EX-13 2 v371826_ex13.htm EXHIBIT 13

 

EXHIBIT 13

 

THE FIRST BANCSHARES, INC.

2013 ANNUAL REPORT

 

 

  

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share Data)

 

   December 31, 
   2013   2012   2011   2010   2009 
Earnings:                         
Net interest income  $28,401   $22,194   $19,079   $16,334   $14,390 
Provision for loan losses   1,076    1,228    1,468    983    1,206 
                          
Noninterest income   7,083    6,324    4,598    3,895    4,397 
Noninterest expense   28,165    22,164    18,870    15,843    15,323 
Net income   4,639    4,049    2,871    2,549    1,743 
Net income applicable to common Stockholders   4,215    3,624    2,529    2,233    1,461 
                          
Per  common share data:                         
Basic net income per Share  $.98   $1.17   $.83   $.74   $.49 
                          
Diluted net income per Share   .96    1.16    .82    .74    .49 
Per share data:                         
Basic net income per share  $1.07   $1.31   $.94   $.84   $.58 
Diluted net income per share   1.06    1.29    .93    .84    .58 
                          
Selected Year End                         
Balances:                         
                          
Total assets  $940,890   $721,385   $681,413   $503,045   $477,552 
Securities   258,023    226,301    221,176    107,136    114,618 
Loans, net of allowance   577,574    408,970    383,418    327,956    314,033 
Deposits   779,971    596,627    573,394    396,479    383,754 
Stockholders’ equity   85,108    65,885    60,425    57,098    43,617 

 

5
 

 

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Purpose

 

The purpose of management's discussion and analysis is to make the reader aware of the significant components, events, and changes in the consolidated financial condition and results of operations of the Company and The First during the year ended December 31, 2013 when compared to the years 2012 and 2011. The Company's consolidated financial statements and related notes should also be considered.

 

Critical Accounting Policies

 

In the preparation of the Company's consolidated financial statements, certain significant amounts are based upon judgment and estimates. The most critical of these is the accounting policy related to the allowance for loan losses. The allowance is based in large measure upon management's evaluation of borrowers' abilities to make loan payments, local and national economic conditions, and other subjective factors. If any of these factors were to deteriorate, management would update its estimates and judgments which may require additional loss provisions.

 

Companies are required to perform periodic reviews of individual securities in their investment portfolios to determine whether decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company’s intent and ability to hold the security. Pursuant to these requirements, Management assesses valuation declines to determine the extent to which such changes are attributable to fundamental factors specific to the issuer, such as financial condition, business prospects or other factors or market-related factors, such as interest rates. Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses.

 

Goodwill is assessed for impairment both annually and when events or circumstances occur that make it more likely than not that impairment has occurred. As part of its testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines the fair value of a reporting unit is less than its carrying amount using these qualitative factors, the Company then compares the fair value of goodwill with its carrying amount, and then measures impaired loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. No impairment was indicated when the annual test was performed in 2013.

 

Overview

 

The First Bancshares, Inc. (the Company) was incorporated on June 23, 1995, and serves as a bank holding company for The First, A National Banking Association (“The First”), located in Hattiesburg, Mississippi. The First began operations on August 5, 1996, from its main office in the Oak Grove community, which is on the western side of Hattiesburg. The First has 25 locations in South Mississippi, South Alabama and Louisiana. See Note C of Notes to Consolidated Financial Statements for information regarding branch acquisitions. The Company and The First engage in a general commercial and retail banking business characterized by personalized service and local decision-making, emphasizing the banking needs of small to medium-sized businesses, professional concerns, and individuals.

 

6
 

 

The Company’s primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investments, the Company seeks to employ as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations. To ensure sufficient liquidity, the Company also maintains a portion of its deposits in cash, government securities, deposits with other financial institutions, and overnight loans of excess reserves (known as “Federal Funds Sold”) to correspondent banks. The revenue which the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of the Company’s loans and deposits, as well as the profit margin (“interest spread”) and fee income which can be generated on these amounts.

 

The Company increased from approximately $721.4 million in total assets, and $596.6 million in deposits at December 31, 2012 to approximately $940.9 million in total assets, and $780.0 million in deposits at December 31, 2013. Loans net of allowance for loan losses increased from $409.0 million at December 31, 2012 to approximately $577.6 at December 31, 2013. The Company increased from $65.9 million in shareholders’ equity at December 31, 2012 to approximately $85.1 million at December 31, 2013. The First reported net income of $5,892,000 and $4,597,000 for the years ended December 31, 2013, and 2012, respectively. For the years ended December 31, 2013 and 2012, the Company reported consolidated net income applicable to common stockholders of $4,215,000 and $3,624,000, respectively. The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and the Company's Consolidated Financial Statements and the Notes thereto and the other financial data included elsewhere.

 

7
 

 

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share Data)

 

   December 31, 
   2013   2012   2011   2010   2009 
Earnings:                         
Net interest income  $28,401   $22,194   $19,079   $16,334   $14,390 
Provision for loan losses   1,076    1,228    1,468    983    1,206 
                          
Noninterest income   7,083    6,324    4,598    3,895    4,397 
Noninterest expense   28,165    22,164    18,870    15,843    15,323 
Net income   4,639    4,049    2,871    2,549    1,743 
Net income applicable to common Stockholders   4,215    3,624    2,529    2,233    1,461 
                          
Per  common share data:                         
Basic net income per Share  $.98   $1.17   $.83   $.74   $.49 
Diluted net income per Share   .96    1.16    .82    .74    .49 
Per share data:                         
Basic net income per share  $1.07   $1.31   $.94   $.84   $.58 
Diluted net income per share   1.06    1.29    .93    .84    .58 
                          
Selected Year End Balances:                         
                          
Total assets  $940,890   $721,385   $681,413   $503,045   $477,552 
Securities   258,023    226,301    221,176    107,136    114,618 
Loans, net of allowance   577,574    408,970    383,418    327,956    314,033 
Deposits   779,971    596,627    573,394    396,479    383,754 
Stockholders’ equity   85,108    65,885    60,425    57,098    43,617 

 

Results of Operations

 

The following is a summary of the results of operations by The First for the years ended December 31, 2013 and 2012.

 

   2013   2012 
   (In thousands) 
         
Interest income  $31,312   $26,325 
Interest expense   2,731    3,930 
Net interest income   28,581    22,395 
           
Provision for loan losses   1,076    1,228 
           
Net interest income after provision for loan losses   27,505    21,167 
           
Other income   7,083    6,324 
           
Other expense   26,578    21,647 
           
Income tax expense   2,115    1,247 
           
Net income  $5,895   $4,597 

 

8
 

 

The following reconciles the above table to the amounts reflected in the consolidated financial statements of the Company at December 31, 2013 and 2012:

 

   2013   2012 
   (In thousands) 
         
Net interest income:          
Net interest income of The First  $28,581   $22,395 
Intercompany eliminations   (180)   (201)
   $28,401   $22,194 
           
Net income applicable to common stockholders:          
Net income of  The First  $5,892   $4,597 
Net loss of the Company, excluding intercompany accounts   (1,677)   (973)
   $4,215   $3,624 

 

Consolidated Net Income

 

The Company reported consolidated net income applicable to common stockholders of approximately $4,215,067 for the year ended December 31, 2013, compared to a consolidated net income of $3,624,339 for the year ended December 31, 2012. The increase in income was attributable to an increase in net interest income of $6.2 million or 28.0%, and an increase of $.8 million or 12.0% in other income which were offset by an increase in other expenses of $6.0 million or 27.1%.

 

Consolidated Net Interest Income

 

The largest component of net income for the Company is net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on the Company’s interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.

 

Consolidated net interest income was approximately $28,401,000 for the year ended December 31, 2013, as compared to $22,194,000 for the year ended December 31, 2012. This increase was the direct result of increased loan volumes and decreased rates paid on interest-bearing liabilities during 2013 as compared to 2012. Average interest-bearing liabilities for the year 2013 were $728,322,000 compared to $534,998,000 for the year 2012. At December 31, 2013, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.25% compared to 3.29% at December 31, 2012. The net interest margin (which is net interest income divided by average earning assets) was 3.31% for the year 2013 compared to 3.42% for the year 2012. Rates paid on average interest-bearing liabilities decreased from .77% for the year 2012 to .40% for the year 2013. Interest earned on assets and interest accrued on liabilities is significantly influenced by market factors, specifically interest rates as set by Federal agencies. Average loans comprised 68.0% of average earning assets for the year 2013 compared to 59.8% for the year 2012.

 

9
 

 

Average Balances, Income and Expenses, and Rates. 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, Income and Expenses, and Rates

 

   Years Ended December 31, 
   2013   2012   2011 
   Average Balance   Income/
Expenses
   Yield/
Rate
   Average
Balance
   Income/
Expenses
   Yield/
Rate
   Average
Balance
   Income/
Expenses
   Yield/
Rate
 
   (Dollars in thousands) 
Assets                                             
Earning Assets                                             
Loans (1)(2)  $583,200   $25,736    4.41%  $388,012   $21,412    5.52%  $354,295   $20,971    5.92%
Securities   248,237    5,419    2.18%   235,833    4,785    2.03%   134,815    3,360    2.49%
Federal funds sold (3)   18,564    62    .33%   19,670    51    .26%   5,486    72    1.31%
Other   7,404    101    1.36%   4,845    83    1.71%   2,530    72    2.85%
Total earning assets   857,405    31,318    3.65%   648,360    26,331    4.06%   497,126    24,475    4.92%
                                              
Cash and due from banks   25,447              16,699              47,632           
Premises and equipment   30,816              22,633              17,401           
Other assets   33,314              32,337              21,613           
Allowance for loan losses   (5,240)             (4,457)             (4,340)          
Total assets  $941,742             $715,572             $579,432           
                                              
Liabilities                                             
Interest-bearing liabilities  $728,322   $2,917    .40%  $534,998   $4,137    .77%  $445,893   $5,396    1.21%
Demand deposits (1)   115,909              107,392              65,830           
Other liabilities   12,430              10,036              18,757           
Shareholders’ equity   85,081              63,146              48,952           
Total liabilities and shareholders’ equity  $941,742             $715,572             $579,432           
                                              
Net interest spread             3.25%             3.29%             3.71%
Net yield on interest-earning assets       $28,401    3.31%       $22,194    3.42%       $19,079    3.84%

 

 

(1)All loans and deposits were made to borrowers in the United States. Includes nonaccrual loans of $3,181, $3,589, and $5,125, respectively, during the periods presented. Loans include held for sale loans.
(2)Includes loan fees of $525, $430, and $418 respectively.
(3)Includes EBA-MNBB and Federal Reserve – New Orleans.

 

10
 

 

Analysis of Changes in Net Interest Income. The following table presents the consolidated dollar amount of changes in interest income and interest expense attributable to changes in volume and to changes in rate. The combined effect in both volume and rate which cannot be separately identified has been allocated proportionately to the change due to volume and due to rate.

 

Analysis of Changes in Consolidated Net Interest Income

 

   Year Ended December 31,   Year Ended December 31, 
   2013 versus 2012
Increase (decrease) due to
   2012 versus 2011
Increase (decrease) due to
 
   Volume   Rate   Net   Volume   Rate   Net 
   (Dollars in thousands) 
Earning Assets                              
Loans  $10,774   $(6,450)  $4,324   $1,993   $(1,552)  $441 
Securities   270    374    644    2,518    (1,093)   1,425 
Federal funds sold   (3)   13    10    186    (207)   (21)
Other short-term investments   35    (26)   9    66    (55)   11 
Total interest income   11,076    (6,089)   4,987    4,763    (2,907)   1,856 
Interest-Bearing Liabilities                              
Interest-bearing transaction accounts   460    (748)   (288)   361    (785)   (424)
Money market accounts   123    (154)   (31)   116    (185)   (69)
Savings deposits   3    (10)   (7)   23    (9)   14 
Time deposits   172    (886)   (714)   36    (683)   (647)
Borrowed funds   97    (277)   (180)   542    (675)   (133)
Total interest expense   855    (2,075)   (1,220)   1,078    (2,337)   (1,259)
Net interest income  $10,221   $(4,014)  $6,207   $3,685   $(570)  $3,115 

 

Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. A monitoring technique employed by the Company is the measurement of the Company's interest sensitivity "gap," which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.

 

11
 

 

The following tables illustrate the Company's consolidated interest rate sensitivity and consolidated cumulative gap position at December 31, 2011, 2012, and 2013.

  

   December 31, 2011 
   Within
Three
Months
   After Three
Through
Twelve
Months
   Within
One
Year
   Greater Than
One Year or
Nonsensitive
   Total 
   (Dollars in thousands) 
Assets                         
Earning Assets:                         
Loans  $72,117   $74,832   $146,949   $240,980   $387,929 
Securities (2)   9,987    12,945    22,932    198,244    221,176 
Funds sold and other   241    12,788    13,029    -    13,029 
Total earning assets  $82,345   $100,565   $182,910   $439,224   $622,134 
Liabilities                         
Interest-bearing liabilities:                         
Interest-bearing deposits:                         
NOW accounts (1)  $-   $200,210   $200,210   $-   $200,210 
Money market accounts   43,296    -    43,296    -    43,296 
Savings deposits (1)   -    45,644    45,644    -    45,644 
Time deposits   39,411    87,259    126,670    50,445    177,115 
Total interest-bearing deposits   82,707    333,113    415,820    50,445    466,265 
Borrowed funds (3)   231    12,990    13,221    13,811    27,032 
Total interest-bearing liabilities   82,938    346,103    429,041    64,256    493,297 
Interest-sensitivity gap per period  $(593)  $(245,538)  $(246,131)  $374,968   $128,837 
Cumulative gap at December 31, 2011  $(593)  $(246,131)  $(246,131)  $128,837   $128,837 
Ratio of cumulative gap to total earning assets at December 31, 2011   (.09)%   (39.6)%   (39.6)%   20.7%     

 

   December 31, 2012 
   Within
Three
Months
   After Three
Through
Twelve
Months
   Within
One
Year
   Greater Than
One Year or
Nonsensitive
   Total 
   (Dollars in thousands) 
Assets                         
Earning Assets:                         
Loans  $72,670   $78,168   $150,838   $262,859   $413,697 
Securities (2)   11,185    15,504    26,689    199,612    226,301 
Funds sold and other   1,064    9,588    10,652    -    10,652 
Total earning assets  $84,919   $103,260   $188,179   $462,471   $650,650 
Liabilities                         
Interest-bearing liabilities:                         
Interest-bearing deposits:                         
NOW accounts (1)  $-   $230,588   $230,588   $-   $230,588 
Money market accounts   47,325    -    47,325    -    47,325 
Savings deposits (1)   -    48,153    48,153    -    48,153 
Time deposits   32,624    70,883    103,507    57,429    160,936 
Total interest-bearing deposits   79,949    349,624    429,573    57,429    487,002 
Borrowed funds (3)   20,000    1,771    21,771    15,000    36,771 
Total interest-bearing liabilities   99,949    351,395    451,344    72,429    523,773 
Interest-sensitivity gap per period  $(15,030)  $(248,135)  $(263,165)  $390,042   $126,877 
Cumulative gap at December 31, 2012  $(15,030)  $(263,165)  $(263,165)  $126,877   $126,877 
Ratio of cumulative gap to total earning assets at  December 31, 2012   (2.3)%   (40.4)%   (40.4)%   19.5%     

 

12
 

 

   December 31, 2013 
   Within
Three
Months
   After Three
Through
Twelve
Months
   Within
One
Year
   Greater Than
One Year or
Nonsensitive
   Total 
   (Dollars in thousands) 
Assets                         
Earning Assets:                         
Loans  $89,314   $98,315   $187,629   $395,673   $583,302 
Securities (2)   10,114    16,006    26,120    231,903    258,023 
Funds sold and other   967    14,205    15,172    -    15,172 
Total earning assets  $100,395   $128,526   $228,921   $627,576   $856,497 
Liabilities                         
Interest-bearing liabilities:                         
Interest-bearing deposits:                         
NOW accounts (1)  $-   $240,513   $240,513   $-   $240,513 
Money market accounts   107,564    -    107,564    -    107,564 
Savings deposits (1)   -    55,113    55,113    -    55,113 
Time deposits   46,875    87,475    134,350    68,637    202,987 
Total interest-bearing deposits   154,439    383,101    537,540    68,637    606,177 
Borrowed funds (3)   37,000    4,000    41,000    11,000    52,000 
Total interest-bearing liabilities   191,439    387,101    578,540    79,637    658,177 
Interest-sensitivity gap per period  $(91,044)  $(258,575)  $(349,619)  $547,939   $198,320 
Cumulative gap at December 31, 2013  $(91,044)  $(349,619)  $(349,619)  $198,320   $198,320 
Ratio of cumulative gap to total earning assets at  December 31, 2013   (10.6)%   (40.8)%   (40.8)%   23.2%     

 

 

 

(1)NOW and savings accounts are subject to immediate withdrawal and repricing. These deposits do not tend to immediately react to changes in interest rates and the Company believes these deposits are a stable and predictable funding source. Therefore, these deposits are included in the repricing period that management believes most closely matches the periods in which they are likely to reprice rather than the period in which the funds can be withdrawn contractually.
(2)Securities include mortgage backed and other installment paying obligations based upon stated maturity dates.
(3)Does not include subordinated debentures of $10,310,000.

 

The Company generally would benefit from increasing market rates of interest when it has an asset-sensitive gap and generally from decreasing market rates of interest when it is liability sensitive. The Company currently is liability sensitive within the one-year time frame. However, the Company's gap analysis is not a precise indicator of its interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by management as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Accordingly, management believes a liability sensitive-position within one year would not be as indicative of the Company’s true interest sensitivity as it would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income is also affected by other significant factors, including changes in the volume and mix of earning assets and interest-bearing liabilities.

 

Provision and Allowance for Loan Losses

 

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

 

13
 

 

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. A loan loss history based upon the prior three years is utilized in determining 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 upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan 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. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.

 

Our allowance for loan losses model is focused on establishing a loss history within the Bank and relying on specific impairment to determine credits that the Bank feels the ultimate repayment source will be liquidation of the subject collateral.  Our model takes into account many other factors as well such as local and national economic factors, portfolio trends, non performing asset, charge off, and delinquency trends as well as underwriting standards and the experience of branch management and lending staff.   These trends are measured in the following ways:

 

Local Trends: (Updated quarterly usually the month following quarter end)

Local Unemployment Rate
Insurance issues (Windpool areas)
Bankruptcy Rates (increasing/declining)
Local Commercial R/E Vacancy rates
Established market/new market
Hurricane threat

 

14
 

 

National Trends: (Updated quarterly usually the month following quarter end)

Gross Domestic Product (GDP)
Home Sales
Consumer Price Index (CPI)
Interest Rate Environment (increasing/steady/declining)
Single Family construction starts
Inflation Rate
Retail Sales

 

Portfolio Trends: (Updated monthly as the ALLL is calculated)

Second Mortgages
Single Pay Loans
Non-Recourse Loans
Limited Guaranty Loans
Loan to Value Exceptions
Secured by Non-Owner Occupied property
Raw Land Loans
Unsecured Loans

 

Measurable Bank Trends: (Updated quarterly)

Delinquency Trends
Non-Accrual Trends
Net Charge Offs
Loan Volume Trends
Non-Performing Assets
Underwriting Standards/Lending Policies

Experience/Depth of Bank Lending

Management

 

Our model takes into account many local and national economic factors as well as portfolio trends.  Local and national economic trends are measured quarterly, typically in the month following quarter end to facilitate the release of economic data from the reporting agencies.  These factors are allocated a basis point value ranging from -25 to +25 basis points and directly affect the amount reserved for each branch.  As of December 31, 2013, most economic indicators both local and national pointed to a weak economy thus most factors were assigned a positive basis point value. This increased the amount of the allowance that was indicated by historical loss factors.  Portfolio trends are measured monthly on a per branch basis to determine the percentage of loans in each branch that the Bank has determined as having more risk.  Portfolio risk is defined as areas in the Bank’s loan portfolio in which there is additional risk involved in the loan type or some other area in which the Bank has identified as having more risk.  Each area is tracked on bank-wide as well as on a branch-wide basis.  Branches are analyzed based on the gross percentage of concentrations of the Bank as a whole.  Portfolio risk is determined by analyzing concentrations in the areas outlined by determining the percentage of each branch’s total portfolio that is made up of the particular loan type and then comparing that concentration to the Bank as a whole. Branches with concentrations in these areas are graded on a scale from – 25 basis points to + 25 basis points. Second mortgages, single pay loans, loans secured by raw land, unsecured loans and loans secured by non owner occupied property are considered to be of higher risk than those of a secured and amortizing basis. LTV exceptions place the Bank at risk in the event of repossession or foreclosure. 

 

15
 

 

Measurable Bank Wide Trends are measured on a quarterly basis as well. This consists of data tracked on a bank wide basis in which we have identified areas of additional risk or the need for additional allocation to the allowance for loan loss.   Data is updated quarterly, each area is assigned a basis point value from -25 basis points to + 25 basis points based on how each area measures to the previous time period.  Net charge offs, loan volume trends and non performing assets have all trended upwards therefore increasing the need for increased funds reserved for loan losses.  Underwriting standards/ lending standards as well as experience/ depth of bank lending management is evaluated on a per branch level. 

 

Loans are reviewed for impairment when, in the Bank’s opinion, the ultimate source of repayment will be the liquidation of collateral through foreclosure or repossession.  Once identified updated collateral values are obtained on these loans and impairment worksheets are prepared to determine if impairment exists.  This method takes into account any expected expenses related to the disposal of the subject collateral.  Specific allowances for these loans are done on a per loan basis as each loan is reviewed for impairment.  Updated appraisals are ordered on real estate loans and updated valuations are ordered on non real estate loans to determine actual market value. 

 

At December 31, 2013, the consolidated allowance for loan losses amounted to approximately $5.7 million, or .98% of outstanding loans or 1.21% of loans excluding those booked at fair value due to business combination. At December 31, 2012, the allowance for loan losses amounted to approximately $4.7 million, which was 1.14% of outstanding loans. The Company’s provision for loan losses was $1,076,000 for the year ended December 31, 2013, compared to $1,228,000 for the year ended December 31, 2012.

 

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. 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 Bank’s opinion the ultimate source of repayment will be generated from the liquidation of collateral.

 

16
 

 

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.

 

The following tables illustrate the Company’s past due and nonaccrual loans at December 31, 2013 and 2012.

 

   December 31, 2013 
   (In thousands) 
   Past Due 30 to
89 Days
   Past Due 90 days or 
more and still accruing
   Non-Accrual 
             
Real Estate-construction  $478   $-   $212 
Real Estate-mortgage   4,696    143    2,453 
Real Estate-non farm nonresidential   252    -    507 
Commercial   12    -    9 
Consumer   115    16    - 
Total  $5,553   $159   $3,181 

 

   December 31, 2012 
   (In thousands) 
   Past Due 30 to
89 Days
   Past Due 90 days or 
more and still accruing
   Non-Accrual 
             
Real Estate-construction  $990   $-   $1,667 
Real Estate-mortgage   3,045    147    1,174 
Real Estate-non farm nonresidential   389    -    608 
Commercial   88    -    135 
Consumer   132    11    5 
Total  $4,644   $158   $3,589 

 

Total nonaccrual loans at December 31, 2013 amounted to $3.2 million which was a decrease of $.2 million from the December 31, 2012 amount of $3.4 million. Management believes these relationships were adequately reserved at December 31, 2013. Restructured loans not reported as past due or nonaccrual at December 31, 2013 amounted to $1.6 million.

 

A potential problem loan is one in which management has serious doubts about the borrower’s future performance under the terms of the loan contract. These loans are current as to principal and interest and, accordingly, they are not included in nonperforming asset categories. The level of potential problem loans is one factor used in the determination of the adequacy of the allowance for loan losses. At December 31, 2013 and December 31, 2012, The First had potential problem loans of $17,070,000 and $19,164,000, respectively. This represents a decrease of $2,094,000.

 

17
 

  

Consolidated Allowance For Loan Losses

 

   Years Ended December 31, 
   2013   2012   2011   2010   2009 
                     
Average loans outstanding  $583,200   $388,012   $354,295   $328,950   $320,495 
Loans outstanding at year end  $583,302   $413,697   $387,929   $332,573   $318,795 
                          
Total nonaccrual loans  $3,181   $3,401   $5,125   $4,212   $4,367 
                          
Beginning balance of allowance  $4,727   $4,511   $4,617   $4,762   $4,785 
Loans charged-off   (759)   (1,190)   (1,987)   (1,370)   (1,396)
Total loans charged-off   (759)   (1,190)   (1,987)   (1,370)   (1,396)
Total recoveries   684    178    413    242    167 
Net loans charged-off   (75)   (1,012)   (1,574)   (1,128)   (1,229)
Acquisition   -    -    -    -    - 
Provision for loan losses   1,076    1,228    1,468    983    1,206 
Balance at year end  $5,728   $4,727   $4,511   $4,617   $4,762 
                          
Net charge-offs to average loans   .01%   .26%   .44%   .34%   .38%
Allowance as percent of total loans   .98%   1.14%   1.16%   1.39%   1.49%
Nonperforming loans as a percentage of total loans   .55%   .82%   1.32%   1.27%   1.37%
Allowance as a multiple of nonaccrual loans   1.8X   1.4X   .88X   1.1X   1.1X

 

At December 31, 2013, the components of the allowance for loan losses consisted of the following:

 

   Allowance 
   (In thousands) 
Allocated:     
Impaired loans  $849 
Graded loans   4,879 
   $5,728 

 

Graded loans are those loans or pools of loans assigned a grade by internal loan review.

  

18
 

  

The following table represents the activity of the allowance for loan losses for the years 2013 and 2012.

 

Analysis of the Allowance for Loan Losses

 

   Years Ended December 31, 
   2013   2012 
   (Dollars in thousands) 
         
Balance at beginning of year  $4,727   $4,511 
Charge-offs:          
Real Estate-construction   (305)   (102)
Real Estate-mortgage   (152)   (559)
Real Estate-nonfarm nonresidential   (-)   (160)
Commercial   (105)   (166)
Consumer   (197)   (203)
Total   (759)   (1,190)
Recoveries:          
Real Estate-construction   133    14 
Real Estate-mortgage   393    37 
Real Estate-nonfarm nonresidential   74    32 
Commercial   18    25 
Consumer   66    70 
Total   684    178 
Net Charge-offs   (75)   (1,012)
Provision for Loan Losses   1,076    1,228 
Balance at end of year  $5,728   $4,727 

 

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 December 31, 2013 and 2012.

 

 

Allocation of the Allowance for Loan Losses

 

   December 31, 2013 
   (Dollars in thousands) 
   Amount   % of loans
in each category
to total loans
 
         
Commercial Non Real Estate  $582    14.0%
Commercial Real Estate   3,384    57.2%
Consumer Real Estate   1,427    25.4%
Consumer   173    3.4%
Unallocated   162    - 
Total  $5,278    100%

 

   December 31, 2012 
   (Dollars in thousands) 
   Amount   % of loans
in each category
to total loans
 
         
Commercial Non Real Estate  $420    13.3%
Commercial Real Estate   3,338    63.7%
Consumer Real Estate   810    19.0%
Consumer   151    4.0%
Unallocated   8    - 
Total  $4,727    100%

 

19
 

 

Noninterest Income and Expense

 

Noninterest Income. The Company’s primary source of noninterest income is service charges on deposit accounts. Other sources of noninterest income include bankcard fees, commissions on check sales, safe deposit box rent, wire transfer fees, official check fees and bank owned life insurance income.

 

Noninterest income increased $760,000 or 12.0% during 2013 to $7,083,000 from $6,324,000 for the year ended December 31, 2012. The deposit activity fees were $3,979,000 for 2013 compared to $3,432,000 for 2012. Other service charges decreased by $240,000 or 9.9% from $2,427,000 for the year ended December 31, 2012, to $2,187,000 for the year ended December 31, 2013. Impairment losses on investment securities were $0 for 2013 as compared to $0 for 2012.

 

Noninterest expense increased from $22.2 million for the year ended December 31, 2012 to $28.2 million for the year ended December 31, 2013. The Company experienced slight increases in most expense categories. The largest increase was in salaries and employee benefits, which increased by $2.9 million in 2013 as compared to 2012. These increases were due in part to the addition of the Baldwin County branches and staff.

 

The following table sets forth the primary components of noninterest expense for the periods indicated:

 

Noninterest Expense

 

   Years ended December 31, 
   2013   2012   2011 
   (In thousands) 
             
Salaries and employee benefits  $14,855   $12,001   $9,679 
Occupancy   2,351    1,797    1,356 
Equipment   1,568    1,435    1,114 
Marketing and public relations   451    329    353 
Data processing   169    85    46 
Supplies and printing   455    425    416 
Telephone   731    533    346 
Correspondent services   74    96    105 
Deposit and other insurance   834    734    865 
Professional and consulting fees   2,433    747    1,825 
Postage   303    252    236 
ATM fees   575    434    310 
Other   3,366    3,296    2,219 
                
Total  $28,165   $22,164   $18,870 

 

Income Tax Expense

 

Income tax expense consists of two components. The first is the current tax expense which represents the expected income tax to be paid to taxing authorities. The Company also recognizes deferred tax for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities.

 

 

 

20
 

  

Analysis of Financial Condition

 

Earning Assets

 

Loans. Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2013 and 2012, respectively, average loans accounted for 68.0% and 59.8% of average earning assets. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Loans averaged $583.2 million during 2013, as compared to $388.0 million during 2012, and $354.3 million during 2011.

 

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

 

Composition of Loan Portfolio

 

   December 31, 
   2013   2012   2011 
       Percent       Percent       Percent 
   Amount   Of Total   Amount   of Total   Amount   of Total 
   (Dollars in thousands) 
Mortgage loans held for sale  $3,680    0.6%  $5,585    1.4%  $2,906    0.7%
Commercial, financial and agricultural   81,792    14.0%   53,234    12.9%   48,385    12.5%
Real Estate:                              
Mortgage-commercial   212,388    36.4%   142,046    34.3%   138,943    35.8%
Mortgage-residential   202,343    34.7%   140,703    34.0%   117,692    30.3%
Construction   67,287    11.5%   57,529    13.9%   63,357    16.3%
Consumer and other   15,812    2.8%   14,600    3.5%   16,645    4.4%
Total loans   583,302    100%   413,697    100%   387,928    100%
Allowance for loan losses   (5,728)        (4,727)        (4,511)     
Net loans  $577,574        $408,970        $383,417      

 

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

 

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

 

21
 

 

The following table sets forth the Company's commercial and construction real estate loans maturing within specified intervals at December 31, 2013.

 

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

 

   December 31, 2013 
Type  One Year
or Less
   Over One Year
Through

Five Years
   Over Five
Years
   Total 
   (In thousands) 
                 
Commercial, financial and agricultural  $49,237   $27,785   $4,770   $81,792 
Real estate – construction   42,242    25,045    -    67,287 
   $91,479   $52,830   $4,770   $149,079 
Loans maturing after one year with:                 $43,826 
Fixed interest rates                  13,774 
Floating interest rates                 $57,600 

 

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity.

 

 

Investment Securities. The investment securities portfolio is a significant component of the Company's total earning assets. Total securities averaged $248.2 million in 2013, as compared to $235.8 million in 2012 and $134.8 million in 2011. This represents 29.0%, 36.4%, and 27.1% of the average earning assets for the years ended December 31, 2013, 2012, and 2011, respectively. At December 31, 2013, investment securities were $258.0 million and represented 30.1% of earning assets. The Company attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations with maturities up to five years.

 

The following table summarizes the carrying value of securities for the dates indicated.

 

Securities Portfolio

 

   December 31, 
   2013   2012   2011 
   (In thousands) 
Available-for-sale               
U. S. Government agencies  $108,148   $98,326   $103,004 
States and municipal subdivisions   108,079    98,910    94,258 
Corporate obligations   26,852    16,187    14,293 
Mutual finds   972    970    974 
Total available-for-sale   244,051    214,393    212,529 
Held-to-maturity               
U.S. Government agencies   2,438    2,470    2 
States and municipal subdivisions   6,000    6,000    6,000 
Total held-to-maturity   8,438    8,470    6,002 
Total  $252,489   $222,863   $218,531 

 

22
 

 

The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2013.

 

Investment Securities Maturity Distribution and Yields (1)

 

   December 31, 2013 
       After One But   After Five But     
(Dollars in thousands)  Within One Year   Within Five Years   Within Ten Years   After Ten Years 
   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield 
Held-to-maturity:                                        
U.S. Government agencies (2)  $-    -   $-    -   $-    -   $-    - 
States and municipal subdivisions   -    -    -    -    -    -    6,000    .93%
Total investment securities held-to-maturity  $-        $-        $-        $6,000      
Available-for-sale:                                        
U.S. Government agencies (3)  $3,566    .98%  $25,919    1.11%  $477    1.00%  $-    - 
States and municipal subdivisions   12,662    2.70%   44,060    2.88%   30,738    4.05%   20,619    4.83%
Corporate obligations and other   2,035    1.50%   11,368    1.92%   7,686    2.71%   6,734    1.76%
Total investment securities available-for-sale  $18,263        $81,347        $38,901        $27,353      

 

 

(1)Investments with a call feature are shown as of the contractual maturity date.
(2)Excludes mortgage-backed securities totaling $2.4 million with a yield of 2.63%.
(3)Excludes mortgage-backed securities totaling $78.2 million with a yield of 2.27% and mutual funds of $1.0 million.

 

Short-Term Investments. Short-term investments, consisting of Federal Funds Sold, funds in due from banks and interest-bearing deposits with banks, averaged $18.6 million in 2013, $19.7 million in 2012, and $5.5 million in 2011. At December 31, 2013, and December 31, 2012, short-term investments totaled $967,000 and $1,064,000, respectively. These funds are a primary source of the Company's liquidity and are generally invested in an earning capacity on an overnight basis.

 

Deposits

 

Deposits. Average total deposits increased $125.1 million, or 26.3% in 2012. Average total deposits increased $160.0 million, or 26.6% in 2013. At December 31, 2013, total deposits were $780.0 million, compared to $596.6 million a year earlier, an increase of $183.3 million, or 30.7%.

  

23
 

  

The following table sets forth the deposits of the Company by category for the period indicated.

  

Deposits

 

   December 31, 
(Dollars in thousands)  2013   2012   2011 
       Percent
of
       Percent
of
       Percent
of
 
   Amount   Deposits   Amount   Deposits   Amount   Deposits 
                         
Noninterest-bearing accounts  $173,793    22.3%  $109,624    18.4%  $107,129    18.7%
NOW accounts   240,514    30.8%   230,589    38.6%   200,210    34.9%
Money market accounts   107,564    13.8%   47,325    7.9%   43,296    7.6%
Savings accounts   55,113    7.1%   48,153    8.1%   45,644    8.0%
Time deposits less than $100,000   86,363    11.1%   69,115    11.6%   77,569    13.5%
Time deposits of $100,000 or over   116,624    14.9%   91,821    15.4%   99,546    17.3%
Total deposits  $779,971    100%  $596,627    100%  $573,394    100%

 

The Company’s loan-to-deposit ratio was 74.3% at December 31, 2013 and 68.4% at December 31, 2012. The loan-to-deposit ratio averaged 76.6% during 2013. Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for the Company's loan portfolio and other earning assets. The Company's core deposits were $663.3 million at December 31, 2013 and $504.8 million at December 31, 2012. Management anticipates that a stable base of deposits will be the Company's primary source of funding to meet both its short-term and long-term liquidity needs in the future. The Company has purchased brokered deposits from time to time to help fund loan growth. Brokered deposits and jumbo certificates of deposit generally carry a higher interest rate than traditional core deposits. Further, brokered deposit customers typically do not have loan or other relationships with the Company. The Company has adopted a policy not to permit brokered deposits to represent more than 10% of all of the Company’s deposits.

 

The maturity distribution of the Company's certificates of deposit of $100,000 or more at December 31, 2013, is shown in the following table. The Company did not have any other time deposits of $100,000 or more.

 

Maturities of Certificates of Deposit

of $100,000 or More

 

       After Three         
   Within Three   Through   After Twelve     
(In thousands)  Months   Twelve Months   Months   Total 
                     
December 31, 2013  $28,701   $49,487   $38,436   $116,624 

 

Borrowed Funds

 

Borrowed funds consist of advances from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase agreements. At December 31, 2013, advances from the FHLB totaled $47.0 million compared to $31.8 million at December 31, 2012. The advances are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. There were no federal funds purchased at December 31, 2013 and December 31, 2012.

 

24
 

 

Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $6,530,592 at December 31, 2013 and $6,421,762 at December 31, 2012. The maturity date of the remaining agreement is September 26, 2017 with a rate of 3.81%.

 

Subordinated Debentures

 

In 2006, the Company issued subordinated debentures of $4,124,000 to The First Bancshares, Inc. Statutory Trust 2 (Trust 2). The Company is the sole owner of the equity of the Trust 2. The Trust 2 issued $4,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 2. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2011 and thereafter, and mature in 2036. The Company entered into this arrangement to provide funding for expected growth.

 

In 2007, the Company issued subordinated debentures of $6,186,000 to The First Bancshares, Inc. Statutory Trust 3 (Trust 3). The Company is the sole owner of the equity of the Trust 3. The Trust 3 issued $6,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 3. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2012 and thereafter, and mature in 2037. The Company entered into this arrangement to provide funding for expected growth.

 

Capital

 

Total shareholders’ equity as of December 31, 2013, was $85.1 million, an increase of $19.2 million or approximately 29.2%, compared with shareholders' equity of $65.9 million as of December 31, 2012.

 

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders' equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general reserve for loan losses, subject to certain limitations. An institution’s total risk-based capital for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The risk-based regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

 

Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 4%. All but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. The Company and The First exceeded their minimum regulatory capital ratios as of December 31, 2013 and 2012.

 

25
 

 

Analysis of Capital

 

   Adequately   Well   The Company   The First 
Capital Ratios  Capitalized   Capitalized   December 31,   December 31, 
           2013   2012   2013   2012 
                         
Leverage   4.0%   5.0%   9.0%   8.6%   8.9%   8.4%
Risk-based capital:                              
Tier 1   4.0%   6.0%   12.5%   12.8%   12.4%   12.7%
Total   8.0%   10.0%   13.4%   13.8%   13.3%   13.6%

 

Ratios

 

   2013   2012   2011 
Return on assets (net income applicable to common stockholders divided by average total assets)   .45%   .51%   .44%
                
Return on equity (net income applicable to common stockholders divided by average equity)   5.0%   5.7%   5.2%
                
Dividend payout ratio (dividends per share divided by net income per common share)   15.6%   12.9%   18.3%
                
Equity to asset ratio (average equity divided by average total assets)   9.0%   8.8%   8.4%

 

Liquidity Management

 

Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company’s market area.

 

 

The Company's Federal Funds Sold position, which includes funds in due from banks and interest-bearing deposits with banks, is typically its primary source of liquidity, averaged $18.6 million during the year ended December 31, 2013 and totaled $10.9 million at December 31, 2013. Also, the Company has available advances from the Federal Home Loan Bank. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2013, advances available totaled approximately $181.8 million of which $47.0 million had been drawn, or used for letters of credit.

 

26
 

 

Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources.

 

EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000.  However, with the passage of the Dodd-Frank Act, this increase in the basic coverage limit has been made permanent.

 

Subprime Assets

 

The Bank does not engage in subprime lending activities targeted towards borrowers in high risk categories.

 

Accounting Matters

 

Information on new accounting matters is set forth in Footnote B to the Consolidated Financial Statements included at Item 8 in this report. This information is incorporated herein by reference.

 

Impact of Inflation

 

Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

 

 

27
 

  

REPORT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

The First Bancshares, Inc.

Hattiesburg, Mississippi

 

We have audited the accompanying consolidated balance sheets of The First Bancshares, Inc., as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2013. The management of The First Bancshares, Inc. is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The First Bancshares, Inc., as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

 

  /s/ T. E. LOTT & COMPANY
   
Columbus, Mississippi  
March 31, 2014  

 

28
 

  

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2013 AND 2012

 

   2013   2012 
         
ASSETS          
           
Cash and due from banks  $24,079,590   $20,225,123 
Interest-bearing deposits with banks   14,205,335    9,587,601 
Federal funds sold   967,000    1,064,000 
Total cash and cash equivalents   39,251,925    30,876,724 
Held-to-maturity securities (fair value of  $9,624,427 in 2013 and $7,055,499 in 2012)   8,438,435    8,470,103 
Available-for-sale securities   244,050,671    214,392,682 
Other securities   5,533,850    3,437,750 
Total securities   258,022,956    226,300,535 
Loans held for sale   3,679,521    5,585,373 
Loans, net of allowance for loan losses of $5,727,800 in 2013 and $4,726,618 in 2012   573,894,868    403,384,642 
Interest receivable   3,291,887    2,887,287 
Premises and equipment   32,071,741    22,242,838 
Cash surrender value of life insurance   6,593,403    6,441,109 
Goodwill   10,620,814    9,362,498 
Other assets   13,462,960    14,304,274 
Total assets  $940,890,075   $721,385,280 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Deposits:          
Noninterest-bearing  $173,793,894   $109,624,640 
Interest-bearing   606,177,141    487,001,945 
Total deposits   779,971,035    596,626,585 
Interest payable   399,976    212,041 
Borrowed funds   52,000,000    36,770,773 
Subordinated debentures   10,310,000    10,310,000 
Other liabilities   13,100,724    11,580,415 
Total liabilities   855,781,735    655,499,814 
Stockholders’ Equity:          
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 shares issued and outstanding in 2013 and 2012, respectively   17,102,507    17,020,539 
Common stock, par value $1 per share: 10,000,000 shares authorized; 5,122,941 and 3,133,596 shares issued and outstanding  in 2013 and 2012, respectively   5,122,941    3,133,596 
Additional paid-in capital   42,086,463    23,710,775 
Retained earnings   22,508,918    19,951,173 
Accumulated other comprehensive income (loss)   (1,248,844)   2,533,028 
Treasury stock, at cost   (463,645)   (463,645)
Total stockholders’ equity   85,108,340    65,885,466 
Total liabilities and stockholders’ equity  $940,890,075   $721,385,280 

 

The accompanying notes are an integral part of these statements.

 

29
 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2013 AND 2012

 

   2013   2012 
INTEREST INCOME          
Interest and fees on loans  $25,736,169   $21,412,469 
Interest and dividends on securities:          
Taxable interest and dividends   3,279,367    2,744,643 
Tax-exempt interest   2,140,084    2,040,412 
Interest on federal funds sold   62,244    50,689 
Interest on deposits in banks   100,169    82,716 
Total interest income   31,318,033    26,330,929 
           
INTEREST EXPENSE          
Interest on time deposits of $100,000 or more   698,580    1,050,138 
Interest on other deposits   1,601,024    2,016,490 
Interest on borrowed funds   617,654    1,069,988 
Total interest expense   2,917,258    4,136,616 
Net interest income   28,400,775    22,194,313 
Provision for loan losses   1,075,983    1,228,016 
Net interest income after provision for loan losses   27,324,792    20,966,297 
           
OTHER INCOME          
Service charges on deposit accounts   3,979,159    3,431,579 
Other service charges and fees   2,187,229    2,426,759 
Bank owned life insurance income   152,294    170,918 
Loss on sale of other real estate   (76,532)   (55,426)
Other   841,147    349,922 
Total other income   7,083,297    6,323,752 
           
OTHER EXPENSE          
Salaries   12,216,098    10,059,380 
Employee benefits   2,638,558    1,941,330 
Occupancy   2,351,009    1,797,347 
Furniture and equipment   1,568,113    1,435,153 
Supplies and printing   455,443    425,086 
Professional and consulting fees   2,433,111    746,941 
Marketing and public relations   451,018    329,362 
FDIC and OCC assessments   766,503    681,540 
Other   5,285,148    4,747,764 
Total other expense   28,165,001    22,163,903 

 

30
 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2013 AND 2012

 

 

Continued:  2013   2012 
         
Income before income taxes   6,243,088    5,126,146 
Income taxes   1,603,593    1,077,379 
           
Net income   4,639,495    4,048,767 
Preferred dividends and stock accretion   424,428    424,428 
Net income applicable to common stockholders  $4,215,067   $3,624,339 
           
Net income per share:          
Basic  $1.07   $1.31 
Diluted   1.06    1.29 
Net income applicable to common stockholders:          
Basic  $.98   $1.17 
Diluted   .96    1.16 

 

The accompanying notes are an integral part of these statements.

 

31
 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2013 AND 2012

 

   2013   2012 
         
Net income  $4,639,495   $4,048,767 
           
Other comprehensive income (loss):          
Unrealized gains on securities:          
Unrealized holding gains (losses) arising during the period   (5,676,942)   3,022,776 
Plus reclassification adjustment for losses included in net income   -    - 
    (5,676,942)   3,022,776 
           
Unrealized holding losses on loans held for sale   (55,967)   (36,365)
           
Income tax benefit (expense)   1,951,037    (1,015,380)
           
Other comprehensive income (loss)   (3,781,872)   1,971,031 
           
Comprehensive income  $857,623   $6,019,798 

 

The accompanying notes are an integral part of these statements.

 

32
 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2013 AND 2012

 

  

Common

Stock

  

Preferred

Stock

  

Stock

Warrants

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Accum-

ulated

Other

Compre-

hensive

Income
(Loss)

  

Treasury

Stock

   Total 
Balance, January 1, 2012  $3,092,566   $16,938,571   $283,738   $23,220,493   $16,791,561   $561,997   $(463,645)  $60,425,281 
                                         
Net income 2012   -    -    -    -    4,048,767    -    -    4,048,767 
Other comprehensive income                            1,971,031         1,971,031 
Dividends on preferred stock   -    -    -    -    (342,460)   -    -    (342,460)
Cash dividend declared, $.15 per common share   -    -    -    -    (464,727)   -    -    (464,727)
Grant of restricted stock   42,795    -    -    (42,795)   -    -    -    - 
Compensation cost on restricted stock   -    -    -    263,216    -    -    -    263,216 
Preferred stock accretion   -    81,968    -    -    (81,968)   -    -    - 
Repurchase of restricted stock for payment of taxes   (1,765)   -    -    (13,877)   -    -    -    (15,642)
Balance, December 31, 2012  $3,133,596   $17,020,539   $283,738   $23,427,037   $19,951,173   $2,533,028   $(463,645)  $65,885,466 
                                         
Net income 2013   -    -    -    -    4,639,495    -    -    4,639,495 
Other comprehensive income   -    -    -    -    -    (3,781,872)   -    (3,781,872)
Dividends on preferred stock   -    -    -    -    (342,460)   -    -    (342,460)
Cash dividend declared, $.15 per common share   -    -    -    -    (615,781)   -    -    (615,781)

 

33
 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2013 AND 2012

 

Continued: 

Common

Stock

  

Preferred

Stock

  

Stock

Warrants

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Accum-

ulated

Other

Compre-

hensive

Income
(Loss)

  

Treasury

Stock

   Total 
                                 
Grant of restricted stock   39,913    -    -    (39,913)   -    -    -    - 
Compensation cost on restricted stock   -    -    -    391,777    -    -    -    391,777 
Preferred stock accretion   -    81,968    -    -    (81,968)   -    -    - 
Repurchase of restricted stock for payment of taxes   (1,788)   -    -    (24,961)   -    -    -    (26,749)
Issuance of 1,951,220 common shares   1,951,220    -    -    18,048,785    (1,041,541)   -    -    18,958,464 
Balance, December 31, 2013  $5,122,941   $17,102,507   $283,738   $41,802,725   $22,508,918   $(1,248,844)  $(463,645)  $85,108,340 

 

The accompanying notes are an integral part of these statements.

 

34
 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2013 AND 2012

 

   2013   2012 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $4,639,495   $4,048,767 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   1,915,398    1,724,050 
FHLB Stock dividends   (4,100)   (3,300)
Provision for loan losses   1,075,983    1,228,016 
Deferred income taxes   1,707,403    (136,348)
Restricted stock expense   391,777    263,216 
Increase in cash value of life insurance   (152,294)   (170,918)
Amortization and accretion, net   (107,170)   789,999 
Writedown of bank property   193,073    - 
Loss on sale/writedown of other real estate   350,023    526,957 
Changes in:          
Loans held for sale   2,671,885    (2,716,039)
Interest receivable   (54,600)   (115,611)
Other assets   4,412,575    3,255,806 
Interest payable   (153,065)   (95,711)
Other liabilities   1,108,980    1,624,587 
Net cash provided by operating activities   17,995,363    10,223,471 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of available-for-sale securities   (83,415,975)   (60,102,101)
Purchases of other securities   (2,780,100)   (1,409,300)
Purchases of held-to-maturity securities   -    (2,489,450)
Proceeds from maturities and calls of available-for-sale securities   52,237,989    59,198,136 
Proceeds from redemption of other securities   788,200    620,100 
Increase in loans   (50,100,144)   (29,994,973)
Net additions to premises and equipment   (746,724)   (448,274)
Cash received in excess of cash paid for acquisition   43,150,000    - 
Net cash used in investing activities   (40,866,754)   (34,625,862)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Increase (decrease) in deposits   (1,971,438)   23,170,427 
Proceeds from borrowed funds   47,000,000    133,340,000 
Repayment of borrowed funds   (31,770,773)   (123,601,058)
Dividends paid on common stock   (600,452)   (453,105)
Dividends paid on preferred stock   (342,460)   (342,460)
Repurchase of restricted stock for payment of taxes   (26,749)   (15,642)
Issuance of 1,951,220 common shares, net   18,958,464    - 
Net cash provided by financing activities   31,246,592    32,098,162 

 

The accompanying notes are an integral part of these statements.

 

35
 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2013 AND 2012

 

Continued:  2013   2012 
         
Net increase in cash and cash equivalents   8,375,201    7,695,771 
Cash and cash equivalents at beginning of year   30,876,724    23,180,953 
Cash and cash equivalents at end of year  $39,251,925   $30,876,724 
           
Supplemental disclosures:          
           
Cash paid during the year for:          
Interest  $2,729,323   $4,232,327 
Income taxes   980,490    1,562,850 
           
Non-cash activities:          
Transfers of loans to other real estate   2,136,687    6,198,006 
Issuance of restricted stock grants   39,913    42,795 

 

The accompanying notes are an integral part of these statements.

 

36
 

 

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A - NATURE OF BUSINESS

 

The First Bancshares, Inc. (the Company) is a bank holding company whose business is primarily conducted by its wholly-owned subsidiary, The First, A National Banking Association (the Bank). The Bank provides a full range of banking services in its primary market area of South Mississippi, South Alabama, and Bogalusa, Louisiana. The Company is regulated by the Federal Reserve Bank. Its subsidiary bank is subject to the regulation of the Office of the Comptroller of the Currency (OCC).

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company and the Bank follow accounting principles generally accepted in the United States of America including, where applicable, general practices within the banking industry.

 

1.Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

 

2.Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets.

 

3.Cash and Due From Banks

 

Included in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the form of cash and balances due from the Federal Reserve. The reserve balance varies depending upon the types and amounts of deposits. At December 31, 2013, the required reserve balance on deposit with the Federal Reserve Bank was approximately $8,706,000.

 

4.Securities

 

Investments in securities are accounted for as follows:

 

Available-for-Sale Securities

 

Securities classified as available-for-sale are those securities that are intended to be held for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including movements in interest rates, liquidity needs, security risk assessments, changes in the mix of assets and liabilities and other similar factors. These securities are carried at their estimated fair value, and the net unrealized gain or loss is reported net of tax, as a component of accumulated other comprehensive income (loss) in stockholders' equity, until realized. Premiums and discounts are recognized in interest income using the interest method. Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold.

 

37
 

 

Securities to be Held-to-Maturity

 

Securities classified as held-to-maturity are those securities for which there is a positive intent and ability to hold to maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of discounts, computed by the interest method.

 

Trading Account Securities

 

Trading account securities are those securities which are held for the purpose of selling them at a profit. There were no trading account securities on hand at December 31, 2013 and 2012.

 

Other Securities

 

Other securities are carried at cost and are restricted in marketability. Other securities consist of investments in the Federal Home Loan Bank (FHLB), Federal Reserve Bank and First National Bankers’ Bankshares, Inc. Management reviews for impairment based on the ultimate recoverability of the cost basis.

 

Other-than-Temporary Impairment

 

Management evaluates investment securities for other-than-temporary impairment on a quarterly basis. A decline in the fair value of available-for-sale and held-to-maturity securities below cost that is deemed other-than-temporary is charged to earnings for a decline in value deemed to be credit related and a new cost basis for the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income.

 

5.Loans held for sale

 

The Bank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and concurrently “locks in” with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the servicing retained by the Bank. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors.

 

6.Loans

 

Loans are carried at the principal amount outstanding, net of the allowance for loan losses. Interest income on loans is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

38
 

 

A loan is considered impaired, in accordance with the impairment accounting guidance of Accounting Standards Codification (ASC) Section 310-10-35, Receivables, Subsequent Measurement, when—based upon current events and information—it is probable that the scheduled payments of principal and interest will not be collected in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral values, and the probability of collecting scheduled payments of principal and interest when due. Generally, impairment is measured on a loan by loan basis using the fair value of the supporting collateral.

 

Loans are generally placed on a nonaccrual status when principal or interest is past due ninety days or when specifically determined to be impaired. When a loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. If collectibility is in doubt, cash receipts on nonaccrual loans are used to reduce principal rather than recorded in interest income. Past due status is determined based upon contractual terms.

 

7.Allowance for Loan Losses

 

For financial reporting purposes, the provision for loan losses charged to operations is based upon management's estimations of the amount necessary to maintain the allowance at an adequate level. Allowances for any impaired loans are generally determined based on collateral values. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely.

 

Management evaluates the adequacy of the allowance for loan losses on a regular basis. These evaluations are based upon a periodic review of the collectibility considering historical experience, the nature and value of the loan portfolio, underlying collateral values, internal and independent loan reviews, and prevailing economic conditions. In addition, the OCC, as a part of the regulatory examination process, reviews the loan portfolio and the allowance for loan losses and may require changes in the allowance based upon information available at the time of the examination. The allowance consists of two components: allocated and unallocated. The components represent an estimation done pursuant to either ASC Topic 450, Contingencies, or ASC Subtopic 310-10, Receivables. The allocated component of the allowance reflects expected losses resulting from an analysis developed through specific credit allocations for individual loans, including any impaired loans, and historical loan loss history. The analysis is performed quarterly and loss factors are updated regularly.

 

The unallocated portion of the allowance reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, changes in collateral values, unfavorable information about a borrower’s financial condition, and other risk factors that have not yet manifested themselves. In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in the loan loss analysis.

 

8.Premises and Equipment

 

Premises and equipment are stated at cost, less accumulated depreciation. The depreciation policy is to provide for depreciation over the estimated useful lives of the assets using the straight-line method. Repairs and maintenance expenditures are charged to operating expenses; major expenditures for renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon retirement, sale, or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and any gains or losses are included in operations.

 

39
 

 

9.Other Real Estate

 

Other real estate, carried in other assets in the consolidated balance sheets, consists of properties acquired through foreclosure and, as held for sale property, is recorded at the lower of the outstanding loan balance or current appraisal less estimated costs to sell. Any write-down to fair value required at the time of foreclosure is charged to the allowance for loan losses. Subsequent gains or losses on other real estate are reported in other operating income or expenses. At December 31, 2013 and 2012, other real estate totaled $4,470,249 and $6,782,422, respectively.

 

10.Goodwill and Other Intangible Assets

 

Goodwill totaled $10,620,814 and $9,362,498 for the years ended December 31, 2013 and 2012, respectively.

 

Goodwill totaling $1,258,316 acquired during the year ended December 31, 2013 was a result of the acquisition of First National Bank of Baldwin County. Footnote C to these consolidated financial statements provides additional information on the acquisition during 2013.

 

The Company performed the required annual impairment tests of goodwill as of December 1, 2013. The Company’s annual impairment test did not indicate impairment as of the testing date, and subsequent to that date, management is not aware of any events or changes in circumstances since the impairment test that would indicate that goodwill might be impaired.

 

The Company’s acquisition method recognized intangible assets, which are subject to amortization, and included in other assets in the accompanying consolidated balance sheets, include core deposit intangibles, amortized on a straight-line basis, over a 10 year average life. The definite-lived intangible assets had the following carrying values at December 31, 2013 and 2012.

 

   2013   2012 
   Gross       Net   Gross       Net 
   Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying 
   Amount   Amortization   Amount   Amount   Amortization   Amount 
(Dollars in thousands)                              
Core deposit intangibles  $3,775   $(1,098)  $2,677   $3,095   $(743)  $2,352 

 

During 2013, the Company recorded $679,970 in core deposit intangible assets related to the deposits acquired in the Baldwin acquisition.

 

40
 

 

The related amortization expense of business combination related intangible assets is as follows:

 

(dollars in thousands)    
   Amount 
Aggregate amortization expense for the year ended December 31:     
      
2012  $309 
2013   355 
      
Estimated amortization expense for the year ending December 31:     
      
2014  $377 
2015   377 
2016   360 
2017   308 
2018   308 
Thereafter   947 
   $2,677 

 

11.Other Assets and Cash Surrender Value

 

Financing costs related to the issuance of junior subordinated debentures are being amortized over the life of the instruments and are included in other assets. The Company invests in bank owned life insurance (BOLI). BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Company is the owner of the policies and, accordingly, the cash surrender value of the policies is reported as an asset, and increases in cash surrender values are reported as income.

 

12.Stock Options

 

The Company accounts for stock based compensation in accordance with ASC Topic 718, Compensation - Stock Compensation. Compensation cost is recognized for all stock options granted based on the weighted average fair value stock price at the grant date.

 

13.Income Taxes

 

Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently payable plus deferred taxes related primarily to differences between the bases of assets and liabilities as measured by income tax laws and their bases as reported in the financial statements. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

 

The Company and its subsidiary file consolidated income tax returns. The subsidiary provides for income taxes on a separate return basis and remits to the Company amounts determined to be payable.

 

ASC Topic 740, Income Taxes, provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. ASC Topic 740 requires an evaluation of tax positions to determine if the tax positions will more likely than not be sustainable upon examination by the appropriate taxing authority. The Company at December 31, 2013 and 2012, had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

 

14.Advertising Costs

 

Advertising costs are expensed in the period in which they are incurred. Advertising expense for the years ended December 31, 2013 and 2012, was $419,873 and $278,330, respectively.

 

41
 

 

15.Statements of Cash Flows

 

For purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Generally, federal funds are sold for a one to seven day period.

 

16.Off-Balance Sheet Financial Instruments

 

In the ordinary course of business, the subsidiary bank enters into off-balance sheet financial instruments consisting of commitments to extend credit, credit card lines and standby letters of credit. Such financial instruments are recorded in the financial statements when they are exercised.

 

17.Earnings Applicable to Common Stockholders

 

Per share amounts are presented in accordance with ASC Topic 260, Earnings Per Share. Under ASC Topic 260, two per share amounts are considered and presented, if applicable. 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, such as outstanding stock options.

 

The following table discloses the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common stockholders:

 

   For the Year Ended   For the Year Ended 
   December 31, 2013   December 31, 2012 
   Net
Income
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
   Net
Income
(Numerator)
   Shares
(Denominator)
   Per Share
Amount
 
                         
Basic per common share  $4,215,067    4,319,485   $.98   $3,624,339    3,101,411   $1.17 
                               
Effect of dilutive shares:                              
                               
Restricted Stock        53,445              23,856      
   $4,215,067    4,372,930   $.96   $3,624,339    3,125,267   $1.16 

 

The diluted per share amounts were computed by applying the treasury stock method.

 

18.Reclassifications

 

Certain reclassifications have been made to the 2012 financial statements to conform with the classi-fications used in 2013. These reclassifications did not impact the Company's consolidated financial condition or results of operations.

 

42
 

 

19.Accounting Pronouncements

 

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet Disclosures about Offsetting Assets and Liabilities.” The ASU amends ASC Topic 210 by requiring additional improved information to be disclosed regarding financial instruments and derivative instruments that are offset in accordance with the conditions under ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendment is effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by the amendments should be applied retrospectively for all comparative periods presented. In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The ASU clarifies that ordinary trade receivables and receivables are not in the scope of ASU 2011-11. Only derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Codification or subject to a master netting arrangement or similar agreement are applicable. The amendments did not have a material impact on the financial statements.

 

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. These amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U. S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U. S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U. S. GAAP that provide additional details about these amounts. ASU 2013-02 was effective for interim and annual periods beginning after December 15, 2012. The Company adopted this standard on January 1, 2013. The effect of adopting this guidance increased the disclosures surrounding reclassification items, if any, out of accumulated other comprehensive income.

 

In February 2013, the FASB issued ASU No. 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” The ASU requires entities to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The measurement is the sum of both the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint-and-several arrangement and the total outstanding amount of the obligation for all joint parties. ASU 2013-04 is effective for interim and annual periods beginning on or after December 15, 2013. The ASU should be applied retrospectively to obligations existing at the beginning of an entity’s fiscal year of adoption. Early adoption is permitted. The Company is currently evaluating the possible effects of this guidance on its financial statement disclosures.

 

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The ASU requires an entity to present a unrecognized tax benefit, or a portion thereof, in the financial statements as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward, except when the entity does not intend to use the deferred tax asset, or the item is not available as of the reporting date. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. Early adoption and retrospective application is permitted. The Company is currently evaluating the possible effects of this guidance on its financial statements.

 

43
 

 

NOTE C – BUSINESS COMBINATION

 

On April 30, 2013, the Company completed the acquisition of all of the outstanding shares of First National Bank of Baldwin County, a wholly-owned subsidiary of First Baldwin Bancshares, Inc., an Alabama corporation, which included five (5) branches and (1) loan production office located on the Alabama Gulf Coast in Baldwin County, Alabama.

 

In connection with the acquisition, the Company recorded $1.3 million of goodwill and $.7 million of core deposit intangible. The core deposit intangible will be expensed over 10 years. The Company acquired the $124.2 million loan portfolio at a fair value discount of $.5 million. The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments.

 

The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):

 

Purchase price:    
Cash  $3,300 
Total purchase price   3,300 
Identifiable assets:     
Cash and due from banks   46,450 
Investments   2,508 
Loans and leases   124,165 
Other Real Estate   87 
Core deposit intangible   680 
Personal and real property   10,655 
Deferred tax asset   2,969 
Other assets   1,034 
Total assets   188,548 
Liabilities and equity:     
Deposits   185,771 
Other liabilities   736 
Total liabilities   186,507 
Net assets acquired   2,041 
Goodwill resulting from acquisition  $1,259 

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at December 31, 2013, are as follows (dollars in thousands):

 

Outstanding principal balance  $108,639 
Carrying amount   108,441 

 

44
 

 

All loans obtained in the acquisition reflect no specific evidence of credit deterioration and very low probability that the Company would be unable to collect all contractually required principal and interest payments.

 

The amount of the revenue and earnings included in the Company’s consolidated income statement for the year ended December 31, 2013, reflect only amounts from the acquisition date of April 30, 2013, through December 31, 2013. Historical financial information related to each loan and deposit acquired was impractical to determine due to retrospective application requiring significant estimates of amounts that cannot be independently substantiated. Further, we believe it is impossible to distinguish objectively information about those estimates that provides evidence of circumstances that existed on the dates at which those amounts would be recognized and measured under retrospective application.

 

Expenses associated with the acquisition were $30,000 and $1,439,000 for the three and twelve month periods ended December 31, 2013, respectively. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.

 

NOTE D – SECURITIES

 

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at December 31, 2013 and 2012, follows:

 

   December 31, 2013 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Available-for-sale securities:                    
Obligations of U.S. Government Agencies  $29,963,634   $122,764   $124,491   $29,961,907 
Tax-exempt and taxable obligations of states and municipal subdivisions   107,676,085    1,937,586    1,535,036    108,078,635 
Mortgage-backed securities   78,770,400    810,370    1,394,067    78,186,703 
Corporate obligations   28,210,148    223,776    1,582,001    26,851,923 
Other   1,255,483    -    283,980    971,503 
   $245,875,750   $3,094,496   $4,919,575   $244,050,671 
Held-to-maturity securities:                    
Mortgage-backed securities  $2,438,435   $-   $74,008   $2,364,427 
Taxable obligations of states and municipal subdivisions   6,000,000    1,260,000    -    7,260,000 
   $8,438,435   $1,260,000   $74,008   $9,624,427 

 

45
 

 

   December 31, 2012 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Available-for-sale securities:                    
Obligations of U.S. Government agencies  $36,148,002   $231,810   $20,735   $36,359,077 
Tax-exempt and taxable obligations of states and municipal subdivisions   95,113,063    3,823,242    26,121    98,910,184 
Mortgage-backed securities   60,384,181    1,596,672    14,364    61,966,489 
Corporate obligations   17,640,092    298,471    1,751,814    16,186,749 
Other   1,255,483    -    285,300    970,183 
   $210,540,821   $5,950,195   $2,098,334   $214,392,682 
Held-to-maturity securities:                    
Mortgage-backed securities  $2,470,103   $84,796   $-   $2,554,899 
Taxable obligations of states and municipal subdivisions   6,000,000    -    1,499,400    4,500,600 
   $8,470,103   $84,796   $1,499,400   $7,055,499 

 

The scheduled maturities of securities at December 31, 2013, were as follows:

 

   Available-for-Sale   Held-to-Maturity 
   Amortized
Cost
   Estimated
Fair
Value
   Amortized
Cost
   Estimated
Fair
Value
 
                 
Due less than one year  $18,172,801   $18,263,173   $-   $- 
Due after one year through five years   80,376,374    81,347,356    -    - 
Due after five years through ten years   38,986,734    38,900,600    -    - 
Due after ten years   29,569,441    27,352,839    6,000,000    7,260,000 
Mortgage-backed securities   78,770,400    78,186,703    2,438,435    2,364,427 
   $245,875,750   $244,050,671   $8,438,435   $9,624,427 

 

Actual maturities can differ from contractual maturities because the obligations may be called or prepaid with or without penalties.

 

No gain or loss was realized from the sale of available-for-sale securities in 2013 or in 2012. No other-than-temporary impairment losses were recognized for the years ended 2013 and 2012.

 

Securities with a carrying value of $197,611,193 and $159,725,903 at December 31, 2013 and 2012, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law.

 

The details concerning securities classified as available-for-sale with unrealized losses as of December 31, 2013 and 2012, were as follows:

 

46
 

 

   2013 
   Losses < 12 Months   Losses 12 Months or >   Total 
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 
Obligations of U.S. government agencies  $6,898,945   $124,491   $-   $-   $6,898,945   $124,491 
Tax-exempt and tax- able obligations of states and municipal subdivisions   37,725,915    1,523,780    1,297,792    11,256    39,023,707    1,535,036 
Mortgage-backed securities   39,540,663    1,394,067    -    -    39,540,663    1,394,067 
Corporate obligations   10,814,405    174,210    3,386,225    1,407,791    14,200,630    1,582,001 
Other   -    -    971,503    283,980    971,503    283,980 
   $94,979,928   $3,216,548   $5,655,520   $1,703,027   $100,635,448   $4,919,575 

 

   2012 
   Losses < 12 Months   Losses 12 Months or >   Total 
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 
Obligations of U.S. government agencies  $5,063,924   $20,735   $-   $-   $5,063,924   $20,735 
Tax-exempt and tax- able obligations of states and municipal subdivisions   4,556,699    26,000    254,605    121    4,811,304    26,121 
Mortgage-backed securities   -    -    236,886    14,364    236,886    14,364 
Corporate obligations   978,600    1,764    2,668,168    1,750,050    3,646,768    1,751,814 
Other   -    -    970,183    285,300    970,183    285,300 
   $10,599,223   $48,499   $4,129,842   $2,049,835   $14,729,065   $2,098,334 

 

Approximately 38% of the number of securities in the investment portfolio at December 31, 2013, reflected an unrealized loss. Management is of the opinion the Company has the ability to hold these securities until such time as the value recovers or the securities mature. Management also believes the deterioration in value is attributable to changes in market interest rates and lack of liquidity in the credit markets. We have determined that these securities are not other-than-temporarily impaired based upon anticipated cash flows.

 

NOTE E - LOANS

 

Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2013 and December 31, 2012, respectively, loans accounted for 68.1% and 63.6% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

 

47
 

 

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

 

   December 31,  2013   December 31, 2012 
  

 

Amount

  

Percent of

Total

   Amount  

Percent of

Total

 
   (Dollars in thousands) 
Mortgage loans held for sale  $3,680    0.6%  $5,585    1.4%
Commercial, financial and agricultural   81,792    14.0    53,234    12.9 
Real Estate:                    
Mortgage-commercial   212,388    36.4    142,046    34.3 
Mortgage-residential   202,343    34.7    140,703    34.0 
Construction   67,287    11.5    57,529    13.9 
Consumer and other   15,812    2.8    14,600    3.5 
Total loans   583,302    100%   413,697    100%
Allowance for loan losses   (5,728)        (4,727)     
Net loans  $577,574        $408,970      

 

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

 

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

 

Activity in the allowance for loan losses for December 31, 2013 and 2012 is as follows:

 

(In thousands)

 

   2013   2012 
         
Balance at beginning of period  $4,727   $4,511 
Loans charged-off:          
Real Estate   (457)   (821)
Installment and Other   (197)   (203)
Commercial, Financial and Agriculture   (105)   (166)
Total   (759)   (1,190)
Recoveries on loans previously charged-off:          
Real Estate   600    83 
Installment and Other   66    70 
Commercial, Financial and Agriculture   18    25 
Total   684    178 
Net Charge-offs   (75)   (1,012)
Provision for Loan Losses   1,076    1,228 
Balance at end of period  $5,728   $4,727 

 

48
 

 

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 December 31, 2013 and December 31, 2012.

 

Allocation of the Allowance for Loan Losses

 

   December 31, 2013 
   (Dollars in thousands) 
   Amount  

% of loans

in each

category

to total loans

 
         
Commercial Non Real Estate  $582    14.0%
Commercial Real Estate   3,384    57.2 
Consumer Real Estate   1,427    25.4 
Consumer   173    3.4 
Unallocated   162    - 
Total  $5,728    100%

 

   December 31, 2012 
   (Dollars in thousands) 
   Amount  

% of loans

in each

category

to total loans

 
         
Commercial Non Real Estate  $420    13.3%
Commercial Real Estate   3,338    63.7 
Consumer Real Estate   810    19.0 
Consumer   151    4.0 
Unallocated   8    - 
Total  $4,727    100%

 

The following table represents the Company’s impaired loans at December 31, 2013 and December 31, 2012. This table excludes performing troubled debt restructurings.

 

   December 31,   December 31, 
   2013   2012 
   (In thousands) 
Impaired Loans:          
Impaired loans without a valuation allowance  $759   $1,445 
Impaired loans with a valuation allowance   4,071    2,144 
Total impaired loans  $4,830   $3,589 
Allowance for loan losses on impaired loans at period End   849    936 
Total nonaccrual loans   3,181    3,401 
           
Past due 90 days or more and still accruing   159    158 
Average investment in impaired loans   4,007    2,979 

 

49
 

 

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans for the years ended December 31, 2013 and December 31, 2012:

 

   2013   2012 
         
Average of individually impaired loans during period  $3,811   $2,979 
Interest income recognized during Impairment   -    - 
Cash-basis interest income Recognized   148    50 

 

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 twelve months for the years ended December 31, 2013 and 2012, was $43,000 and $81,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at December 31, 2013 and 2012.

 

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 December 31, 2013 and December 31, 2012. 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.

 

December 31, 2013

 

       Installment   Commercial,     
       and   Financial and     
   Real Estate   Other   Agriculture   Total 
   (In thousands) 
Loans                    
Individually evaluated  $4,709   $39   $82   $4,830 
Collectively evaluated   473,832    19,725    81,236    574,793 
Total  $478,541   $19,764   $81,318   $579,623 
                     
Allowance for Loan Losses                    
Individually evaluated  $804   $35   $10   $849 
Collectively evaluated   4,007    300    572    4,879 
Total  $4,811   $335   $582   $5,728 

 

50
 

 

December 31, 2012

 

       Installment   Commercial,     
   Real Estate   And
Other
   Financial and
Agriculture
   Total 
   (In thousands) 
Loans                    
Individually evaluated  $4,111   $55   $221   $4,387 
Collectively evaluated   333,298    16,401    54,025    403,724 
Total  $337,409   $16,456   $54,246   $408,111 
                     
Allowance for Loan Losses                    
Individually evaluated  $917   $110   $76   $1,103 
Collectively evaluated   3,231    49    344    3,624 
Total  $4,148   $159   $420   $4,727 

 

The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2013 and 2012. 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. As nearly all of our impaired loans at December 31, 2013 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

 

December 31, 2013                
                     
               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
   (In thousands) 
Impaired loans with  no related allowance:                         
Commercial installment  $3   $3   $-   $45   $- 
Commercial real estate   353    353    -    1,035    8 
Consumer real estate   341    399    -    262    9 
Consumer installment   4    4    -    5    - 
Total  $701   $759   $-   $1,347   $17 
                          
Impaired loans with  a related allowance:                         
Commercial installment  $79   $79   $10   $42   $6 
Commercial real estate   2,685    2,685    400    2,147    100 
Consumer real estate   1,202    1,272    404    1,019    21 
Consumer installment   35    35    35    36    4 
Total  $4,001   $4,071   $849   $3,244   $131 
                          
Total Impaired Loans:                         
Commercial installment  $82   $82   $10   $87   $6 
Commercial real estate   3,038    3,038    400    3,182    108 
Consumer real estate   1,543    1,671    404    1,281    30 
Consumer installment   39    39    35    41    4 
Total Impaired Loans  $4,702   $4,830   $849   $4,591   $148 

 

51
 

 

December 31, 2012

 

               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
   (In thousands) 
Impaired loans with  no related allowance:                         
Commercial installment  $15   $15   $-   $46   $- 
Commercial real estate   1,013    1,529    -    1,004    39 
Consumer real estate   106    969    -    168    8 
Consumer installment   311    311    -    156    1 
Total  $1,445   $2,824   $-   $1,374   $48 
                          
Impaired loans with  a related allowance:                         
Commercial installment  $203   $203   $73   $173   $8 
Commercial real estate   1,549    1,549    747    1,546    38 
Consumer real estate   44    44    44    72    4 
Consumer installment   348    348    72    197    2 
Total  $2,144   $2,144   $936   $1,988   $52 
                          
Total Impaired Loans:                         
Commercial installment  $218   $218   $73   $219   $8 
Commercial real estate   2,562    3,078    747    2,550    77 
Consumer real estate   150    1,013    44    240    12 
Consumer installment   659    659    72    353    3 
Total Impaired Loans  $3,589   $4,968   $936   $3,362   $100 

 

52
 

 

The following tables provide additional detail of troubled debt restructurings at December 31, 2013.

 

                 
   Outstanding
Recorded
   Outstanding
Recorded
       Interest 
   Investment
Pre-Modification
   Investment
Post-Modification
   Number of
Loans
   Income
Recognized
 
   (in thousands except number of loans) 
                 
Commercial installment  $-   $-    -   $- 
Commercial real estate   858    858    3    53 
Consumer real estate   66    65    1    2 
Consumer installment   -    -    -    - 
Total  $924   $923    4   $55 

 

The balance of troubled debt restructurings at December 31, 2013 was $2.2 million, calculated for regulatory reporting purpose. Of these amounts, $1.6 million were performing in accordance with the modified terms. The remaining $.6 million are on non-accrual. There was $80,000 in specific reserves established with respect to these loans as of December 31, 2013. As of December 31, 2013, the Company had no additional amount committed on any loan classified as troubled debt restructuring.

 

The recorded investment in loans for which the allowance for loan losses was previously measured under a general allowance for loan losses methodology and are now impaired under ASC Section 310-10-35 was $1,305,000. The allowance for loan losses associated with those loans on the basis of a current evaluation of loss was $80,000. All loans were performing as agreed with modified terms.

 

During the twelve month period ending December 31, 2013, the terms of 4 loans were modified as a TDRs. The modifications 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 following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual:

 

   December 31, 2013 
   (In thousands) 
  

Past Due

30 to 89

Days

  

Past Due

90 Days or

More and

Still Accruing

  

 

Non-Accrual

  

Total

Past Due and

Non-Accrual

  

Total

Loans

 
                     
Real Estate-construction  $478   $-   $212   $690   $67,287 
Real Estate-mortgage   4,696    143    2,453    7,292    202,343 
Real Estate-non farm nonresidential   252    -    507    759    212,388 
Commercial   12    -    9    21    81,792 
Consumer   115    16    -    131    15,813 
Total  $5,553   $159   $3,181   $8,893   $579,623 

 

53
 

 

   December 31, 2012 
   (In thousands) 
  

Past Due

30 to 89

Days

  

Past Due 90

Days or More

and Still

Accruing

  

 

 

 

Non-Accrual

  

Total

Past Due and

Non-Accrual

  

 

 

Total

Loans

 
                     
Real Estate-construction  $990   $-   $1,667   $2,657   $57,529 
Real Estate-mortgage   3,045    147    986    4,178    140,702 
Real Estate-non farm nonresidential   389    -    608    997    142,046 
Commercial   88    -    135    223    53,234 
Consumer   132    11    5    148    14,600 
Total  $4,644   $158   $3,401   $8,203   $408,111 

 

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

 

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

 

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

 

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

 

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

 

As of December 31, 2013 and December 31, 2012, 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:

 

54
 

 

(In thousands)                    
December 31, 2013                
                     
               Commercial,     
  

Real Estate

Commercial

  

Real Estate

Mortgage

  

Installment and

Other

  

Financial and

Agriculture

   Total 
                     
Pass  $316,573   $145,787   $19,725   $80,087   $562,172 
Special Mention   4,084    32    -    1,033    5,149 
Substandard   10,972    1,426    39    225    12,662 
Doubtful   -    -    -    -    - 
Subtotal   331,629    147,245    19,764    81,345    579,983 
Less:                         
Unearned Discount   236    97    -    27    360 
                          
Loans, net of unearned discount  $331,393   $147,148   $19,764   $81,318   $579,623 

 

December 31, 2012

               Commercial,     
  

Real Estate

Commercial

  

Real Estate

Mortgage

  

Installment and

Other

  

Financial and

Agriculture

   Total 
                     
Pass  $241,926   $76,206   $16,426   $53,880   $388,438 
Special Mention   5,653    144    17    -    5,814 
Substandard   12,606    1,059    15    320    14,000 
Doubtful   -    -    -    60    60 
Subtotal   260,185    77,409    16,458    54,260    408,312 
Less:                         
Unearned Discount   91    94    2    14    201 
                          
Loans, net of unearned discount  $260,094   $77,315   $16,456   $54,246   $408,111 

 

NOTE F - PREMISES AND EQUIPMENT

 

Premises and equipment are stated at cost, less accumulated depreciation and amortization as follows:

 

   2013   2012 
         
Premises:          
Land  $9,891,750   $7,226,252 
Buildings and improvements   22,966,215    15,697,160 
Equipment   9,558,090    6,954,110 
Construction in progress   32,985    11,473 
    42,449,040    29,888,995 
Less accumulated depreciation and amortization   10,377,299    7,646,157 
   $32,071,741   $22,242,838 

 

55
 

 

The amounts charged to operating expense for depreciation were $1,379,748 and $1,195,877 in 2013 and 2012, respectively.

 

NOTE G - DEPOSITS

 

The aggregate amount of time deposits in denominations of $100,000 or more as of December 31, 2013 and 2012 was $116,623,516 and $91,821,044, respectively.

 

At December 31, 2013, the scheduled maturities of time deposits included in interest-bearing deposits were as follows (in thousands):

 

Year  Amount 
     
2014  $134,350 
2015   34,571 
2016   12,972 
2017   13,373 
2018   7,721 
Thereafter   - 
   $202,987 

 

NOTE H - BORROWED FUNDS

 

Borrowed funds consisted of the following:

   December 31, 
   2013   2012 
         
Reverse Repurchase Agreement  $5,000,000   $5,000,000 
FHLB advances   47,000,000    31,770,773 
   $52,000,000   $36,770,773 

 

Advances from the FHLB have maturity dates ranging from January 2014 through June, 2019. Interest is payable monthly at rates ranging from 0.13% to 2.22%. Advances due to the FHLB are collateralized by a blanket lien on first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. At December 31, 2013, FHLB advances available and unused totaled $134,844,839.

 

Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2013, were as follows:

Year   Amount 
     
2014  $41,000,000 
2015   3,000,000 
2016   - 
2017   - 
2018   - 
2019   3,000,000 
   $47,000,000 

 

56
 

 

Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $6,530,592 at December 31, 2013 and $6,421,762 at December 31, 2012. The maturity date of the remaining agreement is September 26, 2017 with a rate of 3.81%.

 

NOTE I – LEASE OBLIGATIONS

 

The Company is committed under several long-term operating leases which provide for minimum lease payments. Certain leases contain options for renewal. Total rental expense under these operating leases amounted to $249,000 and $125,000 as of December 31, 2013 and 2012, respectively.

 

The Company is also committed under one long-term capital lease agreement. The capital lease agreement had an outstanding balance of $1,286,000 and $1,415,000 at December 31, 2013 and 2012, respectively (included in other liabilities). This lease has a remaining term of 8 years at December 31, 2013. Assets related to the capital lease are included in premises and equipment and the cost consists of $2.6 million less accumulated depreciation of approximately $605,712 and $346,110 at December 31, 2013 and 2012, respectively.

 

Minimum future lease payments for the operating and capital leases at December 31, 2013 were as follows:

 

   Operating     
   Leases   Capital Lease 
   (In thousands) 
         
2014  $265   $166 
2015   236    166 
2016   229    168 
2017   167    191 
2018   126    191 
Thereafter   816    557 
           
Total Minimum Lease Payments  $1,839   $1,439 
           
Less: Amounts representing interest        (153)
           
Present value of minimum lease payments       $1,286 

 

NOTE J - REGULATORY MATTERS

 

The Company and its subsidiary bank are subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgment by regulators about components, risk weightings, and other related factors.

 

57
 

 

To ensure capital adequacy, quantitative measures have been established by regulators, and these require the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to adjusted total assets (leverage). Management believes, as of December 31, 2013, that the Company and its subsidiary bank exceeded all capital adequacy requirements.

 

At December 31, 2013 and 2012, the subsidiary bank was categorized by regulators as well-capitalized under the regulatory framework for prompt corrective action. A financial institution is considered to be well-capitalized if it has a total risk-based capital ratio of 10% or more, has a Tier I risk-based capital ratio of 6% or more, and has a Tier I leverage capital ratio of 5% or more. There are no conditions or anticipated events that, in the opinion of management, would change the categorization. The actual capital amounts and ratios at December 31, 2013 and 2012, are presented in the following table. No amount was deducted from capital for interest-rate risk exposure.

 

   Company   Subsidiary 
   (Consolidated)   The First 
   Amount   Ratio   Amount   Ratio 
December 31, 2013                    
Total risk-based  $88,503    13.4%  $87,707    13.3%
Tier I risk-based   82,755    12.5%   81,979    12.4%
Tier I leverage   82,755    9.0%   81,979    8.9%
                     
December 31, 2012                    
Total risk-based  $66,080    13.8%  $65,046    13.6%
Tier I risk-based   61,353    12.8%   60,319    12.7%
Tier I leverage   61,353    8.6%   60,319    8.4%

 

The minimum amounts of capital and ratios as established by banking regulators at December 31, 2013 and 2012, were as follows:

 

   Company   Subsidiary 
   (Consolidated)   The First 
   Amount   Ratio   Amount   Ratio 
December 31, 2013                    
Total risk-based  $53,029    8.0%  $52,935    8.0%
Tier I risk-based   26,514    4.0%   26,467    4.0%
Tier I leverage   37,002    4.0%   36,956    4.0%
                     
December 31, 2012                    
Total risk-based  $38,271    8.0%  $38,161    8.0%
Tier I risk-based   19,135    4.0%   19,080    4.0%
Tier I leverage   28,712    4.0%   28,661    4.0%

 

The Company’s dividends, if any, are expected to be made from dividends received from its subsidiary bank. The OCC limits dividends of a national bank in any calendar year to the net profits of that year combined with the retained net profits for the two preceding years.

 

58
 

 

NOTE K - INCOME TAXES

 

The components of income tax expense are as follows:

   Years Ended December 31, 
   2013   2012 
Current:          
Federal (benefit)  $(88,073)  $1,000,418 
State (benefit)   (15,737)   213,309 
Deferred (benefit)   1,707,403    (136,348)
   $1,603,593   $1,077,379 

 

The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:

 

   Years Ended December 31, 
   2013   2012 
   Amount    %    Amount    % 
                 
Income taxes at statutory rate  $2,122,650    34%  $1,742,890    34%
Tax-exempt income   (797,167)   (13)%   (745,595)   (15)%
Nondeductible expenses   326,871    5%   233,006    5%
State income tax, net of federal tax effect   (10,386)   -    92,156    2%
Tax credits   -    -    (295,800)   (6)%
Other, net   (38,375)   -    50,722    1%
   $1,603,593    26%  $1,077,379    21%

 

The components of deferred income taxes included in the consolidated financial statements were as follows:

 

   December 31, 
   2013   2012 
Deferred tax assets:          
Allowance for loan losses  $1,980,194   $1,489,546 
Net operating loss carryover   1,313,501    652,061 
Unrealized loss on available-for-sale securities   620,527    - 
Other   1,113,761    870,831 
    5,027,983    3,012,438 
Deferred tax liabilities:          
Securities   (97,917)   (89,426)
Premises and equipment   (684,787)   (986,689)
Unrealized gain on available-for-sale securities   -    (1,309,633)
Core deposit intangible   (239,364)   (58,358)
Goodwill   (498,612)   (281,036)
    (1,520,680)   (2,725,142)
Net deferred tax asset, included in other assets  $3,507,303   $287,296 

 

59
 

 

With the acquisition of Wiggins in 2006 and Baldwin in 2013, the Company assumed federal tax net operating loss carryovers. These net operating losses are available to the Company through the year 2023 and 2033, respectively.

 

The Company follows the guidance of ASC Topic 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2013, the Company had no uncertain tax positions that it believes should be recognized in the financial statements. The tax years still subject to examination by taxing authorities are years subsequent to 2008.

 

NOTE L - EMPLOYEE BENEFITS

 

The Company and its subsidiary bank provide a deferred compensation arrangement (401(k) plan) whereby employees contribute a percentage of their compensation. For employee contributions of six percent or less, the Company and its subsidiary bank provide a 50% matching contribution. Contributions totaled $248,355 in 2013 and $189,519 in 2012.

 

The Company sponsors an Employee Stock Ownership Plan (ESOP) for employees who have completed one year of service for the Company and attained age 21. Employees become fully vested after five years of service. Contributions to the plan are at the discretion of the Board of Directors. At December 31, 2013, the ESOP held 6,022 shares of Company common stock and had no debt obligation. All shares held by the plan were considered outstanding for net income per share purposes. Total ESOP expense was $22,785 for 2013 and $20,310 for 2012.

 

NOTE M - STOCK PLANS

 

In 2007, the Company adopted the 2007 Stock Incentive Plan.  The 2007 Plan provides for the issuance of up to 315,000 shares of Company Common Stock, $1.00 par value per share.  Shares issued under the 2007 Plan may consist in whole or in part of authorized but unissued shares or treasury shares.  Through the year ended December 31, 2009, no shares were issued under this Plan. During the year ended December 31, 2012, 42,785 nonvested restricted stock awards were granted under the Plan. During the year ended December 31, 2013, 52,653 nonvested restricted stock awards were granted under the Plan and 12,740 stock awards were forfeited due to separation. During 2013, 1,788 shares were repurchased for payment of taxes. The weighted average grant-date fair value for these shares was $11.57 per share. Compensation costs in the amount of $391,777 was recognized for the year ended December 31, 2013 and $263,216 for the year ended December 31, 2012. Shares of restricted stock granted to employees under this stock plan are subject to restrictions as to the vesting period. The restricted stock award becomes 100% vested on the earliest of 1) the three year vesting period provided the Grantee has not incurred a termination of employment prior to that date, 2) the Grantee’s retirement, or 3) the Grantee’s death. During this period, the holder is entitled to full voting rights and dividends. As of December 31, 2013, there was approximately $632,000 of unrecognized compensation cost related to this Plan. The cost is expected to be recognized over the remaining term of the vesting period (approximately 2 years).

 

60
 

  

NOTE N - SUBORDINATED DEBENTURES

 

On June 30, 2006, the Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities were redeemable by the Company in 2011, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, the Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company in 2012, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the provisions of ASC Topic 810, Consolidation, the trusts are not included in the consolidated financial statements.

 

NOTE O - TREASURY STOCK

 

Shares held in treasury totaled 26,494 at December 31, 2013, and 2012.

 

NOTE P - RELATED PARTY TRANSACTIONS

 

In the normal course of business, the Bank makes loans to its directors and executive officers and to companies in which they have a significant ownership interest. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties, are consistent with sound banking practices, and are within applicable regulatory and lending limitations. Such loans amounted to approximately $8,977,000 and $9,683,000 at December 31, 2013 and 2012, respectively. The activity in loans to current directors, executive officers, and their affiliates during the year ended December 31, 2013, is summarized as follows (in thousands):

 

Loans outstanding at beginning of year  $9,683 
New loans   576 
Repayments   (1,282)
Loans outstanding at end of year  $8,977 

 

61
 

 

NOTE Q - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISK

 

In the normal course of business, there are outstanding various commitments and contingent liabilities, such as guaranties, commitments to extend credit, etc., which are not reflected in the accompanying financial statements. The subsidiary bank had outstanding letters of credit of $675,000 and $574,000 at December 31, 2013 and 2012, respectively, and had made loan commitments of approximately $113,372,000 and $63,583,000 at December 31, 2013 and 2012, respectively.

 

Commitments to extend credit and letters of credit include some exposure to credit loss in the event of nonperformance of the customer. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit policies and procedures for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a number expire without being drawn upon, they generally do not present any significant liquidity risk. No significant losses on commitments were incurred during the two years ended December 31, 2013, nor are any significant losses as a result of these transactions anticipated.

 

The primary market area served by the Bank is Forrest, Lamar, Jones, Pearl River, Jackson, Hancock, Stone, and Harrison Counties within South Mississippi, as well as Washington Parish and St. Tammany Parish in Louisiana and Baldwin County in South Alabama. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. As of December 31, 2013, management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area.

 

NOTE R - FAIR VALUES OF ASSETS AND LIABILITIES

 

The Company follows the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, that establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

The guidance defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

In accordance with the guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

  Level 1: Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

62
 

 

  Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.
     
  Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets.

 

Available-for-Sale Securities

 

The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. Level 1 securities include mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

The following table presents the Company’s available-for-sale securities that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of December 31, 2013 and December 31, 2012 (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) 
December 31, 2013                                                        
Obligations of U.S. Government agencies  $29,962   $-   $29,962   $- 
Municipal securities   108,078    -    108,078    - 
Mortgage-backed securities   78,187    -    78,187    - 
Corporate obligations   26,852    -    24,054    2,798 
Other   972    972    -    - 
Total  $244,051   $972   $240,281   $2,798 

 

63
 

 

       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) 
December 31, 2012                                                         
Obligations of U.S. Government agencies  $36,359   $-   $36,359   $- 
Municipal securities   98,910    -    98,910    - 
Mortgage-backed securities   61,967    -    61,967    - 
Corporate obligations   16,187    -    13,519    2,668 
Other   970    970    -