID-19 is unknown and cannot be reasonably estimated as these events are still developing.

 

NOTE 14 – RECLASSIFICATION

 

Certain amounts in the 2019 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

 

27

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD LOOKING STATEMENTS

 

Certain statements made or incorporated by reference in this Report which are not statements of historical fact, including those under “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Report, constitute forward-looking statements within the meaning of, and subject to the protections of, Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, many of which are beyond the Company’s control and which may cause the Company’s actual results, performance or achievements or the financial services industry or economy generally, to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

 

All statements other than statements of historical fact are forward-looking statements. You can identify these forward-looking statements through the Company’s use of words such as “believes,” “anticipates,” “expects,” “may,” “will,” “assumes,” “predicts,” “could,” “should,” “would,” “intends,” “targets,” “estimates,” “projects,” “plans,” “potential” and other similar words and expressions of the future or otherwise regarding the outlook for the Company’s future business and financial performance and/or the performance of the financial services industry and economy in general. Forward-looking statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this document. Many of these factors are beyond the Company’s ability to control or predict. The most recent factor that could cause future results to differ materially from those anticipated by our forward-looking statements, include the negative impact of the novel coronavirus (“COVID-19”) pandemic on our financial statements, including our ability to continue our business activities in certain communities we serve, the duration of the pandemic and its continued effects on financial markets, a reduction in financial transaction and business activities resulting in decreased deposits and reduced loan originations, increases in unemployment rates impacting our borrowers’ ability to repay their loans, our ability to manage liquidity in a rapidly changing and unpredictable market, additional interest rate changes by the Federal Reserve and other government actions in response to the pandemic including additional quarantines, regulations or laws enacted to counter the effects of the COVID-19 pandemic on the economy. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:

  

  · the negative impacts and disruptions resulting from the outbreak of the novel coronavirus, or COVID-19, on the economies and communities we serve, which has had and may continue to have an adverse impact on our business operations and performance, and could have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically;

  

  · government or regulatory responses to the COVID-19 pandemic;

 

  · reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

 

  · general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

 

  · adverse changes in asset quality and resulting credit risk-related losses and expenses;

 

  · ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters, public health emergencies and international instability;

 

  · current or future legislation, regulatory changes or changes in monetary, tax or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the Federal Reserve’s actions with respect to interest rates, the capital requirements promulgated by the Basel Committee on Banking Supervision (“Basel Committee”), potential impacts from the Tax Cuts and Jobs Act, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) of 2020, uncertainty relating to calculation of LIBOR and other regulatory responses to economic conditions;
     
  · changes in political conditions or the legislative or regulatory environment;

 

  · the adequacy of the level of our allowance for credit losses and the amount of loan loss provisions required to replenish the allowance in future periods;

 

  · reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

 

  · changes in the interest rate environment which could reduce anticipated or actual margins;

  

  · increased funding costs due to market illiquidity, increased competition for funding, higher interest rates, and increased regulatory requirements with regard to funding;

 

  · results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses through additional loan loss provisions or write-down of our assets;

 

  · the rate of delinquencies and amount of loans charged-off;

 

  · the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;

 

28

 

 

  · risks and uncertainties relating to not successfully closing and integrating the currently contemplated or completed acquisitions within our currently expected timeframe and other terms;

 

  · significant increases in competition in the banking and financial services industries;

 

  · changes in the securities markets;

 

  · loss of consumer confidence and economic disruptions resulting from national disasters or terrorist activities;

 

  · our ability to retain our existing customers, including our deposit relationships;

 

  · changes occurring in business conditions and inflation;

 

  · changes in technology or risks to cybersecurity;

 

  · changes in deposit flows;

 

  · changes in accounting principles, policies, or guidelines, including the impact of the new CECL standard;

 

  · our ability to maintain adequate internal control over financial reporting;
     
  · risks related to the continued use, availability and reliability of LIBOR and other “benchmark” rates; and

 

  · other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”).

 

We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in and the assumptions underlying our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved or the assumptions will be accurate.  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. Additional information concerning these risks and uncertainties is contained in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, in this Quarterly Report on Form 10Q, and in our other 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 (referred to as the “allowance for loan losses” or the “ALLL”), as explained in detail in Note 10 - Loans to the Consolidated Financial Statements and in the “Allowance for Loan and Lease Losses” sections of this Item 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 10 - Loans 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, as discussed in the “Other Assets” section of this Item 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.

 

As a result of the Company’s immediate response to COVID-19, including loan modifications/payment deferral programs and the Paycheck Protection Program, as well as acquisition and integration of SWG, and increased uncertainty related to certain judgments and estimates, the Company has elected to temporarily defer or suspend the application of two provisions of U.S. Generally Accepted Accounting Principles (GAAP), as allowed by the CARES Act, which was signed into law by the President on March 27, 2020.  Sections 4013 and 4014 of the CARES Act provide the Company with temporary relief from troubled debt restructurings and from CECL, which the Company believes prudent to elect in these challenging times to allow us time to provide consistent, high-quality financial information to our investors and other stakeholders.

 

29

 

 

OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

RESULTS OF OPERATIONS SUMMARY

 

First quarter 2020 compared to first quarter 2019

 

The Company reported net income available to common shareholders of $8.3 million for the three months ended March 31, 2020, compared with net income available to common shareholders of $7.6 million for the same period last year. For the first quarter of 2020, fully diluted earnings per share were $0.44, compared to $0.48 for the first quarter of 2019.

 

Operating net earnings, a non-GAAP financial measure, for the first quarter of 2020 totaled $8.9 million compared to $9.9 million for the first quarter of 2019, a decrease of $1.0 million or 10.5%. The net, after tax, provision charge in the quarter comparison was $4.6 million, which accounted for the decrease. Operating net earnings for the first quarter of 2020 excludes merger-related costs of $576 thousand, net of tax. Operating net earnings for the first quarter of 2019 excludes merger-related costs of $2.5 million, net of tax, and income of $174 thousand, net of tax, related to the Community Development Financial Institutions Fund of the U.S. Treasury. Operating earnings per share were $0.47 on a fully diluted basis for the first quarter 2020, compared to $0.63 for the same period in 2019, excluding the merger-related costs and income described above. See reconciliation of non-GAAP financial measures provided below.

 

Net interest income increased to $34.1 million, or 25.6%, for the three months ended March 31, 2020, compared to $27.1 million for the same period in 2019. The increase was due to interest income earned on a higher volume of loans. Fully tax equivalent (“FTE”) net interest income, which is a non-GAAP measure, totaled $34.5 million and $27.4 million for the first quarter of 2020 and 2019, respectively. FTE net interest income increased $7.1 million in the prior year quarterly comparison due to increased loan volume. Purchase accounting adjustments accounted for $1.2 million of the difference in net interest income for the first quarter comparisons. First quarter 2020 FTE net interest margin, which is a non-GAPP measure, of 3.93% included 28 basis points related to purchase accounting adjustments compared to 3.89% for the same quarter in 2019, which included 18 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the net interest margin decreased 6 basis points in prior year quarterly comparison. In the first quarter of 2020, the Federal Reserve reduced the Federal Funds rate to near zero. The reduction in the rates contributed to the 6 basis point decrease in the core net interest margin. Quarterly average earning assets at March 31, 2020 increased $701 thousand, or 24.9%.

 

Non-interest income for the three months ended March 31, 2020, was $6.5 million compared to $5.6 million for the same period in 2019, reflecting an increase of $920 thousand or 16.6%. Service charges and interchange fee income increased $417 thousand along with mortgage income of $658 thousand.

 

Pre-tax, pre-provision operating earnings which exclude acquisition charges and treasury awards increased 29.9% to $17.8 million for the quarter ended March 31, 2020 as compared to $13.7 million for the first quarter of 2019. See reconciliation of non-GAAP financial measures provided below.

 

Provision for loan losses totaled $7.1 million for the quarter ended March 31, 2020, an increase of $6.0 million, or 532% as compared to $1.1 million for the first quarter of 2019. $5.6 million of the $7.1 million provision for loan loss expense for the quarter ended March 31, 2020 was related to anticipated economic effects of COVID-19. The allowance for loan losses of $20.8 million at March 31, 2020 or 0.80% of total loans is based on our methodology and is considered by management to be adequate to cover losses inherent in the loan portfolio. See “Allowance for Loan and Lease Losses” in Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation.

 

Non-interest expense was $23.4 million for the three months ended March 31, 2020, an increase of $1.5 million or 7.1%, when compared with the same period in 2019. Excluding the decrease in acquisition charges of $2.4 million for the first quarter of 2019, non-interest expense increased $4.0 million in the first quarter of 2020, of which $3.1 million was attributable to the operations of FPB and FFB, as compared to first quarter of 2019.

 

FINANCIAL CONDITION

 

The First represents the primary asset of the Company. The First reported total assets of $4.054 billion at March 31, 2020 compared to $3.935 billion at December 31, 2019, an increase of $119.5 million. Loans increased $1.9 million to $2.602 billion, or 0.1%, during the first three months of 2020. Deposits at March 31, 2020 totaled $3.280 billion compared to $3.082 billion at December 31, 2019.

 

30

 

 

For the three months period ended March 31, 2020, The First reported net income of $10.1 million compared to $9.6 million for the three months ended March 31, 2019. Merger charges, net of tax, equaled $576 thousand for the first three months of 2020 as compared to $2.5 million for the first three months of 2019.

 

CORONAVIRUS (COVID-19) IMPACT

 

In March 2020, the World Health Organization recognized the novel Coronavirus Disease 2019 (“COVID-19”) as a pandemic. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. These disruptions may result in a decline in demand for banking products or services, including loans and deposits, which could impact our future financial condition, result of operations and liquidity.

 

The impacts of the COVID-19 pandemic on the economy and the banking industry are rapidly evolving and the future effects are unknown at this time. The Company is working to adapt to the changing environment and proactively plan for contingencies. To that end, the Company has and is taking steps to protect the health of our employees and to work with our customers experiencing difficulties as a result of this virus. The Company has many non-branch personnel working remotely. All of our branches are open, and we are servicing our clients with limited lobby access by appointment only. We have also been working through loan modifications and payment deferral programs to assist affected customers, and have increased our allowance for loan and lease losses.

 

Our staff has been working to assist clients with payment modifications and processing of Paycheck Protection Program (“PPP”) applications with the United States Small Business Administration (the “SBA”). As of April 24, 2020, we have approximately 1,660 PPP loans approved through the SBA for $199.3 million and have processed payment modifications on 926 loans with principal balances of $401.5 million, representing 15% of total portfolio dollars.

 

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.

 

Net interest income AND NET INTEREST MARGIN

 

Net interest income increased by $6.9 million, or 25.6%, for the first quarter of 2020 relative to the first quarter of 2019. The increase was due to interest income earned on a higher volume of loans. 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 nonaccrual status during the reporting period, and the recovery of interest on loans that had been on nonaccrual and were paid off, sold or returned to accrual status.

 

31

 

 

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

($ in thousands)  Three Months Ended   Three Months Ended 
   March 31, 2020   March 31, 2019 
   Avg.   Tax
Equivalent
   Yield/   Avg.   Tax
Equivalent
   Yield/ 
   Balance   interest   Rate   Balance   interest   Rate 
                         
Earning Assets:                              
Taxable securities  $560,613   $3,944    2.81%  $435,576   $3,581    3.29%
Tax exempt securities   224,212    1,821    3.25%   117,831    1,015    3.45%
Total investment securities   784,825    5,765    2.94%   553,407    4,596    3.32%
Interest bearing deposits in                              
   other banks   129,978    289    0.89%   94,778    130    0.55%
Loans   2,602,340    36,005    5.53%   2,167,495    28,804    5.32%
Total earning assets   3,517,143    42,059    4.78%   2,815,680    33,530    4.76%
Other assets   473,350              366,081           
Total assets  $3,990,493             $3,181,761           
                               
Interest-bearing liabilities:                              
Deposits  $3,042,529   $5,413    0.71%  $2,024,718   $4,363    0.86%
Borrowed funds   145,267    917    2.53%   86,269    546    2.53%
Subordinated debentures   80,697    1,203    5.96%   80,540    1,233    6.12%
Total interest-bearing liabilities   3,268,493    7,533    0.92%   2,191,527    6,142    1.12%
Other liabilities   174,691              600,017           
Stockholders’ equity   547,309              390,217           
Total liabilities and                              
 stockholders’ equity  $3,990,493             $3,181,761           
                               
Net interest income       $34,065             $27,131      
Net interest margin             3.87%             3.85%
Net interest income (FTE)*       $34,526    3.86%       $27,388    3.64%
Net interest margin (FTE)*             3.93%             3.89%

*See reconciliation of Non-GAAP financial measures.

 

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 months ended March 31, 2020 and 2019:

 

($ in thousands)  Three Months Ended 
EARNINGS STATEMENT  3/31/20   % of
Total
   3/31/19   % of
Total
 
Non-interest income:                    
  Service charges on deposit accounts  $1,914    29.56%  $1,831    32.97%
  Mortgage fee income   1,567    24.20%   909    16.37%
  Interchange fee income   1,986    30.68%   1,652    29.74%
  Gain (loss) on securities , net   174    2.69%   38    0.68%
  Financial  assistance award   -    -    233    4.20%
  Other charges and fees   833    12.87%   891    16.04%
Total non-interest income  $6,474    100%  $5,554    100%
                     
Non-interest expense:                    
   Salaries and employee benefits  $13,228    56.43%  $10,697    48.87%
   Occupancy expense   2,918    12.45%   2,442    11.15%
   FDIC premiums   147    0.63%   (52)   (0.24)%
   Marketing   213    0.91%   175    0.80%
   Amortization of core deposit intangibles   938    4.00%   716    3.27%
   Other professional services   874    3.73%   920    4.20%
   Other non-interest expense   4,381    18.69%   3,816    17.43%
   Acquisition and integration charges   740    3.16%   3,179    14.52%
 Total non-interest expense  $23,439    100%  $21,893    100%

 

32

 

 

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 $1.7 million or 16.9% of earnings before income taxes for the first quarter of 2020, compared to $2.0 million or 21.0% of earnings before income taxes for the same period in 2019. The decrease in the effective tax rate for 2020 is related to the CARES Act that was signed into law on March 27, 2020. The Act includes several significant provisions for corporations including increasing the amount of deductible interest under section 163(j), allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss that corporations can use to offset income.

 

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 federal 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 $763.0 million, or 18.8% of total assets at March 31, 2020 compared to $765.1 million, or 19.4% of total assets at December 31, 2019.

 

There were no federal funds sold at March 31, 2020 and December 31, 2019; and interest-bearing balances at other banks increased to $179.5 million at March 31, 2020 from $79.0 million at December 31, 2019. The Company’s investment portfolio decreased $2.9 million, or 0.4%, to a total fair market value of $788.9 million at March 31, 2020 compared to December 31, 2019. The portfolio decrease can be attributed to calls, maturities and mortgage paydowns related to the decline in interest rates since the end of 2019. The Company’s investments are classified as “available-for-sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

 

33

 

 

Refer to the tables shown in Note 9 – Securities to the Consolidated Financial Statements 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 loan losses and including loans held for sale, totaled $2.616 billion at March 31, 2020, an increase of $4.4 million, or 0.2%, from December 31, 2019. The increase is attributed to organic loan growth.

 

The following table shows the composition of the loan portfolio by category ($ in thousands):

 

   Composition of Loan Portfolio 
   March 31, 2020   December 31, 2019 
   Amount  

Percent

of Total

   Amount  

Percent

of Total

 
Loans held for sale  $13,288    0.5%  $10,810    0.4%
Commercial, financial and agricultural   327,979    12.5%   332,600    12.7%
   Real estate - commercial   1,048,854    40.1%   1,028,012    39.4%
   Real estate - residential   828,378    31.7%   814,282    31.2%
   Real estate - construction   334,707    12.8%   359,195    13.8%
Lease financing receivable   3,526    0.1%   3,095    0.1%
Obligations of states and subdivisions   18,218    0.7%   20,716    0.8%
Consumer and other   40,626    1.6%   42,458    1.6%
Total loans   2,615,576    100%   2,611,168    100%
Allowance for loan losses   (20,804)        (13,908)     
Net loans  $2,594,772        $2,597,260      

 

In the context of this discussion, a "real estate residential 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 its market area by 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. Associated servicing rights are not retained. Commitments from investors to purchase the loans are obtained upon origination.

 

LOAN CONCENTRATIONS

 

Diversification within the loan portfolio is an important means of reducing inherent lending risk. At March 31, 2020, 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, Florida and Georgia.

 

NON-PERFORMING ASSETS

 

Non-performing assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and OREO. Loans are placed on nonaccrual status when they become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans, including PCI loans, totaled $37.8 million at March 31, 2020, an decrease of $1.0 million from December 31, 2019.

 

Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $7.0 million at March 31, 2020 as compared to $7.3 million at December 31, 2019.

 

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 difficulty. At March 31, 2020, the Bank had $31.1 million in loans that were classified as “TDRs”, of which $6.2 million were performing as agreed with modified terms. At December 31, 2019, the Bank had $32.0 million in loans that were classified as troubled debt restructurings of which $6.8 million were performing as agreed with modified terms. TDRs may be classified as either non-performing or performing loans depending on their accrual status. As of March 31, 2020, $24.9 million in loans categorized as TDRs were classified as non-performing as compared to $25.1 million at December 31, 2019.

 

34

 

 

The following table, which includes purchased credit impaired loans, presents comparative data for the Company’s non-performing assets and performing TDRs as of the dates noted:

 

($ in thousands)  3/31/20   12/31/19 
         
Nonaccrual Loans          
           
  Real Estate:          
       1-4 Family residential construction  $-   $- 
       Other Construction/land   1,578    1,548 
       1-4 family residential revolving/open-end   1,154    998 
       1-4 family residential closed-end   8,679    8,986 
       Nonfarm, nonresidential, owner-occupied   20,270    20,157 
       Nonfarm, nonresidential, other nonfarm nonresidential   3,772    4,647 
Total Real Estate   35,453    36,336 
  Commercial and industrial   2,069    2,234 
  Loans to individuals – other   229    265 
Total Nonaccrual Loans   37,751    38,835 
           
  Other real-estate owned   6,974    7,299 
           
Total Non-performing Assets  $44,725   $46,134 
Performing TDRs  $6,171   $6,824 
Total non-performing assets as a % of total loans & leases net of unearned income   1.72%   1.77%
Total nonaccrual loans as a % of total loans & leases net of unearned income   1.45%   1.49%

 

Non-performing assets totaled $44.7 million at March 31, 2020, compared to $46.1 million at December 31, 2019, a decrease of $1.4 million. The ALLL/total loans ratio was 0.80% at March 31, 2020, and 0.53% at December 31, 2019. The increase in the ALLL/total loans ratio is primarily attributable to an increase in the ALLL due to concerns with the anticipated economic effects of COVID-19, as discussed under the heading “Allowance for Loan and Lease Losses” below. Total valuation accounting adjustments total $11.1 million on acquired loans. The ratio of annualized net charge-offs (recoveries) to total loans was 0.03% for the quarter ended March 31, 2020 compared to (0.002)% at December 31, 2019.

 

The following table represents the Company’s impaired loans, excluding PCI loans, as of the dates noted:

 

($ in thousands)  March 31,   December 31, 
   2020   2019 
Impaired Loans:          
    Impaired loans without a valuation allowance  $14,067   $14,178 
    Impaired loans with a valuation allowance   15,159    15,761 
Total impaired loans  $29,226   $29,939 
Allowance for loan losses on impaired loans at period end   4,035    4,424 
           
Total nonaccrual loans  $29,226   $29,939 
           
Past due 90 days or more and still accruing   2,392    2,715 
Average investment in impaired loans   29,266    26,195 

 

ALLOWANCE 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 for credit losses is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. The level of this allowance is dependent upon a number of factors, including the total amount of past due loans, general economic conditions, and management’s assessment of potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions to the allowance may be necessary. 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 allowance for loan losses will not be required. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.

 

35

 

 

The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. The Company uses a loan loss history based upon the prior ten years to determine the appropriate allowance. Historical loss factors are determined by criticized and uncriticized 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 on 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 committees, and data and guidance received or obtained from the Company’s regulatory authorities.

 

The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. Impaired loans are determined based upon a review by internal loan review and senior loan officers. Impaired loans are loans for which the Bank does not expect to receive contractual interest and/or principal by the due date. A specific allowance is assigned to each loan determined to be impaired based upon the value of the loan’s underlying collateral. Appraisals are used by management to determine the value of the collateral.

 

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

 

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.

 

At March 31, 2020, the consolidated allowance for loan losses was approximately $20.8 million, or 0.80% of outstanding loans excluding loans held for sale. At December 31, 2019, the allowance for loan losses amounted to approximately $13.9 million, which was 0.53% of outstanding loans excluding loans held for sale. The provision for loan losses is a charge to earnings to maintain the allowance for loan losses at a level consistent with management’s assessment of the collectability of the loan portfolio in light of current economic conditions and market trends. During the quarter, the World Health Organization declared the spread of the COVID-19 virus to be a global pandemic. This has caused significant disruptions to the U.S. economy across all industries. While it is not yet possible to know the full effect that the pandemic will have on the economy, or to what extent this crisis will impact the Company, all available current industry statistics and internal monitoring of loan repayment ability and payment forgiveness across the portfolio has been analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration. This analysis of the possibility of increasing credit losses resulted in the need for a higher than normal provision expense to provide the required allowance reserve for this situation. If economic conditions continue to worsen, further funding to the allowance may be required in future periods. The Company maintains the allowance at a level that management believes is adequate to absorb probable incurred losses inherent in the 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 Company’s provision for loan losses was $7.1 million at March 31, 2020, $3.7 million at December 31, 2019 and $1.1 million at March 31, 2019. The overall allowance for loan losses results from consistent application of our loan loss reserve methodology as described above. At March 31, 2020, management believes the allowance is appropriate and has been derived from consistent application of our methodology. Should any of the factors considered by management in evaluating the appropriateness of the allowance for loan losses change, management’s estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for loan losses.

 

36

 

 

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

 

Allowance for Loan and Lease Losses            
   Three Months Ended   Three Months Ended   For the Year Ended 
Balances:  3/31/20   3/31/19   12/31/19 
Average gross loans & leases outstanding during               
  period:  $2,602,340   $2,167,495   $2,341,202 
Gross loans & leases outstanding at end of               
  period:   2,615,575    2,341,586    2,611,168 
Allowance for Loan and Lease Losses:               
Balance at beginning of period  $13,908   $10,065   $10,065 
Provision charged to expense   7,102    1,123    3,738 
Charge-offs:               
Real Estate-               
1-4 family residential construction   -    -    - 
Other construction/land   -    -    - 
1-4 family revolving, open-ended   -    -    54 
1-4 family closed-end   9    42    109 
Nonfarm, nonresidential, owner-occupied   333    -    54 
Total Real Estate   342    42    217 
Commercial and industrial   99    4    141 
Credit cards   -    -    33 
Automobile loans   21    1    48 
Loans to individuals - other   28    28    - 
All other loans   10    -    225 
Total   500    75    664 
Recoveries:               
Real Estate-               
1-4 family residential construction   -    -    - 
Other construction/land   9    6    129 
1-4 family revolving, open-ended   25    1    19 
1-4 family closed-end   24    19    221 
Nonfarm, nonresidential, owner-occupied   60    4    13 
Total Real Estate   118    30    382 
Commercial and industrial   76    12    85 
Credit cards   -    -    3 
Automobile loans   33    13    40 
Loans to individuals - other   21    12    72 
All other loans   46    55    187 
Total   294    122    769 
Net loan charge offs (recoveries)   206    (47)   (105)
Balance at end of period  $20,804   $11,235   $13,908 
                
RATIOS               
Net Charge-offs (recoveries) to average loans &               
  leases (annualized)   0.03%   (0.008)%   (0.004)%
Allowance for loan losses to gross loans &               
  leases at end of period   0.80%   0.48%   0.53%
Net Loan Charge-offs (recoveries) to provision               
  for loan losses   2.90%   (4.19)%   (2.81)%

 

37

 

 

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 March 31, 2020 and December 31, 2019.

 

Allocation of the Allowance for Loan Losses
($ in thousands)  March 31, 2020 
   Amount   % of loans
in each category to total loans
 
Commercial, financial and agriculture  $4,466    13.2%
Commercial real estate   13,095    65.8%
Consumer real estate   2,840    19.6%
Installment and other   403    1.4%
Unallocated   -    - 
        Total  $20,804    100%

 

($ in thousands)  December 31, 2019 
   Amount   % of loans
in each category to total loans
 
Commercial, financial and agriculture  $3,043    13.1%
Commercial real estate   8,836    65.5%
Consumer real estate   1,694    19.8%
Installment and other   296    1.6%
Unallocated   39    - 
        Total  $13,908    100%

 

OTHER ASSETS

 

The Company’s balance of non-interest earning cash and due from banks was $107.3 million at March 31, 2020 and $89.7 million at December 31, 2019. 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 (“ FHLB”). Should a large “short” overnight position persists 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.

 

Total other securities decreased $779 thousand due to a decrease in FHLB stock. The Company’s net premises and equipment at March 31, 2020 was $108.0 million and $105.0 million at December 31, 2019; an increase of $3.0 million, or 2.9% for the first three months of 2020. The increase is attributed to the recording of a finance lease in the first quarter of 2020. Bank-owned life insurance increased to 65.7 million at March 31, 2020, an increase of $6.1 million from December 31. 2019. Goodwill at March 31, 2020 remained unchanged at $158.6 million when compared to December 31, 2019. Other intangible assets, consisting primarily of the Company’s core deposit intangible, decreased by $938 thousand in the first quarter of 2020, as compared to December 31, 2019.

 

38

 

 

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually and more frequently, if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Given the recent events surrounding the COVID-19 pandemic, the Company performed a peer stock price comparison and did not note any impairment. At this time, we do not believe there exists any impairment to goodwill and intangible assets, long-lived assets, or available-for-sale securities due to the COVID-19 pandemic.

 

Other real estate owned decreased by $325 thousand, or 4.5%, to $7.0 million at March 31, 2020 as compared to December 31, 2019.

 

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 $361.5 million at March 31, 2020 and $410.3 million at December 31, 2019, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 14.0% of gross loans at March 31, 2020 and 15.8% at December 31, 2019, with the decrease related to revolving open-ended lines secured by 1-4 family and commercial and industrial loans. The Company also had undrawn standby similar letters of credit to customers totaling $12.3 million at March 31, 2020 and $12.1 million at December 31, 2019. 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 7 – Financial Instruments with Off-Balance Risk to the Consolidated Financial Statements.

 

In addition to unused commitments to provide credit, the Company is utilizing a $5.0 million letter of credit issued by the FHLB on the Company’s behalf as of March 31, 2020. That letter of credit is backed by loans which are pledged to the FHLB by the Company.

 

liquidity and CAPITAL RESOURCES

 

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 its 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 $1.093 billion at March 31, 2020. 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 March 31, 2020, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $306.8 million of the Company’s investment balances, compared to $348.3 million at December 31, 2019. The decrease in unpledged securities from March 2020 compared to December 2019 is primarily due to an decrease in portfolio assets. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding federal funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since it utilizes 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 $109.5 million at March 31, 2020.

 

39

 

 

The Company’s liquidity ratio as of March 31, 2020 was 20.1%, as compared to internal liquidity policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines:

 

  

 

 

March 31, 2020 

  

 

 

Policy Maximum 

  

 

 

Policy

Compliance

Loans to Deposits (including FHLB advances)   76.7%   90.0%  In Policy
Net Non-core Funding Dependency Ratio   2.9%   20.0%  In Policy
Fed Funds Purchased / Total Assets   0.0%   10.0%  In Policy
FHLB Advances / Total Assets   2.7%   20.0%  In Policy
FRB Advances / Total Assets   0.0%   10.0%  In Policy
Pledged Securities to Total Securities   58.3%   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.

 

As of March 31, 2020, cash and cash equivalents were $286.8 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately $682.3 million at March 31, 2020. Approximately $363.4 million in loan commitments could fund within the next three months and other commitments, primarily commercial and similar letters of credit, totaled $11.2 million at March 31, 2020.

 

Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs. During March 2020, in response to COVID-19, the Federal Reserve lowered the primary credit rate by 150 basis points to 0.25 percent and extended terms to 90 days to enhance market liquidity and encourage use of the discount window. In addition, the Federal Reserve announced it would begin quantitative easing, or large-scale asset purchases, consisting primarily of Treasury securities and mortgage-backed securities to stem the effects of the pandemic on the financial markets. A prolonged outbreak of the COVID-19 pandemic could cause a widespread liquidity crisis, and the availability of these funds or the options to sell securities currently held could be hindered. The full impact and duration of COVID-19 on our business is unknown but if it continues to curtail economic activity, it could impact our ability to obtain funding and result in the reduction of or the cessation of dividends.

 

The 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 Company does not conduct regular banking operations. Both the Company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 1. Business – Supervision and Regulation in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

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 for the three-month periods ended March 31, 2020 and 2019 is included in the Average Balances, Tax Equivalent Interest and Yield/Rates tables appearing above, under the heading “Net Interest Income and Net Interest Margin.” The Company implemented Deposit Reclassification at the beginning of 2020. This program reclassifies noninterest bearing deposits and NOW deposit balances to money market accounts. This program reduces our reserve balance required at the Federal Reserve Bank of Atlanta and provides additional funds for liquidity or lending. At quarter end March 31, 2020, $409.3 million in noninterest deposit balances and $643.5 million in NOW deposit accounts were reclassified as money market accounts. 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  March 31, 2020   December 31, 2019 
($ in thousands)  Amount   Percent of Total   Amount   Percent of Total 
Non-interest bearing demand deposits  $340,606    10.4%  $723,208    23.5%
NOW accounts and Other   478,526    14.6%   941,598    30.7%
Money Market accounts   1,530,796    46.7%   462,810    15.0%
Savings accounts   296,177    9.0%   287,200    9.3%
Time Deposits of less than $250,000   462,808    14.1%   479,386    15.6%
Time Deposits of $250,000 or more   168,881    5.2%   182,331    5.9%
Total deposits  $3,277,794    100%  $3,076,533    100%

 

40

 

 

OTHER INTEREST-BEARING LIABILITIES

 

The Company’s non-deposit borrowings may, at any given time, include federal funds purchased from correspondent banks, borrowings from the FHLB, 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 federal 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 decreased by $98.1 million, or 33.3%, in the first three months of 2020, due in part to a decrease in notes payable to the FHLB of $95.2 million. The Company had junior subordinated debentures totaling $80.7 million at March 31, 2020 and $80.7 million December 31, 2019, which consists of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities and of 10 and 15 year subordinated notes issued by the Company in 2018.

 

OTHER LIABILITIES

 

Other liabilities are principally comprised of accrued interest payable, lease liabilities and other accrued but unpaid expenses. Other liabilities increased by $4.5 million, or 16.9%, during the first three months of 2020. The Company recorded a finance lease during the first quarter of 2019 resulting in an increase to other liabilities of $2.7 million. For more information regarding the Company’s leases, see Note 12 – Leases to the Consolidated Financial Statements.

 

CAPITAL

 

At March 31, 2020, the Company had total stockholders’ equity of $555.9 million, comprised of $19.0 million in common stock, $5.7 million in treasury stock, $409.9 million in surplus, $116.9 million in undivided profits and $15.8 million in accumulated comprehensive income (loss) on available-for-sale securities. Total stockholders’ equity at the end of 2019 was $543.7 million. The increase of $12.3 million, or 2.3%, in stockholders’ equity during the first three months of 2020 is comprised of capital added via net earnings of $8.3 million, an $5.7 million increase in accumulated comprehensive income for available-for-sale securities and, offset by $1.9 million in cash dividends paid.

 

On March 28, 2019, the Company announced that its Board of Directors authorized a share repurchase program to purchase up to an aggregate of $20 million of the Company’s common stock (the “March 2019 program”). This share repurchase program expired as of December 31, 2019. Under the March 2019 program, the Company repurchased shares of its common stock periodically in a manner determined by the Company’s management. The Company repurchased 168,188 shares under the March 2019 program during the year ended December 31, 2019.

 

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 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, A National Banking Association
  March 31,
2020
   December 31, 2019   Minimum Required to be Well Capitalized 
Common Equity Tier 1 Capital Ratio   15.5%   15.1%   6.5%
Tier 1 Capital Ratio   15.5%   15.1%   8.0%
Total Capital Ratio   16.2%   15.6%   10.0%
Tier 1 Leverage Ratio   11.4%   11.8%   5.0%

 

41

 

 

Regulatory Capital Ratios
The First Bancshares, Inc.
  March 31,
2020
   December 31, 2019   Minimum Required to be Well Capitalized
Common Equity Tier 1  Capital Ratio*   12.7%   12.5%  N/A
Tier 1 Capital Ratio**   13.2%   13.0%  N/A
Total Capital Ratio   16.3%   15.8%  N/A
Tier 1 Leverage Ratio   9.8%   10.3%  N/A

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

** The numerator includes Trust Preferred.

 

Our capital ratios remain very strong relative to the median for peer financial institutions, and at March 31, 2020 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. Basel III rules require a “capital conservation buffer” for both the Company and the Bank. The capital conservation buffer is subject to a three year phase-in period that began January 1, 2016 and was fully phased-in on January 1, 2019 at 2.5%. Under this guidance banking institutions with a CETI, Tier 1 Capital Ratio and Total Risk Based Capital above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.

 

In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). The Company has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (“CARES Act”), until the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020 whichever occurs first. The Company has elected to utilize the five-year CECL transition.

 

As of March 31, 2020, management believes that each of the Bank and the Company met all capital adequacy requirements to which they are subject. 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.

 

Total consolidated equity capital at March 31, 2020 was $555.9 million, or approximately 13.7% of total assets. The Company currently has adequate capital to meet the minimum capital requirements for all regulatory agencies.

 

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 (“Trust 2”) in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. Trust 2 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 Trust 2’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 (“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 3’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 2018, the Company acquired FMB’s Capital Trust 1 (“Trust 1”), which consisted of $6.1 million of floating rate junior subordinated deferrable interest debentures in which the Company owns all of the common equity. The debentures are the sole asset of Trust 1. Trust 1 issued $6,000,000 of Trust Preferred Securities 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 1’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 2033. Interest on the preferred securities is the three month LIBOR plus 2.85% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.

 

42

 

 

In accordance with the provisions of ASC Topic 810, Consolidation, the trusts are not included in the consolidated financial statements.

 

Subordinated Notes

 

On April 30, 2018, The Company entered into two Subordinated Note Purchase Agreements pursuant to which the Company sold and issued $24 million in aggregate principal amount of 5.875% fixed-to-floating rate subordinated notes due 2028 and $42 million in aggregate principal amount of 6.40% fixed-to-floating rate subordinated notes due 2033 (collectively, the “Notes”).

  

The Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are not subject to redemption at the option of the holder. Principal and interest on the Notes are subject to acceleration only in limited circumstances. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness, and each Note is pari passu in right to payment with respect to the other Notes.

 

Reconciliation of Non-GAAP Financial Measures

 

Our accounting and reporting policies conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. This Quarterly Report on Form 10-Q includes operating net earnings, operating earnings per share, fully tax equivalent (“FTE”) net interest income, FTE net interest margin and tangible book value per common share. The Company believes that the non-GAAP financial measures included in this Quarterly Report on Form 10-Q allow management and investors to understand and compare results in a more consistent manner for the periods presented herein. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 25.3% 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. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented, and other bank holding companies may define or calculate these measures differently. These non-GAAP financial measures should not be considered in isolation and do not purport to be an alternative to net income, earnings per share, net interest income, net interest margin, book value per common share or other GAAP financial measures as a measure of operating performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided below.

 

Operating Net Earnings

 

($ in thousands)  Three Months   Three Months 
   Ended   Ended 
  

March 31,

2020

  

March 31,

2019

 
Net income available to common          
   shareholders  $8,311   $7,635 
Effect of acquisition charges   740    3,179 
Tax on acquisition charges   (164)   (712)
Treasury awards   -    (233)
Tax on Treasury awards   -    59 
  Net earnings available to common           
   shareholders, operating  $8,887   $9,928 

 

Operating Earnings per Share

 

($ in thousands)  Three Months   Three Months 
   Ended   Ended 
  

March 31,

2020

  

March 31,

2019

 
Book value per common share  $29.49   $26.30 
Effect of intangible assets per share   9.97    8.51 
Tangible book value per common share  $19.52   $17.79 
           
Diluted earnings per share  $0.44   $0.48 
Effect of acquisition charges   0.04    0.21 
Tax on acquisition charges   (0.01)   (0.05)
Effect of Treasury Awards   -    (0.01)
Tax on Treasury Awards   -    - 
Diluted earnings per share, operating  $0.47   $0.63 

 

43

 

 

Net Interest Income Fully Tax Equivalent

 

($ in thousands)  Three Months   Three Months 
   Ended   Ended 
  

March 31,

2020

  

March 31,

2019

 
         
Net interest income  $34,065   $27,131 
Tax exempt investment income   (1,360)   (758)
Taxable investment income   1,821    1,015 
Net interest income fully tax equivalent  $34,526   $27,388 
           
Average earning assets  $3,517,143   $2,815,680 
Net interest margin fully tax equivalent   3.93%   3.89%

 

Pre-Tax Pre-Provision Operating Earnings

 

($ in thousands)  Three Months   Three Months 
   Ended   Ended 
  

March 31,

2020

  

March 31,

2019

 
         
Earnings before income taxes  $9,998   $9,669 
Acquisition charges   740    3,179 
Provision for loan losses   7,102    1,123 
Treasury Awards   -    (233)
Pre-Tax, Pre-Provision Operating Earnings  $17,840   $13,738 

 

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

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).

 

44

 

 

The following table shows the estimated changes in net interest income at risk and market value of equity along with policy limits:

 

   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   4.8%   -20.0%   30.3%   -40.0%
Up 300 bps   4.2%   -15.0%   27.2%   -30.0%
Up 200 bps   2.3%   -10.0%   21.5%   -20.0%
Up 100 bps   0.3%   -5.0%   12.6%   -10.0%
Down 100 bps   -1.5%   -5.0%   -9.5%   -10.0%
Down 200 bps   -2.9%   -10.0%   -2.3%   -20.0%

 

 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 March 31, 2020, 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:

 

March 31, 2020  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   114,788    116,371    118,182    118,494    120,876    123,111    123,899 
Dollar Change   -3,394    -1,811         312    2,694    4,929    5,717 
NII @ Risk - Sensitivity Y1   -2.9%   -1.5%        0.3%   2.3%   4.2%   4.8%
Policy Limits   -10.0%   -5.0%        -5.0%   -10.0%   -15.0%   -20.0%

 

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 $3.4 million lower than in a stable interest rate scenario, for a negative variance of 2.9%. 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. 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 $2.7 million, or 2.3%, 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 would expect to benefit from a material upward shift in the yield curve.

 

The Company’s one year cumulative GAP ratio is approximately 156.0%, 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 financial institutions should improve with rising rates and decrease with declining rates.

 

If interest rates change in the modeled amounts, our assets and liabilities may not perform as anticipated.  Measuring interest rate risk has inherent limitations including model assumptions.  For example, changes in market indices as modeled in conjunction with a changes in the shapes of the yield curves could result in different net interest income.    We consider many factors in monitoring our interest rate risk, and management adjusts strategies for the balance sheet and earnings as needed.

 

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.

 

45

 

 

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 March 31, 2020, 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   756,984    701,119    774,404    872,120    940,598    985,105    1,008,703 
Change in EVE from base   -17,420    -73,285         97,716    166,194    210,701    234,299 
% Change   -2.3%   -9.5%        12.6%   21.5%   27.2%   30.3%
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. 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.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2020, (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 (the “Exchange Act”). Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the Evaluation Date, 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 Control over Financial Reporting

        

There have been no changes in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended March 31, 2020 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

46

 

 

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

 

The following represents a material change in our risk factors from those disclosed in Part I - “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

The novel coronavirus, COVID-19, may adversely affect our business, financial condition, results of operations and our liquidity in the short term and for the foreseeable future.

 

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The Company has taken a number of steps to assess the effects, and mitigate the adverse consequences to its businesses, of the outbreak; though the magnitude of the impact remains to be seen, the Company’s business will likely be adversely impacted by the outbreak of COVID-19.

 

As previously disclosed in Part I - Item IA - Risk Factors” of the Company’s 2019 Form 10-K, the Company’s operations and profitability are impacted by business and economic conditions generally, as well as those in the primary banking markets in which it operates. The COVID-19 pandemic has resulted in historic job losses and decreases in economic activity. While the duration and full extent of job losses and magnitude of economic dislocation are not yet known, it is clear that they may impact the ability of individuals and businesses to make payments, adversely affect the value of underlying collateral and the ability of guarantors to make payments in the case of default, which may decrease demand for the Company’s products and services and otherwise adversely impact the Company’s financial condition, results of operations and business.

 

The United States and various state and local governments have implemented various programs designed to aid individuals and businesses, but the impact of, and extent to which, these efforts will be successful cannot be determined at this time. We have participated in some of these programs, including PPP, and likely will continue to participate in and facilitate such programs. Such programs have been developed and implemented rapidly, often with little immediate guidance from regulatory authorities, creating uncertainty regarding the rules for participating in and facilitating these programs in a compliant manner. We may experience losses as a result of our participation in and facilitation of PPP and similar government stimulus and relief programs, including losses arising from fraud, litigation or regulatory action.

 

COVID-19 presents a significant risk to our loan portfolio. Timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrower’s business. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation and collection actions, such as foreclosure. Approximately 20% of our loan portfolio also includes exposure to sectors that are expected to be subject to increased risk from COVID-19, including hotels, restaurants, retail, convenience stores, healthcare, and direct energy.

 

47

 

 

As a result of the adverse impact of COVID-19 on our customers, we have faced and may continue to face a decrease in demand for certain products, reduced access to our branches by our customers, and disruptions in the operations of its vendors. The pandemic could also result in recognition of additional credit losses in the Company’s loan portfolios and increase its allowance for credit losses as both businesses and consumers are negatively impacted by the economic downturn. In addition, in future periods the Company will be required to evaluate the impact of COVID-19 on the carrying value of certain of its assets, including goodwill, and to conduct impairments tests on those assets, which may result in impairment charges on these assets in future periods that could be material.

 

Effective March 2020, the Federal Reserve lowered the primary credit rate by 150 basis points to 0.25 percent to mitigate the effects of the COVID-19 pandemic and to support the liquidity and stability of banking institutions as they serve the increased demand for credit. We expect a long duration of reduced interest rates to negatively impact our net interest income, margin, cost of borrowing and future profitability and to have a material adverse effect on our financial results for the remainder of 2020.

 

In order to protect the health of our customers and employees, and to comply with applicable government restrictions, we have modified our business practices, including restricting employee travel, directing many employees to work remotely, cancelling in-person meetings and implementing our business continuity plans and protocols to the extent necessary. In compliance with social distancing mandates and recommendations issued by federal, state and local governments to combat the spread of the virus, our branches are servicing clients primarily through drive-thrus with limited lobby access by appointment only. We may take further such actions that we determine are in the best interest of our employees, customers and communities or as may be required by government order. These precautions could impact demand for the Company’s products and services.

 

As many of our employees are required to work from home, our internal controls over financial reporting could also be negatively affected as the remote working environment could necessitate new processes, procedures, and controls. The increased reliance on remote access to information systems also increases the Company’s exposure to potential cybersecurity breaches and could impact the Company’s productivity. Additionally, the Company’s business customers are increasingly required to work remotely as well and may not have appropriately secured remote networks may be more vulnerable to cyber-attacks or phishing schemes that could also affect us. Furthermore, if a large proportion of the Company’s key employees were to contract COVID-19 or be quarantined as a result of the virus, then the Company’s operations could be adversely impacted and its business continuity plans may not prove effective..

 

Any of these occurrences could have a material adverse effect on the Company’s financial condition, results of operations and business The extent to which the pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including the duration of the pandemic, government and regulatory responses to the pandemic, new information which may emerge concerning its severity and the actions necessary to contain it or address its impact, among others. Behavioral changes are not fully known and may not be temporary.

 

The potential effects of COVID-19 also could impact and heighten many of our risk factors included in Part I - “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. Including, but not limited to: risks associated with information technology and systems, including service interruptions or security breaches; disruptions in services provided by third parties; our ability to hire or retain key personnel; the analytical and forecasting models we use to estimate our loan losses and to measure the fair value of our financial instruments; general political or economic conditions in the U.S.; economic conditions in the geographic areas in which we operate; funding to provide liquidity; the failure to maintain an effective system of disclosure controls and procedures, including internal control over financial reporting; the value of our goodwill and other intangible assets; our susceptibility to fraud; the impact of governmental regulation and supervision; the soundness of other financial institutions; volatility in our stock price. However, as the COVID-19 situation is unprecedented and continuously evolving, the potential impacts to our risk factors that are further described in our Annual Report on Form 10-K for the year ended December 31, 2019, remain uncertain.

 

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

 

The following table provides information with respect to purchases of common stock of the Company made during the three months ended March 31, 2020, by the Company or any “affiliated purchaser” of the Company as defined in Rule 10b-18(a)(3) under the Exchange Act:

 

   Current Program 
Period  Total
Number of
Shares
Purchased
   Average
Price Paid
Per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
 
January 2020   -   $-    -    - 
February 2020   10,991    34.42    -    - 
March 2020   -    -    -    - 
Total   10,991   $34.42    -    - 

 

The share listed above represents shares withheld by the Company in order to satisfy employee tax obligations for vesting of restricted stock awards.

 

48

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

Item 5. Other Information

 

The Company is disclosing under this Item 5 the following information otherwise disclosable in a Current Report on Form 8-K under “Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year”:

 

On May 7, 2020, our board of directors approved and adopted an Amendment No. 1 to our Amended and Restated Bylaws. Amendment No. 1 was adopted to clarify that (i) shareholders may participate meetings by means of remote communications to extent permitted by Mississippi law the board of directors, and (ii) meetings of shareholders can be held entirely by means of remote communication to the extent permitted by the Mississippi Business Corporation Act. In light of the uncertainty resulting from the COVID-19 pandemic, our 2020 annual meeting will be held in completely virtual annual meeting, as permitted by Executive Order No. 1469 issued by the Governor of the state of Mississippi on April 9, 2020.

 

The foregoing summary is subject to, and qualified in its entirety by, the full text of the Amended and Restated Bylaws, a copy of which is filed as Exhibit 3.4 to this Quarterly Report on Form 10-Q and is incorporated by reference into this Item 5.

 

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   Amendment to the Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2018).
  3.3   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).
  3.4   Amendment No. 1 to the Amended and Restated Bylaws of The First Bancshares, Inc. effective as of May 7, 2020*
  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 September 15, 2017).
  10.1   Amendment to Employment Agreement dated January 16, 2020, between The First, A National Banking Association, and M. Ray Cole, Jr.*
  10.2   Amendment to Employment Agreement dated January 16, 2020, between The First, A National Banking Association, and Donna T. Lowery*
  10.3   Supplemental Executive Retirement Agreement effective January 1, 2020 between The First, A National Banking Association and Milton R. Cole, Jr.*
  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

 

* Filed herewith.

** Furnished herewith.

 

49

 

 

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.
May 11, 2020                      M. Ray (Hoppy) Cole, Jr.
(Date) Chief Executive Officer
   
  /s/ DONNA T. (DEE DEE) LOWERY
May 11, 2020                      Donna T. (Dee Dee) Lowery, Executive
(Date) Vice President and Chief Financial Officer

 

50