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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
OR
Commission file no. 333-94288
THE FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Mississippi
(State or Other Jurisdiction of
Incorporation or Organization)
6480 U.S. Hwy. 98 West, Suite A
Hattiesburg, Mississippi
(Address of principal executive offices)
Issuer’s telephone number:
(601) 268-8998
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class
Common Stock, $1.00 par value
Trading Symbol(s)
FBMS
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act.
Yes ◻ No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ◻ No ⌧
64-0862173
(I.R.S. Employer Identification Number)
39402
(Zip Code)
Name of Each Exchange on
Which Registered
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically and every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ◻ Accelerated filer ⌧ Non-accelerated filer ◻ Smaller reporting company ◻
Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ◻ No ⌧
Based on the price at which the registrant’s Common Stock was last sold on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market
value of the registrant’s Common Stock held by non-affiliates of the registrant was $458.3 million.
On March 3, 2021, the registrant had outstanding 21,018,319 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant’s proxy statement to be filed for the Annual Meeting of Shareholders to be held May 20, 2021 are incorporated by reference into Part III of this Annual Report on
Form 10-K. Other than those portions of the proxy statement specifically incorporated by reference pursuant to Items 10-14 of Part III hereof, no other portions of the proxy statement shall be deemed so
incorporated.
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THE FIRST BANCSHARES, INC.
FORM 10-K
TABLE OF CONTENTS
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART I
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
SIGNATURES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
PART IV
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THE FIRST BANCSHARES, INC.
FORM 10-K
PART I
This Annual Report on Form 10-K, including information incorporated by reference herein, contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements are statements that include projections, predictions,
expectations, or beliefs about future events or results or otherwise are not statements of historical fact, and may include statements relating to
our projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance
goals, as well as statements relating to the anticipated effects on our business, financial condition and results of operations from expected
developments or events, our business, growth and strategies. Such statements are often characterized by the use of qualifying words (and their
derivatives) such as “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” ”seek,” “potential,” “aim,”
“continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” “estimate,” or other statements concerning opinions or judgments of the
Company, the Bank, and management about possible future events or outcomes.
These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections about our
industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and
beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that
such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not
guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond our
control. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date of this Annual
Report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. There are or
will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements,
including, but not limited to, the following:
Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, competitive pressures
among financial institutions increasing significantly; economic conditions, either nationally or locally, in areas in which the Company conducts
operations being less favorable than expected; interest rate risk; legislation or regulatory changes which adversely affect the ability of the
consolidated Company to conduct business combinations or new operations; financial success or changing strategies of the Bank’s customers or
vendors; actions of government regulators; and the risk that anticipated benefits from the recent acquisitions are not realized in the time frame
anticipated or at all as a result of changes in general economic and market conditions.
Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in any forward-looking
statements include, but are not limited to, the following:
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the negative impacts and disruptions resulting from the outbreak of Coronavirus Disease 2019 (“COVID-19”) on the economies and
communities we serve, which has had and may continue to have an adverse impact on our business operations and performance, and
could have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and
domestically;
government or regulatory responses to the COVID-19 pandemic, including additional interest rate changes by the Federal Reserve,
additional quarantines, or other regulations or laws enacted to counter the effects of the COVID-19 pandemic on the economy;
the costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto,
including the costs and effects of litigation related to our participation in government stimulus programs associated with the COVID-
19 pandemic;
reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by
real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing
unemployment, or changes in payment behavior or other factors occurring in those areas;
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general economic conditions, either nationally or regionally and especially in our primary service areas, becoming less favorable than
expected resulting in, among other things, a deterioration in credit quality;
adverse changes in asset quality and resulting credit risk-related losses and expenses;
ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions,
adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or layoffs,
natural disasters, public health emergencies and international instability;
current or future legislation, regulatory changes or changes in monetary, tax or fiscal policy that adversely affect the businesses in
which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (“Dodd-Frank Act”), the Federal Reserve’s action with respect to interest rates, the capital requirements
promulgated by the Basel Committee on Banking Supervision (“Basel Committee”). Potential impacts from the Tax Cuts and Jobs
Act, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) of 2020, uncertainty relating to calculations of
LIBOR and other regulatory responses to economic conditions;
changes in political conditions or the legislative or regulatory environment;
the adequacy of the level of our allowance for loan losses and the amount of loan loss provision required to replenish the allowance in
future periods;
reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or
location of the borrower or collateral;
changes in the interest rate environment which could reduce anticipated or actual margins;
increased funding costs due to market illiquidity, increased competition for funding, higher interest rates, and increased regulatory
requirements with regard to funding;
results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things,
require us to increase our allowance for loan losses through additional loan loss provisions or write-down of our assets;
the rate of delinquencies and amount of loans charged-off;
the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;
risks and uncertainties relating to not successfully integrating the currently contemplated or completed acquisitions within our
currently expected timeframe and other terms;
significant increases in competition in the banking and financial services industries;
changes in the securities markets;
loss of consumer confidence and economic disruptions resulting from national disasters or terrorist activities;
our ability to retain our existing customers, including our deposit relationships;
changes occurring in business conditions and inflation;
changes in technology or risks related to cybersecurity;
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changes in deposit flows;
changes in accounting principles, policies, or guidelines, including the impact of the new current expected credit loss (“CECL”)
standard;
our ability to maintain adequate internal control over financial reporting;
risks related to the continued use, availability and reliability of London Inter-Bank Offered Rate (“LIBOR”) and other “benchmark”
rates; and
●
other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”).
We have based our forward-looking statements on our current expectations about future events. Although we believe that the
expectations reflected in and the assumptions underlying our forward-looking statements are reasonable, we cannot guarantee that these
expectations will be achieved or the assumptions will be accurate. The Company disclaims any obligation to update such factors or to publicly
announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments.
Additional information concerning these risks and uncertainties is contained in this Annual Report on Form 10-K for the year ended December
31, 2020, included in Item 1A. Risk Factors and in our future filings with the SEC. Further information on The First Bancshares, Inc. is
available in its filings with the Securities and Exchange Commission, available at the SEC’s website, http://www.sec.gov.
ITEM 1. BUSINESS
Overview and History
BUSINESS OF THE COMPANY
The First Bancshares, Inc. (“Company”) was incorporated on June 23, 1995 to serve as a bank holding company for The First, A
National Banking Association (“The First”), headquartered in Hattiesburg, Mississippi. The Company is a Mississippi corporation and is a
registered financial holding company. The First began operations on August 5, 1996 from our main office in the Oak Grove community, which
is now incorporated within the city of Hattiesburg. As of December 31, 2020, The First operated 84 locations in Mississippi, Alabama, Florida,
Georgia and Louisiana. Our principal executive offices are located at 6480 U.S. Highway 98 West, Hattiesburg, Mississippi 39402, and our
telephone number is (601) 268-8998.
The Company is a community-focused financial institution that offers a full range of financial services to individuals, businesses,
municipal entities, and nonprofit organizations in the communities that it serves. These services include consumer and commercial loans,
deposit accounts and safe deposit services.
We have benefitted from historically strong asset quality metrics compared to most of our peers, which we believe illustrates our
historically disciplined underwriting and credit culture. As such, we benefited from our strength by taking advantage of growth opportunities
when many of our peers were unable to do so. We have also focused on growing earnings per share and increasing our tangible common equity
and tangible book value per share.
In recent years, we have developed and executed a regional expansion strategy to take advantage of growth opportunities through
several acquisitions, which has allowed us to expand our footprint to Alabama, Florida Louisiana and Georgia. We believe the conversion and
integration of these acquisitions have been successful to date, and we are optimistic that these markets will continue to contribute to our future
growth and success. In addition, we continue to experience organic loan growth by continuing to strengthen our relationships with existing
clients and creating new relationships.
On April 3, 2020, the Company completed its acquisition of Southwest Georgia Financial Corporation (“SWG”), and immediately
thereafter merged its wholly-owned subsidiary, Southwest Georgia Bank with and into The First. The Company paid a total consideration of
$47.9 million to the SWG shareholders as consideration in the merger, which included 2,546,967 shares of Company common stock and
approximately $2 thousand in cash.
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Unless otherwise indicated or unless the context requires otherwise, all references in this report to “the Company”, “we”, “us”, “our”,
or similar references, mean The First Bancshares, Inc. and our subsidiaries, including our banking subsidiary, The First, on a consolidated basis.
References to “The First” or the “Bank” mean our wholly owned banking subsidiary, The First.
Human Capital Resources
At December 31, 2020, we employed 744 full-time equivalent employees spanning 5 states and 84 locations.
We are dedicated to providing competitive compensation and benefit programs to help attract and maintain skilled and highly trained
employees. Our compensation and benefit programs include: a 401-K plan, with matching contributions; a Loan Incentive Plan for our lending
officers; an Executive Incentive Plan; and an Employee Stock Ownership Plan. The Company offers a Continuing Education Program for our
employees to support and help them attain personal goals and professional achievements by encouraging and supporting those who pursue and
participate in continuing their education.
We endeavor to ensure that the makeup of our employees, management team and board of directors are reflective of the diversity of
the communities we serve. We believe in the importance of diversity and value the benefits that diversity can bring, and we are dedicated to
fostering and maintaining an inclusive culture that solicits multiple perspectives and views and is free of conscious or unconscious bias and
discrimination.
We strive to maintain a safe and healthy working environment. We provide our employees with access to a Grief Counseling and
Confidential Assistance Program, which provides counseling services to employees on a confidential basis to ensure our employees get the help
they may need. In response to the COVID-19 pandemic, we have taken steps to ensure the safety of our employees and clients by implementing
procedures and protocols concerning: social distancing, business travel, sanitation and disinfection, encouraged employees to work remotely,
improved and upgraded electronic delivery and execution of documents to limit in person exposure. During the pandemic, we have limited
lobby hours throughout our branch offices, and prioritizing drive-thru and appointment banking.
Market Areas
As of December 31, 2020, The First had 84 locations across Mississippi, Louisiana, Alabama, Florida and Georgia.
Recent Developments
During the first quarter of 2020, the Company elected to delay the adoption of the CECL afforded through the CARES Act. The
Company currently anticipates CECL adoption to occur as of January 1, 2021.
Banking Services
We strive to provide our customers with the breadth of products and services offered by large regional banks, while maintaining the
timely response and personal service of a locally owned and managed bank. In addition to offering a full range of deposit services and loan
products, we have a mortgage and private banking division. The following is a description of the products and services we offer.
Deposit Services. We offer a full range of deposit services that are typically available in most banks and savings institutions, including
checking accounts, NOW accounts, savings accounts, and other time deposits of various types, ranging from daily money market accounts to
longer-term certificates of deposit. The transaction accounts and time certificates are tailored to our principal market areas at rates competitive
to those offered by other banks in these areas. All deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the
maximum amount allowed by law. We solicit these accounts from individuals, businesses, associations, organizations, and governmental
authorities. In addition, we offer certain retirement account services, such as Individual Retirement Accounts (IRAs) and health savings
accounts.
Loan Products. We offer a full range of commercial and personal loans. Commercial loans include both secured and unsecured loans
for working capital (including loans secured by inventory and accounts receivable), business expansion (including acquisition of real estate and
improvements), and purchase of equipment and machinery. Consumer loans include equity lines of credit, secured and unsecured loans for
financing automobiles, home improvements, education, and personal investments. We also make real estate
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construction and acquisition loans. Our lending activities are subject to a variety of lending limits imposed by federal law. While differing limits
apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the bank), in
general we are subject to an aggregate loans-to-one-borrower limit of 15% of our unimpaired capital and surplus.
Mortgage Loan Division. We have a residential mortgage loan division which originates conventional or government agency insured
loans to purchase existing residential homes, construct new homes or refinance existing mortgages.
Private Banking Division. We have a private banking division, which offers financial and wealth management services to individuals
who meet certain criteria.
Other Services. Other bank services we offer include on-line internet banking services, automated teller machines, voice response
telephone inquiry services, commercial sweep accounts, cash management services, safe deposit boxes, merchant services, mobile deposit,
direct deposit of payroll and social security checks, and automatic drafts for various accounts. We network with other automated teller machines
that may be used by our customers throughout our market area and other regions. The First also offers credit card services through a
correspondent bank.
Competition
The First generally competes with other financial institutions through the selection of banking products and services offered, the
pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal
manner in which services are offered. State law permits statewide branching by banks and savings institutions, and many financial institutions
in our market area have branch networks. Consequently, commercial banking in Mississippi, Alabama, Louisiana, Florida, and Georgia is
highly competitive. Many large banking organizations currently operate in our market area, several of which are controlled by out-of-state
ownership. In addition, competition between commercial banks and thrift institutions (savings institutions and credit unions) has been
intensified significantly by the elimination of many previous distinctions between the various types of financial institutions and the expanded
powers and increased activity of thrift institutions in areas of banking which previously had been the sole domain of commercial banks. Federal
legislation, together with other regulatory changes by the primary regulators of the various financial institutions, has resulted in the almost total
elimination of practical distinctions between a commercial bank and a thrift institution. Consequently, competition among financial institutions
of all types is largely unlimited with respect to legal ability and authority to provide most financial services. Currently there are numerous other
commercial banks, savings institutions, and credit unions operating in The First’s primary service area.
We face increased competition from both federally-chartered and state-chartered financial and thrift institutions, as well as credit
unions, consumer finance companies, insurance companies, and other institutions in the Company’s market area. Some of these competitors are
not subject to the same degree of regulation and restriction imposed upon the Company. Many of these competitors also have broader
geographic markets and substantially greater resources and lending limits than the Company and offer certain services such as trust banking that
the Company does not currently provide. In addition, many of these competitors have numerous branch offices located throughout the extended
market areas of the Company that may provide these competitors with an advantage in geographic convenience that the Company does not have
at present.
We also compete with numerous financial and quasi-financial institutions for deposits and loans, including providers of financial
services over the internet, and financial technology, or fintech companies. Recent technology advances and other changes have allowed parties
to effect financial transactions that previously required the involvement of banks. For example, consumers can maintain funds in brokerage
accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying
bills and transferring funds directly without the assistance of banks.
Available Information
Pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) we are required to file Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and other filings pursuant to Section 13(a) or
15(d) of the Exchange Act, and amendments to such filings. The SEC maintains a website at www.sec.gov that contains the reports, proxy
statements, and other filings we electronically file with the SEC. Such information is also available free of charge on
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or through our website www.thefirstbank.com as soon as reasonably practicable after each is electronically filed with, or furnished to, the SEC.
Information appearing on the Company’s website is not part of any report that it files with the SEC.
SUPERVISION AND REGULATION
The Company and The First are subject to state and federal banking laws and regulations which impose specific requirements or
restrictions on and provide for general regulatory oversight with respect to virtually all aspects of our operations. These laws and regulations are
generally intended to protect depositors, the deposit insurance fund ("DIF") of the FDIC and the stability of the U.S. banking system as a whole,
rather than for the protection of our shareholders and non-deposit creditors. To the extent that the following summary describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of the Company.
Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and following with the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), and now most recently the sweeping Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), numerous regulatory requirements have been placed on the banking
industry in the recent years. A significant number of financial services regulations required by the Dodd-Frank Act have not yet been finalized
by banking regulators, Congress continues to consider legislation that would make significant changes to the law and courts are addressing
significant litigation arising under the Dodd-Frank Act, making it difficult to predict the ultimate effect of the Dodd-Frank Act on our business.
The operations of the Company and The First may be affected by legislative changes and the policies of various regulatory authorities. We are
unable to predict the nature or the extent of the effect on our business and earnings that fiscal or monetary policies, economic control, or new
federal or state legislation may have in the future.
Bank Holding Company Regulation
The Company is registered with the Federal Reserve as a bank holding company and is subject to extensive regulation by the Board of
Governors of the Federal Reserve System (the “Federal Reserve”) pursuant to the Bank Holding Company Act of 1956, as amended (the “Bank
Holding Company Act”). As such, the Company and its subsidiaries are subject to the supervision, examination and reporting requirements of
the Bank Holding Company Act and the regulations of the Federal Reserve. In addition, the Company is registered with the SEC and is subject
to its regulation with respect to our securities, financial reporting and certain governance matters. Our securities are listed on the Nasdaq Global
Market, and we are subject to Nasdaq rules for listed companies. We file quarterly reports and other information with the Federal Reserve and
SEC.
The Bank Holding Company Act generally prohibits a corporation that owns a federally insured financial institution (“bank”) from
engaging in activities other than banking and managing or controlling banks or other subsidiaries engaging in permissible activities. Also
prohibited is acquiring or obtaining control 5% or more of the voting interests of any company that engages in activities other than those
activities determined by the Federal Reserve to be so closely related to banking, managing or controlling banks as to be a proper incident
thereto. In determining whether a particular activity is permissible, the Federal Reserve considers whether the performance of the activity can
reasonably be expected to produce benefits to the public that outweigh possible adverse effects. Examples of activities that the Federal Reserve
has determined to be permissible are making, acquiring or servicing loans; leasing personal property; providing certain investment or financial
advice; performing certain data processing services; acting as agent or broker in selling credit life insurance; and performing certain insurance
underwriting activities. The Bank Holding Company Act does not place territorial limits on permissible bank-related activities of bank holding
companies. Even with respect to permissible activities, however, the Federal Reserve has the power to order a holding company or its
subsidiaries to terminate any activity or its control of any subsidiary when the Federal Reserve has reasonable cause to believe that continuation
of such activity or control of such subsidiary would pose a serious risk to the financial safety, soundness or stability of any bank subsidiary of
that holding company.
The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it:
(1) acquires ownership or control of any voting shares of any bank if, after such acquisition, such bank holding company will own or control 5%
or more of the voting shares of such bank, (2) causes any of its non-bank subsidiaries to acquire all of the assets of a bank, (3) merges with any
other bank holding company, or (4) engages in permissible non-banking activities. In reviewing a proposed covered acquisition, the Federal
Reserve considers a bank holding company’s financial, managerial and competitive posture. The future prospects of the companies and banks
concerned and the convenience and needs of the community to be served are also considered. The Federal Reserve also reviews any
indebtedness to be incurred by a bank holding company in connection with the proposed acquisition to ensure that the bank holding company
can service such indebtedness without adversely affecting its ability, and the ability of its
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subsidiaries, to meet their respective regulatory capital requirements. The Bank Holding Company Act further requires that consummation of
approved bank holding company or bank acquisitions or mergers must be delayed for a period of not less than 15 or more than 30 days
following the date of Federal Reserve approval. During such 15 to 30-day period, the Department of Justice has the right to review the
competitive aspects of the proposed transaction. The Department of Justice may file a lawsuit with the relevant United States District Court
seeking an injunction against the proposed acquisition.
The Federal Reserve has adopted capital adequacy guidelines for use in its examination and regulation of bank holding companies and
financial holding companies. The regulatory capital of a bank holding company or financial holding company under applicable federal capital
adequacy guidelines is particularly important in the Federal Reserve’s evaluation of the overall safety and soundness of the bank holding
company or financial holding company and are important factors considered by the Federal Reserve in evaluating any applications made by
such holding company to the Federal Reserve. If regulatory capital falls below minimum guideline levels, a financial holding company may lose
its status as a financial holding company and a bank holding company or bank may be denied approval to acquire or establish additional banks
or non-bank businesses or to open additional facilities. Additionally, each bank subsidiary of a financial holding company as well as the
holding company itself must be well capitalized and well managed as determined by the subsidiary bank’s primary federal regulator, which in
the case of The First, is the Office of the Comptroller of the Currency (the “OCC”). To be considered well managed, the bank and holding
company must have received at least a satisfactory composite rating and a satisfactory management rating at its most recent examination. The
Federal Reserve rates bank holding companies through a confidential component and composite 1-5 rating system, with a composite rating of 1
being the highest rating and 5 being the lowest. This system is designed to help identify institutions requiring special attention. Financial
institutions are assigned ratings based on evaluation and rating of their financial condition and operations. Components reviewed include capital
adequacy, asset quality, management capability, the quality and level of earnings, the adequacy of liquidity and sensitivity to interest rate
fluctuations. As of December 31, 2020, the Company and The First were both well capitalized and well managed.
A financial holding company that becomes aware that it or a subsidiary bank has ceased to be well capitalized or well managed must
notify the Federal Reserve and enter into an agreement to cure the identified deficiency. If the deficiency is not cured timely, the Federal
Reserve may order the financial holding company to divest its banking operations. Alternatively, to avoid divestiture, a financial holding
company may cease to engage in the financial holding company activities that are unrelated to banking or otherwise impermissible for a bank
holding company. See “Capital Requirements” below for more information.
The Gramm-Leach-Bliley Act of 1999 established a comprehensive framework that permits affiliations among qualified bank holding
companies, commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank
Holding Company Act framework to permit a holding company to engage in a full range of financial activities through a financial holding
company.
Federal Reserve Oversight
The Company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve may
disapprove such a transaction if it determines that the proposed redemption or stock purchase would constitute an unsafe or unsound practice,
would violate any law, regulation, Federal Reserve order or directive or any condition imposed by, or written agreement with, the Federal
Reserve.
The Federal Reserve has issued its “Policy Statement on Cash Dividends Not Fully Covered by Earnings” (the “Policy Statement”)
which sets forth various guidelines that the Federal Reserve believes a bank holding company should follow in establishing its dividend policy.
In general, the Federal Reserve stated that bank holding companies should pay dividends only out of current earnings. The Federal Reserve also
stated that dividends should not be paid unless the prospective rate of earnings retention by the holding company appears consistent with its
capital needs, asset quality and overall financial condition.
The Company is required to file annual and quarterly reports with the Federal Reserve, and such additional information as the Federal
Reserve may require pursuant to the Bank Holding Company Act. The Federal Reserve may examine a bank holding company or any of its
subsidiaries.
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Source of Strength Doctrine
Under the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed to engage in interstate transactions. In
the past, only the subsidiary banks were required to meet those standards. The Federal Reserve Board’s “source of strength doctrine” has now
been codified, mandating that bank holding companies such as the Company serve as a source of strength for their subsidiary banks, such that
the bank holding company must be able to provide financial assistance in the event the subsidiary bank experiences financial distress.
Capital Requirements
Federal banking regulators have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and
bank holding companies that is based upon the 1988 capital accord of the Bank for International Settlements’ Basel Committee on Banking
Supervision (the “Basel Committee”), a committee of central banks and bank regulators from the major industrialized countries that coordinates
international standards for bank regulation. Under the guidelines, specific categories of assets and off-balance-sheet activities such as letters of
credit are assigned risk weights, based generally on the perceived credit or other risks associated with the asset. Off-balance-sheet activities are
assigned a credit conversion factor based on the perceived likelihood that they will become on-balance-sheet assets. These risk weights are
multiplied by corresponding asset balances to determine a “risk weighted” asset base which is then measured against various measures of
capital to produce capital ratios.
An organization’s capital is classified in one of two tiers, Core Capital, or Tier 1, and Supplementary Capital, or Tier 2. Tier 1 capital
includes common stock, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in the equity of consolidated
subsidiaries, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding
company level, less goodwill and most intangible assets. Tier 2 capital includes perpetual preferred stock and trust preferred securities not
meeting the Tier 1 definition, mandatory convertible debt securities, subordinated debt, and allowances for loan and lease losses. Each category
is subject to a number of regulatory definitional and qualifying requirements.
The Basel Committee in 2010 released a set of international recommendations for strengthening the regulation, supervision and risk
management of banking organizations, known as Basel III. In July 2013, the Federal Reserve published final rules for the adoption of the Basel
III regulatory capital framework (the “Basel III Capital Rules”). The Basel III Capital Rules became effective for us on January 1, 2015, with
certain transition provisions phasing in over a period that ended on January 1, 2019. The Basel III Capital Rules established a new category of
capital measure, Common Equity Tier 1 capital ("CET1"), which includes a limited number of capital instruments from the existing definition
of Tier 1 Capital, as well as raised minimum thresholds for Tier 1 Leverage capital (100 basis points), and Tier 1 Risk-based capital (200 basis
points).
The Basel III Capital Rules established the following minimum capital ratios: 4.5 percent CET1 to risk-weighted assets; 6.0 percent
Tier 1 capital to risk-weighted assets; 8.0 percent total capital to risk-weighted assets; and 4.0 percent Tier 1 leverage ratio to average
consolidated assets. In addition, the Basel III Capital Rules also introduced a minimum “capital conservation buffer” equal to 2.5% of an
organization’s total risk-weighted assets, which exists in addition to these new required minimum CET1, Tier 1, and total capital ratios. The
“capital conservation buffer,” which must consist entirely of CET1, is designed to absorb losses during periods of economic stress. The Basel
III Capital Rules provide for a number of deductions from and adjustments to CET1, which include the requirement that mortgage servicing
rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant
investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all
such categories in the aggregate exceed 15% of CET1. Under this guidance banking institutions with a CETI, Tier 1 Capital Ratio and Total
Risk Based Capital above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their
ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.
The Company and The First elected in 2015 to exclude the effects of accumulated other comprehensive income items included in
stockholders’ equity from the determination of regulatory capital under the Basel III Capital Rules. Based on estimated capital ratios using
Basel III definitions, the Company and The First currently exceed all capital requirements of the new rule, including the fully phased-in
conservation buffer.
In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that
adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory
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capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase
out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total).
Certain regulatory capital ratios of the Company and The First, as of December 31, 2020, are shown in the following table:
Common Equity Tier 1 risk-based capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio
Capital Adequacy Ratios
Regulatory
Regulatory
Minimums
to be Well
The First
Minimums Capitalized Bancshares, Inc. The First
4.5 %
6.0 %
8.0 %
4.0 %
6.5 %
8.0 %
10.0 %
5.0 %
13.5 %
14.0 %
19.1 %
9.2 %
15.8 %
15.8 %
16.9 %
10.4 %
The essential difference between the leverage capital ratio and the risk-based capital ratios is that the latter identify and weight both
balance sheet and off-balance sheet risks. Tier 1 capital generally includes common equity, retained earnings, qualifying minority interests
(issued by consolidated depository institutions or foreign bank subsidiaries), accounts of consolidated subsidiaries and an amount of qualifying
perpetual preferred stock, limited to 50% of Tier 1 capital. In calculating Tier 1 capital, goodwill and other disallowed intangibles and
disallowed deferred tax assets and certain other assets are excluded. Tier 2 capital is a secondary component of risk-based capital, consisting
primarily of perpetual preferred stock that may not be included as Tier 1 capital, mandatory convertible securities, certain types of subordinated
debt and an amount of the allowance for loan losses (limited to 1.25% of risk weighted assets).
The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies, to take into account off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Under the risk-based capital guidelines, assets are assigned to one of four risk categories: 0%, 20%, 50% and 100%. For example, U.S.
Treasury securities are assigned to the 0% risk category while most categories of loans are assigned to the 100% risk category. Off-balance
sheet exposures such as standby letters of credit are risk-weighted and all or a portion thereof are included in risk-weighted assets based on an
assessment of the relative risks that they present. The risk-weighted asset base is equal to the sum of the aggregate dollar values of assets and
off-balance sheet items in each risk category, multiplied by the weight assigned to that category.
The Company has elected to delay its adoption of ASU 2016-13, as provided by the CARES Act. The Company currently anticipates
CECL adoption to occur as of January 1, 2021. In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that
provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of
CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year
transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in
total).
Prompt Corrective Action and Undercapitalization
The FDICIA established a system of prompt corrective action regulations and policies to resolve the problems of undercapitalized
insured depository institutions. Under this system, insured depository institutions are ranked in one of five capital categories as described below.
Regulators are required to take mandatory supervisory actions and are authorized to take other discretionary actions of increasing severity with
respect to insured depository institutions in the three undercapitalized categories. The five capital categories for insured depository institutions
under the prompt corrective action regulations consist of:
● Well capitalized - equals or exceeds a 10% total risk-based capital ratio, 8% Tier 1 risk-based capital ratio, and 5% leverage ratio and
is not subject to any written agreement, order or directive requiring it to maintain a specific level for any capital measure;
● Adequately capitalized - equals or exceeds an 8% total risk-based capital ratio, 6% Tier 1 risk-based capital ratio, and 4% leverage
ratio;
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● Undercapitalized - total risk-based capital ratio of less than 8%, or a Tier 1 risk-based ratio of less than 6%, or a leverage ratio of less
than 4%;
●
Significantly undercapitalized - total risk-based capital ratio of less than 6%, or a Tier 1 risk-based capital ratio of less than 4%, or a
leverage ratio of less than 3%; and
● Critically undercapitalized - a ratio of tangible equity to total assets equal to or less than 2%.
The prompt corrective action regulations provide that an institution may be downgraded to the next lower category if its regulator
determines, after notice and opportunity for hearing or response, that the institution is in an unsafe or unsound condition or has received and not
corrected a less-than-satisfactory rating for any of the categories of asset quality, management, earnings or liquidity in its most recent
examination.
Federal bank regulatory agencies are required to implement arrangements for prompt corrective action for institutions failing to meet
minimum requirements to be at least adequately capitalized. FDICIA imposes an increasingly stringent array of restrictions, requirements and
prohibitions as an organization’s capital levels deteriorate. A bank rated "adequately capitalized" may not accept, renew or roll over brokered
deposits. A "significantly undercapitalized" institution is subject to mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions. The OCC has only very limited discretion in dealing with a
"critically undercapitalized" institution and generally must appoint a receiver or conservator (the FDIC) if the capital deficiency is not corrected
promptly.
Under the Federal Deposit Insurance Act (“FDIA”), “critically undercapitalized” banks may not, beginning 60 days after becoming
critically undercapitalized, make any payment of principal or interest on their subordinated debt (subject to certain limited exceptions). In
addition, under Section 18(i) of the FDIA, banks are required to obtain the advance consent of the FDIC to retire any part of their subordinated
notes. Under the FDIA, a bank may not pay interest on its subordinated notes if such interest is required to be paid only out of net profits, or
distribute any of its capital assets, while it remains in default on any assessment due to the FDIC.
Federal bank regulators may set capital requirements for a particular banking organization that are higher than the minimum ratios
when circumstances warrant. Federal Reserve and OCC guidelines provide that banking organizations experiencing significant growth or
making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Concentration of credit risks, interest rate risk (imbalances in rates, maturities or sensitivities) and risks
arising from non-traditional activities, as well as an institution’s ability to manage these risks, are important factors taken into account by
regulatory agencies in assessing an organization’s overall capital adequacy.
The OCC and the Federal Reserve also use a leverage ratio as an additional tool to evaluate the capital adequacy of banking
organizations. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. A minimum leverage ratio of
3.0% is required for banks and bank holding companies that either have the highest supervisory rating or have implemented the appropriate
federal regulatory authority’s risk-adjusted measure for market risk. All other banks and bank holding companies are required to maintain a
minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. In order to be considered well
capitalized the leverage ratio must be at least 5.0%.
Our Bank’s leverage ratio was 10.4% at December 31, 2020 and, as a result, it is currently classified as “well capitalized” for purposes
of the OCC’s prompt corrective action regulations.
The risk-based and leverage capital ratios established by federal banking regulators are minimum supervisory ratios generally
applicable to banking organizations that meet specified criteria, assuming that they otherwise have received the highest regulatory ratings in
their most recent examinations. Banking organizations not meeting these criteria are expected to operate with capital positions in excess of the
minimum ratios. Regulators can, from time to time, change their policies or interpretations of banking practices to require changes in risk
weights assigned to our Bank’s assets or changes in the factors considered in order to evaluate capital adequacy, which may require our Bank to
obtain additional capital to support existing asset levels or future growth or reduce asset balances in order to meet minimum acceptable capital
ratios.
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Additional Regulatory Issues
In June 2010, the Federal Reserve, the OCC and the FDIC issued joint guidance on executive compensation designed to help ensure
that a banking organization’s incentive compensation policies do not encourage imprudent risk taking and are consistent with the safety and
soundness of the organization. In addition, the Dodd-Frank Act required those agencies, along with the SEC, to adopt rules to require reporting
of incentive compensation and to prohibit certain compensation arrangements. The objective of the guidance is to assure that incentive
compensation arrangements (i) provide incentives that do not encourage excessive risk-taking, (ii) are compatible with effective internal
controls and risk management and (iii) are supported by strong corporate governance, including oversight by the board of directors. In 2016, the
Federal Reserve and the FDIC proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation
arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2020, these rules have not been implemented.
The Company is a legal entity separate and distinct from The First. There are various restrictions that limit the ability of The First to
finance, pay dividends or otherwise supply funds to the Company or other affiliates. In addition, subsidiary banks of holding companies are
subject to certain restrictions under Sections 23A and 23B of the Federal Reserve Act on any extension of credit to the bank holding company
or any of its subsidiaries, on investments in the stock or other securities thereof and on the taking of such stock or securities as collateral for
loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with extensions of credit, leases or sales of property, or furnishing of services.
Stress Testing
The Dodd-Frank Act requires stress testing of certain bank holding companies and banks. On May 24, 2018 the Economic Growth,
Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was signed into law, which amended portions of the Dodd-Frank
Act and immediately raised the asset threshold for stress testing from $10 billion to $100 billion for bank holding companies. On December 18,
2018, the OCC proposed regulations that would raise the stress testing threshold for national banks from $10 billion to $250 billion. Because the
consolidated assets of the Company and The First are less than these threshold levels, the stress test requirements are not currently applicable to
the Company or to The First.
The First, A National Banking Association
OCC Regulation. The First operates as a national banking association incorporated under the laws of the United States and subject to
supervision, inspection and examination by the OCC. The OCC regulates or monitors virtually all areas of The First’s operations, including
security devices and procedures, adequacy of capitalization and loan loss reserves, loans, investments, borrowings, deposits, mergers, issuances
of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches,
corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering
practices. The OCC imposes limitations on The First’s aggregate investment in real estate, bank premises, and furniture and fixtures. The First
is required by the OCC to prepare quarterly reports on its financial condition and to conduct an annual audit of its financial affairs in
compliance with minimum standards and procedures prescribed by the OCC.
Safe and Sound Banking Practices; Enforcement. Banks and bank holding companies are prohibited from engaging in unsafe and
unsound banking practices. Bank regulators have broad authority to prohibit and penalize activities of bank holding companies and their
subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws, regulations or written directives of or
agreements with regulators. Regulators have considerable discretion in identifying what they deem to be unsafe and unsound practices and in
pursuing enforcement actions in response to them.
Under FDICIA, all insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of
examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate
as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC and the appropriate agency. FDICIA
also directs the FDIC to develop with other appropriate agencies a method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report
of condition, or any other report of any insured depository institution. FDICIA also requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other
things, to: (i) internal controls, information systems, and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk
exposure; and (v) asset quality.
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National banks and their holding companies which have been chartered or registered or undergone a change in control within the past
two years or which have been deemed by the OCC or the Federal Reserve Board, respectively, to be troubled institutions must give the OCC or
the Federal Reserve Board, respectively, thirty days prior notice of the appointment of any senior executive officer or director. Within the thirty-
day period, the OCC or the Federal Reserve Board, as the case may be, may approve or disapprove any such appointment.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by federally insured banks and thrifts for deposit
insurance. Deposits in The First are insured by the FDIC up to a maximum amount (generally $250,000 per depositor, subject to aggregation
rules). The DIF is maintained by the FDIC for commercial banks and thrifts and funded with insurance premiums from the industry that are
used to offset losses from insurance payouts when banks and thrifts fail. Since 1993, insured depository institutions like The First have paid for
deposit insurance under a risk-based premium system. Assessments are calculated based on the depository institution’s average consolidated
total assets, less its average amount of tangible equity.
Transactions With Affiliates and Insiders. The First is subject to Section 23A of the Federal Reserve Act, which places limits on the
amount of loans to, and certain other transactions with, affiliates, as well as on the amount of advances to third parties collateralized by the
securities or obligations of affiliates. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of The First’s
capital and surplus and, as to all affiliates combined, to 20% of The First’s capital and surplus. Furthermore, within the foregoing limitations as
to amount, each covered transaction must meet specified collateral requirements.
The First is also subject to Section 23B of the Federal Reserve Act, which prohibits an institution from engaging in certain transactions
with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution, as those prevailing at the
time for comparable transactions with nonaffiliated companies. The First is subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal shareholders, and their related interests. Such extensions of credit (i) must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable features.
Change in Control. With certain limited exceptions, the BHCA and the Change in Bank Control Act, together with regulations
promulgated thereunder, prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly,
acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in
any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or
application to and the approval of the Federal Reserve.
Dividends. The principal source of funds from which we pay cash dividends are the dividends received from our bank subsidiary, The
First. Federal banking laws and regulations restrict the amount of dividends and loans a bank may make to its parent company. A national bank
may not pay dividends from its capital. All dividends must be paid out of undivided profits then on hand, after deducting expenses, including
reserves for losses and bad debts. In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless the bank has transferred to surplus no less than one-tenth of its net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus. In addition, under FDICIA, the banks may not pay a dividend if, after paying the dividend, the
bank would be undercapitalized. See "Capital Requirements" above.
Interstate Branching and Acquisitions. National banks are required by the National Bank Act to adhere to branch office banking laws
applicable to state banks in the states in which they are located. Formerly, under the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994, a bank’s ability to branch into a particular state was largely dependent upon whether the state “opted in” to de novo interstate
branching. Under the Dodd-Frank Act, de novo interstate branching by national banks is permitted if, under the laws of the state where the
branch is to be located, a state bank chartered in that state would be permitted to establish a branch. Further, a bank headquartered in one state is
authorized to merge with a bank headquartered in another state, as long as neither of the states have opted out of such interstate merger
authority, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not
to exceed five years and certain deposit market-share limitations. Under current Mississippi, Alabama, Louisiana, Florida and Georgia law, The
First may open branches or acquire existing banking operations throughout these states with the prior approval of the OCC. The Dodd-Frank
Act permits out of state acquisitions by bank holding companies (subject to veto by new state law), interstate branching by banks if allowed by
state law, interstate merging by banks, and de novo branching by national
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banks if allowed by state law. All branching in which The First may engage remains subject to regulatory approval and adherence to applicable
legal and regulatory requirements.
Community Reinvestment Act. The Community Reinvestment Act (the “CRA”) requires depository institutions to assist in meeting the
credit needs of their market areas consistent with safe and sound banking practice. Under the Community Reinvestment Act, each depository
institution is required to help meet the credit needs of its market areas by, among other things, providing credit, making investments and
providing community development services to low- and moderate-income individuals and communities. Depository institutions are periodically
examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence new activity permitted
by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least
“satisfactory” in its most recent examination under the CRA. These factors are considered in evaluating mergers, acquisitions, and applications
to open a branch or facility.
USA Patriot Act. In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the “USA Patriot Act”) was signed into law. The USA Patriot Act broadened the application of anti-money laundering
regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. government to
detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA Patriot Act
require that regulated financial institutions, including banks: (i) establish an anti-money laundering program that includes training and audit
components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional
required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their
foreign correspondent banking relationships. The USA Patriot Act also expanded the conditions under which funds in a U.S. interbank account
may be subject to forfeiture and increased the penalties for violation of anti-money laundering regulations. Failure of a financial institution to
comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution. The First has
adopted policies, procedures and controls to address compliance with the requirements of the USA Patriot Act under the existing regulations
and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and implementing
regulations.
Office of Foreign Assets Control. The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) is responsible for
administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals
and other foreign organizations and entities. OFAC publishes lists of prohibited parties that are regularly consulted by our Bank in the conduct
of its business in order to assure compliance. We are responsible for, among other things, blocking accounts of, and transactions with,
prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions
after their occurrence. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for our
Bank.
Consumer Protection Regulations. Interest and certain other charges collected or contracted for by The First are subject to state usury
laws and certain federal laws concerning interest rates. The First’s loan operations are subject to certain federal laws applicable to credit
transactions, such as the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; the Home Mortgage
Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing needs community it serves; the Equal Credit Opportunity Act, prohibiting
discrimination on the basis of race, color, religion, national origin or other prohibited factors in extending credit; the Fair Credit Reporting Act
of 1978, governing the use and provision of information to credit reporting agencies; the Fair Debt Collection Practices Act, concerning the
manner in which consumer debts may be collected by collection agencies; and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit operations of The First also are subject to the Right to Financial Privacy
Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising
from the use of automated teller machines and other electronic banking services.
Other Regulatory Matters
Risk-retention rules. Under the final risk-retention rules, banks that sponsor the securitization of asset-backed securities and
residential-mortgage backed securities are required to retain 5% of any loan they sell or securitize, except for mortgages that meet low-risk
standards to be developed by regulators.
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Changes to federal preemption. The Dodd-Frank Act created a new independent supervisory body, the Consumer Financial Protection
Bureau (the “CFPB”) that is housed within the Federal Reserve. The CFPB is the primary regulator for federal consumer financial statutes. State
attorneys general are authorized to enforce new regulations issued by the CFPB. Although the application of most state consumer financial laws
to The First will continue to be preempted under the National Bank Act, OCC determinations of such preemption are made on a case-by-case
basis. As a result, it is possible that state consumer financial laws enacted in the future may be held to apply to our business activities. The cost
of complying with any such additional laws could have a negative impact on our financial results.
Mortgage Rules. During 2013, the CFPB finalized a series of rules related to the extension of residential mortgage loans by banks.
Among these rules are requirements that a bank make a good faith determination that a borrower has the ability to repay a mortgage loan prior
to extending such credit, a requirement that certain mortgage loans provide for escrow payments, new appraisal requirements, and specific
rules regarding how loan originators may be compensated and the servicing of residential mortgage loans. The implementation of these new
rules began in January 2014.
Volcker Rule. In December 2013, the Federal Reserve, the FDIC, the OCC, the Commission, and the Commodity Futures Trading
Commission issued the “Prohibitions And Restrictions On Proprietary Trading And Certain Interests In, And Relationships With, Hedge Funds
And Private Equity Funds,” commonly referred to as the Volcker Rule, which regulates and restricts investments which may be made by banks.
The Volcker Rule was adopted to implement a portion of the Dodd-Frank Act and new Section 13 of the Bank Holding Company Act, which
prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, or sponsoring or
having certain relationships with, a hedge fund or private equity fund (“covered funds”), subject to certain exemptions. The Regulatory Relief
Act narrowed the “banking entity” definition under the Volcker Rule by excluding from the term “insured depository institution” an institution
that does not have, and is not controlled by a company that has more than $10 billion in total consolidated assets, and does not have total trading
assets and trading liabilities of more than 5% of total consolidated assets. The intended effect of narrowing the scope of the “banking entity”
definition is to reduce the regulatory burden imposed by the Volcker Rule on community banks, which generally include banks such as The
First with total consolidated assets of less than $10 billion and limited trading activities.
Debit Interchange Fees
Interchange fees, or “swipe” fees, are fees that merchants pay to credit card companies and card-issuing banks such as The First for
processing electronic payment transactions on their behalf. The maximum permissible interchange fee that an issuer may receive for an
electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, subject to an
upward adjustment of 1 cent if an issuer certifies that it has implemented policies and procedures reasonably designed to achieve the fraud-
prevention standards set forth by the Federal Reserve.
In addition, the legislation prohibits card issuers and networks from entering into exclusive arrangements requiring that debit card
transactions be processed on a single network or only two affiliated networks, and allows merchants to determine transaction routing. Due to the
Company’s size, the Federal Reserve rule limiting debit interchange fees has not reduced our debit card interchange revenues.
Summary
The foregoing is a brief summary of certain statutes, rules and regulations affecting the Company and The First. It is not intended to be
an exhaustive discussion of all statutes and regulations having an impact on the operations of such entities.
Increased regulation generally has resulted in increased legal and compliance expense.
Finally, additional bills may be introduced in the future in the U.S. Congress and state legislatures to alter the structure, regulation and
competitive relationships of financial institutions. It cannot be predicted whether and in what form any of these proposals will be adopted or the
extent to which the business of the Company and The First may be affected thereby.
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Effect of Governmental Monetary and Fiscal Policies
The difference between the interest rate paid on deposits and other borrowings and the interest rate received on loans and securities
comprises most of a bank’s earnings. In order to mitigate the interest rate risk inherent in the industry, the banking business is becoming
increasingly dependent on the generation of fee and service charge revenue.
The earnings and growth of a bank are affected by both general economic conditions and the monetary and fiscal policy of the U.S.
government and its agencies, particularly the Federal Reserve. The Federal Reserve sets national monetary policy such as seeking to curb
inflation and combat recession. This is accomplished by its open-market operations in U.S. government securities, adjustments in the amount of
reserves that financial institutions are required to maintain and adjustments to the discount rates on borrowings and target rates for federal funds
transactions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect
interest rates on loans and deposits. The nature and timing of any future changes in monetary policies and their potential impact on the
Company cannot be predicted.
ITEM 1A. RISK FACTORS
Our business is subject to risk. The following discussion, along with management’s discussion and analysis and our financial
statements and footnotes, sets forth the most significant risks and uncertainties that we believe could adversely affect our business, financial
condition or results of operations. Additional risks and uncertainties that management is not aware of or that management currently deems
immaterial may also have a material adverse effect on our business, financial condition or results of operations. There is no assurance that this
discussion covers all potential risks that we face. Further, to the extent that any of the information contained in this Annual Report on Form 10-
K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could
cause our actual results to differ materially from those expressed in any forward-looking statements made herein.
Risk Factors Associated With Our Business
General economic conditions in the areas where our operations or loans are concentrated may adversely affect our financial results or
liquidity.
A sudden or severe downturn in the economy in the geographic markets we serve in the states of Mississippi, Louisiana, Alabama,
Florida or Georgia may affect the ability of our customers to meet loan payment obligations on a timely basis. The local economic conditions in
these areas have a significant impact on our commercial, real estate, and construction loans, the ability of borrowers to repay these loans and the
value of the collateral securing such loans. Any deterioration in the economic conditions of these market areas could negatively impact the
financial results of the Company’s banking operations, earnings, and profitability.
Our Bank requires liquidity in the form of available funds to meet its deposit, debt and other obligations as they come due, borrower
requests to draw on committed credit facilities as well as unexpected demands for cash payments. Adverse economic changes may cause
customers to withdraw deposit balances, thereby causing a strain on our liquidity. We have historically had access to a number of alternative
sources of liquidity, but if there is an increase in volatility in the credit and liquidity markets there is no assurance that we will be able to obtain
such liquidity on terms that are favorable to us, or at all.
We may be vulnerable to certain sectors of the economy, including real estate.
A significant portion of our loan portfolio is secured by real estate. The market value of real estate can fluctuate significantly in a
relatively short period of time as a result of market conditions in the geographic area in which the real estate is located. If the economy
deteriorates and real estate values decline materially, a significant part of our loan portfolio could become under-collateralized and losses
incurred upon borrower defaults would increase. This could result in additional loan loss accruals which would negatively impact our earnings.
Our ability to dispose of foreclosed real estate at prices above the respective carrying values could also be impacted, which could cause our
results of operations to be adversely affected.
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Unpredictable market conditions may adversely affect the industry in which we operate.
The capital and credit markets are subject to volatility and disruption. Dramatic declines in the housing market in years past caused
home prices to fall and increased foreclosures, unemployment and under-employment. These events, if they were to happen again, could
negatively impact the credit performance of mortgage loans and result in significant write-downs of asset values, including government-
sponsored entities as well as major commercial and investment banks. Market turmoil and tightening of credit could lead to an increased level
of commercial and consumer delinquencies, lack of consumer confidence and widespread reduction of business activity. Generally a worsening
of these conditions would have an adverse effect on us and others in the financial institution industry, particularly in our real estate markets, as
lower home prices and increased foreclosures would result in higher charge-offs and delinquencies.
The state of the economy and various economic factors, including inflation, recession, unemployment, interest rates and the level of
U.S. debt, as well as governmental action and uncertainty resulting from U.S. and global political trends, may directly and indirectly, have a
destabilizing effect on our financial condition and results of operations. An unfavorable or uncertain national or regional political or economic
environment could drive losses beyond those which are provided for in our allowance for loan losses and could negatively impact our results of
operations.
We must maintain an appropriate allowance for loan losses.
The First, as lender, is exposed to the risk that its customers will be unable to repay their loans in accordance with their terms and that
any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making
loans and could have a material adverse effect on our operating results. Credit risk with respect to our real estate and construction loan portfolio
relates principally to the creditworthiness of the borrower corporations and the value of the real estate serving as security for the repayment of
loans. Credit risk with respect to our commercial and consumer loan portfolio will relate principally to the general creditworthiness of the
borrower businesses and individuals within our local markets.
The First makes various assumptions and judgments about the collectability of its loan portfolio based on a number of factors. We
maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense each quarter, that is
consistent with management’s assessment of the collectability of the loan portfolio in light of the amount of loans committed and outstanding
and current economic conditions, market trends and other factors. When specific loan losses are identified, the amount of the expected loss is
removed, or charged-off, from the allowance. The First believes that its current allowance for loan losses is appropriate and is consistent with
our methodology. However, if our assumptions or judgments prove to be incorrect, the allowance for loan losses may not be sufficient to cover
actual loan losses. We may have to increase the allowance in the future in response to the request of one of our primary banking regulators, to
adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of the loan portfolio. The actual amount of
future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions. Any increase in the
allowance for loan losses or in the amount of loan charge-offs required by regulatory agencies or for other factors could have a negative effect
on our results of operations and financial condition.
In addition, the Company will adopt ASU 2016 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments,” as amended on January 1, 2021. This standard makes significant changes to the accounting for credit losses on financial
instruments presented on an amortized cost basis such as our loans held for investment, and disclosures about them. The new CECL impairment
model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and
supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides
significant flexibility and requires a high degree of judgement with regards to pooling financial assets with similar risk characteristics and
adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. Providing for losses over the life of
our portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred. This change may require
us to increase our allowance for loan losses rapidly in future periods, and greatly increases the type of data we need to collect and review to
determine the appropriate level of allowance for loan losses. In addition, there can be no assurance that the Company’s policies and procedures
will reduce certain lending risks or that the Company’s allowance for loan losses will be adequate to cover actual losses. See Note B – Summary
of Significant Accounting Policies in the notes to consolidated financial statements.
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We are subject to risks related to changes in market interest rates.
Our assets and liabilities are primarily monetary in nature, and as a result we are subject to significant risks resulting from changes in
interest rates. Our profitability is largely dependent upon net interest income. Unexpected movement in interest rates markedly changing the
slope of the current yield curve could cause net interest margins to decrease, subsequently decreasing net interest income. In addition, such
changes could adversely affect the valuation of our assets and liabilities.
The fair market value of the securities portfolio and the investment income from these securities also fluctuates depending on general
economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such
as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate
fluctuations.
At present the Company’s one-year interest rate sensitivity position is asset sensitive. As with most financial institutions, the
Company’s results of operations are affected by changes in interest rates and the Company’s ability to manage this risk. The difference between
interest rates charged on interest-earning assets and interest rates paid on interest-bearing liabilities may be affected by changes in market
interest rates, changes in relationships between interest rate indices, and/or changes in the relationships between long-term and short-term
market interest rates. A change in this difference might result in an increase in interest expense relative to interest income, or a decrease in the
Company’s interest rate spread.
We may be adversely affected by changes in the method of determining the London Interbank Offered Rate (“LIBOR”), or the replacement
of LIBOR with an alternative reference rate, for our variable rate loans and the interest expense paid on our subordinated notes and our
subordinated debentures.
On July 27, 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or
compelling banks to submit rates for the calculation of LIBOR to the LIBOR administration after 2021. The announcement indicates that the
continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent
banks will continue to provide LIBOR submissions to the LIBOR administrator, whether LIBOR will cease to be published or supported before
or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere; however, it does appear highly
likely that LIBOR will be discontinued or modified by 2021. The Alternative Reference Rate Committee has announced secured overnight
financing rate (“SOFR”) as its recommended alternative to LIBOR, SOFR may not gain market acceptance or be widely used as a benchmark.
Uncertainty as to the nature of such potential changes, alternative reference rates, the replacement or disappearance of LIBOR or other
reforms may adversely affect the value of and the return on our subordinated notes and our subordinated debentures, as well as the interest we
pay on those securities.
At December 31, 2020, approximately 1.5% of our total loan portfolio was indexed to 30-day, 90-day, and one-year LIBOR.
Certain changes in interest rates, inflation, or the financial markets could affect demand for our products and our ability to deliver products
efficiently.
Loan originations, and therefore loan revenues, could be adversely impacted by rising interest rates. Increases in market interest rates
can have negative impacts on our business, including reducing our customers’ desire to borrow money from us or adversely affecting their
ability to repay their outstanding loans by increasing their debt service obligations through the periodic reset of adjustable interest rate loans. If
our borrowers’ ability to repay their loans is impaired by increasing interest payment obligations, our level of non-performing assets would
increase, producing an adverse effect on operating results. Asset values, especially commercial real estate as collateral, securities or other fixed
rate earning assets, can decline significantly with relatively minor changes in interest rates. If interest rates were to decrease, our yield on our
variable rate loans and on our new loans would decrease, reducing our net interest income. In addition, lower interest rates may reduce our
realized yields on investment securities, which would reduce our net interest income and cause downward pressure on net interest margin in
future periods. A significant reduction in our net interest income could have a material adverse impact on our capital, financial condition and
results of operations.
An unanticipated increase in inflation could cause operating costs related to salaries and benefits, technology, and supplies to increase
at a faster pace than revenues.
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Evaluation of investment securities for other-than-temporary impairment involves subjective determinations and could materially impact
our results of operations and financial condition.
The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties, and is intended to
determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include
changes in general economic conditions, the issuers’ financial condition or future recovery prospects, the effects of changes in interest rates or
credit spreads and the expected recovery period. Estimating future cash flows involves incorporating information received from third-party
sources and making internal assumptions and judgments regarding the future performance of the underlying collateral and assessing the
probability that an adverse change in future cash flows has occurred. The determination of the amount of other-than-temporary impairments is
based upon the Company’s quarterly evaluation and assessment of known and inherent risks associated with the respective asset class. Such
evaluations and assessments are revised as conditions change and new information becomes available.
Additionally, our management considers a wide range of factors about the security issuer and uses its reasonable judgment in
evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in
management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
Impairments to the carrying value of our investment securities may need to be taken in the future, which could have a material adverse effect on
our results of operations and financial condition.
Changes in the policies of monetary authorities and other government action could adversely affect profitability.
The results of operations of the Company are affected by credit policies of monetary authorities, particularly the Board of Governors
of the Federal Reserve System, which we refer to as the Federal Reserve Board. The instruments of monetary policy employed by the Federal
Reserve Board include open market operations in U.S. government securities, changes in the discount rate or the federal funds rate on bank
borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and monetary
policy, we cannot predict the impact of future changes in interest rates, deposit levels, loan demand or the Company’s business and earnings.
Furthermore, the actions of the United States government and other governments in responding to developing situations or implementing new
fiscal or trade policies may result in currency fluctuations, exchange controls, market disruption and other unanticipated economic effects. Such
actions could have an adverse effect on our results of operations and profitability.
We are subject to regulation by various Federal and State entities.
The Company and The First are subject to extensive regulation by various regulatory agencies, including the Federal Reserve Board,
the FDIC, the OCC and the CFPB. See Supervision and Regulation above for more information. New regulations issued by these agencies may
adversely affect our ability to carry on our business activities. The Company is subject to various Federal and state laws and certain changes in
these laws and regulations may adversely affect operations.
The Company and The First are also subject to the accounting rules and regulations of the SEC and the Financial Accounting
Standards Board. Changes in accounting rules could adversely affect the reported financial statements or results of operations of the Company
and may also require extraordinary efforts or additional costs to implement. Any of these laws or regulations may be modified or changed from
time to time, and we cannot be assured that such modifications or changes will not adversely affect the Company.
The full impact of the Tax Cuts and Jobs Act (the "Tax Act") on us and our customers is unknown at present, creating uncertainty and risk
related to our customers’ future demand for credit and our future results.
Increased economic activity expected to result from the decrease in tax rates on businesses generally could spur additional economic
activity that would encourage additional borrowing. At the same time, some customers may elect to use their additional cash flow from lower
taxes to fund their existing levels of activity, decreasing borrowing needs. The elimination of the federal income tax deductibility of business
interest expense for a significant number of our customers effectively increases the cost of borrowing and makes equity or hybrid funding
relatively more attractive. This could have a long-term negative impact on business customer borrowing. We realized an increase in our after-
tax net income available to stockholders in 2018, however there is no guarantee that future years’ results will have the same benefit. Some or all
of this benefit could be lost to the extent that the banks and financial services companies we compete with elect to lower interest rates and fees
and we are forced to respond in order to remain competitive. Additionally, the tax
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benefits could be repealed as a result of future regulatory actions. There is no assurance that presently anticipated benefits of the Tax Act for the
Company will be realized.
We may be required to pay additional insurance premiums to the FDIC, which could negatively impact earnings.
Pursuant to the Dodd-Frank Act, the limit on FDIC coverage has been permanently increased to $250,000, causing the premiums
assessed to The First by the FDIC to increase. Depending upon any future losses that the FDIC insurance fund may suffer, there can be no
assurance that there will not be additional premium increases in order to replenish the fund. The FDIC may need to set a higher base rate
schedule or impose special assessments due to future financial institution failures and updated failure and loss projections. Potentially higher
FDIC assessment rates than those currently projected could have an adverse impact on our results of operations.
We are subject to industry competition which may have an adverse impact upon our success.
The profitability of the Company depends on its ability to compete successfully with other financial services companies. We operate in
a highly competitive financial services environment. Certain competitors are larger and may have more resources than we do. We face
competition in our regional market areas from other commercial banks, savings institutions, credit unions, internet banks, finance companies,
mutual funds, insurance companies, brokerage and investment banking firms, and other financial intermediaries that offer similar services.
Some of the nonbank competitors are not subject to the same extensive regulations that govern the Company or The First and may have greater
flexibility in competing for business.
Many of these competitors also have broader geographic markets and substantially greater resources and lending limits than The First
and offer certain services such as trust banking that The First does not currently provide. In addition, many of these competitors have numerous
branch offices located throughout the extended market areas of The First that may provide these competitors with an advantage in geographic
convenience that The First does not have at present. Currently there are numerous other commercial banks, savings institutions, and credit
unions operating in The First’s primary service area.
We also compete with numerous financial and quasi-financial institutions for deposits and loans, including providers of financial
services over the internet. Recent technology advances and other changes have allowed parties to effectuate financial transactions that
previously required the involvement of banks. For example, consumers can maintain funds in brokerage accounts or mutual funds that would
have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and transferring funds directly
without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee
income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and
access to lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of
these systems could result in failures or disruptions in our customer relationship management, deposit, loan and other systems. While we have
policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there
can be no assurance that we can prevent any such failures, interruptions, cyber security breaches or other security breaches or, if they do occur,
that they will be adequately addressed. We have been, and likely will continue to be, subject to various forms of external security breaches,
which may include computer hacking, acts of vandalism or theft, malware, computer viruses or other malicious codes, phishing, employee error
or malfeasance, catastrophes, unforeseen events or other cyber-attacks. To date, we have seen no material impact on our business or operations
from these attacks or events. Any future significant compromise or breach of our data security, whether external or internal, or misuse of
customer, associate, supplier or Company data could damage our reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our
financial condition and results of operations. In addition, as the regulatory environment related to information security, data collection and use,
and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those
requirements could also result in additional costs.
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Natural disasters, public health emergencies, acts of war or terrorism and other external events could affect our ability to operate.
Our market areas are susceptible to natural disasters such as hurricanes and tornados. Natural disasters can disrupt operations, result in
damage to properties that may be serving as collateral for our loan assets and negatively affect the local economies in which we operate.
Climate change may be increasing the nature, severity and frequency of adverse weather conditions, making the impact from these types of
natural disasters on our customers or us worse. We cannot predict whether or to what extent damage caused by future hurricanes, tornados or
other natural disasters will affect operations or the economies in our market areas, but such weather events could cause a decline in loan
originations, a decline in the value or destruction of properties serving as collateral for our loans and an increase in the risk of delinquencies,
foreclosures or loan losses.
In addition, health emergencies, disease pandemics, acts of war or terrorism and other external events could cause disruption in our
operations. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of
operations.
Our business is susceptible to fraud.
Our business exposes us to fraud risk from our loan and deposit customers, the parties they do business with, as well as from our
employees, contractors and vendors. We rely on financial and other data from new and existing customers which could turn out to be fraudulent
when accepting such customers, executing their financial transactions and making and purchasing loans and other financial assets. In times of
increased economic stress we are at increased risk of fraud losses. We believe we have underwriting and operational controls in place to prevent
or detect such fraud, but we cannot provide assurance that these controls will be effective in detecting fraud or that we will not experience fraud
losses or incur costs or other damage related to such fraud, at levels that adversely affect our financial results or reputation. Our lending
customers may also experience fraud in their businesses which could adversely affect their ability to repay their loans or make use of our
services. Our exposure and the exposure of our customers to fraud may increase our financial risk and reputation risk as it may result in
unexpected loan losses that exceed those that have been provided for in our allowance for loan losses.
We may not be able to attract and retain skilled personnel.
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for the best personnel in most
activities we engage in can be intense, and we may not be able to hire personnel or to retain them. The unexpected loss of services of one or
more of our key personnel could have a material adverse impact on our business because of the difficulty of promptly finding qualified
replacement personnel with comparable skills, knowledge of our market, relationships in the communities we serve, and years of industry
experience. Although we have employment agreements with certain of our executive officers, there is no guarantee that these officers and other
key personnel will remain employed with the Company.
The failure of other financial institutions could adversely affect the Company.
Our ability to engage in routine funding transactions could be adversely affected by the actions and potential failures of other financial
institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty and other relationships. As a result, defaults by, or
even rumors or concerns about, one or more financial institutions or the financial services industry generally could negatively impact market-
wide liquidity and could lead to losses or defaults by the Company or by other institutions.
The novel coronavirus, COVID-19, may adversely affect our business, financial condition, results of operations and our liquidity in the
short term and for the foreseeable future.
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World
Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States
attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we
operate. The Company has taken a number of steps to assess the effects, and mitigate the adverse consequences to its businesses, of the
outbreak; though the magnitude of the impact remains to be seen, the Company's business will likely be adversely impacted by the outbreak of
COVID-19.
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The Company's operations and profitability are impacted by business and economic conditions generally, as well as those in the
primary banking markets in which it operates. The COVID-19 pandemic has resulted in historic job losses and decreases in economic activity.
While the duration and full extent of job losses and magnitude of economic dislocation are not yet known, it is clear that they may impact the
ability of individuals and businesses to make payments, adversely affect the value of underlying collateral and the ability of guarantors to make
payments in the case of default, which may decrease demand for the Company's products and services and otherwise adversely impact the
Company's financial condition, results of operations and business.
The United States and various state and local governments have implemented various programs designed to aid individuals and
businesses, but the impact of, and extent to which, these efforts will be successful cannot be determined at this time. We have participated in
some of these programs, including the Paycheck Protection Program ("PPP"), and likely will continue to participate in and facilitate such
programs. Such programs have been developed and implemented rapidly, often with little immediate guidance from regulatory authorities,
creating uncertainty regarding the rules for participating in and facilitating these programs in a compliant manner. Since the opening of the PPP,
many banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and
claims related to agent fees. We may experience losses as a result of our participation in and facilitation of PPP and similar government
stimulus and relief programs, including losses arising from fraud, litigation or regulatory action.
Federal, state and local governments have mandated or encouraged financial services companies to make accommodations to
borrowers and other customers affected by the COVID-19 pandemic. Legal and regulatory responses to concerns about the COVID-19
pandemic could result in additional regulation or restrictions affecting the conduct of our business in the future. In addition to the potential
affects from negative economic conditions noted above, the Company instituted a program to help COVID-19 impacted customers. This
program includes waiving NSF fees, offering payment deferment and other loan relief, as appropriate, for customers impacted by COVID-19.
The Company's liquidity could be negatively impacted if a significant number of customers apply and are approved for the deferral of
payments. In addition, if these deferrals are not effective in mitigating the effect of COVID-19 on the Company's customers, it may adversely
affect its business and results of operations more substantially over a longer period of time.
COVID-19 presents a significant risk to our loan portfolio. Timely loan repayment and the value of collateral supporting the loans are
affected by the strength of our borrower's business. Concern about the spread of COVID-19 has caused and is likely to continue to cause
business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased
unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and
overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the
effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies,
foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on
economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral
securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the
future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event
of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or
may result in a delay in our taking certain remediation and collection actions, such as foreclosure. Approximately 14% of our loan portfolio also
includes exposure to sectors that are expected to be subject to increased risk from COVID-19, including hotels, restaurants, retail, and direct
energy.
As a result of the adverse impact of COVID-19 on our customers, we have faced and may continue to face a decrease in demand for
certain products, reduced access to our branches by our customers, and disruptions in the operations of its vendors. The pandemic could also
result in recognition of additional credit losses in the Company's loan portfolios and increase its allowance for credit losses as both businesses
and consumers are negatively impacted by the economic downturn. In addition, in future periods the Company will be required to evaluate the
impact of COVID-19 on the carrying value of certain of its assets, including goodwill, and to conduct impairments tests on those assets, which
may result in impairment charges on these assets in future periods that could be material.
Effective March 2020, the Federal Reserve lowered the primary credit rate by 150 basis points to 0.25 percent to mitigate the effects of
the COVID-19 pandemic and to support the liquidity and stability of banking institutions as they serve the increased demand for credit. We
expect a long duration of reduced interest rates to negatively impact our net interest income, margin, cost of borrowing and future profitability
and to have a material adverse effect on our financial results.
In order to protect the health of our customers and employees, and to comply with applicable government restrictions, we have
modified our business practices, including restricting employee travel, directing many employees to work remotely, cancelling in-person
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meetings and implementing our business continuity plans and protocols to the extent necessary. We may take further such actions that we
determine are in the best interest of our employees, customers and communities or as may be required by government order. These precautions
could impact demand for the Company's products and services.
As many of our employees are required to work from home, our internal controls over financial reporting could also be negatively
affected as the remote working environment could necessitate new processes, procedures, and controls. The increased reliance on remote access
to information systems also increases the Company's exposure to potential cybersecurity breaches and could impact the Company's productivity.
Additionally, the Company's business customers are increasingly required to work remotely as well and may not have appropriately secured
remote networks may be more vulnerable to cyber-attacks or phishing schemes that could also affect us. Furthermore, if a large proportion of
the Company's key employees were to contract COVID-19 or be quarantined as a result of the virus, then the Company's operations could be
adversely impacted and its business continuity plans may not prove effective.
Any of these occurrences could have a material adverse effect on the Company's financial condition, results of operations and
business. The extent to which the pandemic impacts the Company's results will depend on future developments, which are highly uncertain and
cannot be predicted, including the duration of the pandemic, government and regulatory responses to the pandemic, new information which may
emerge concerning its severity and the actions necessary to contain it or address its impact, among others. Behavioral changes are not fully
known and may not be temporary. See the section captioned "COVID-19 Impact" in Part II. Financial Information, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations elsewhere in this report for further discussion.
Merger-Related Risks
We may engage in acquisitions of other businesses from time to time, which may adversely impact our results.
From time to time, we may engage in acquisitions of other businesses. Difficulty in integrating an acquired business or company may
cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence, or other anticipated benefits from
any acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of the
Company’s business or the business of the acquired company, or otherwise adversely affect the Company’s ability to maintain relationships
with customers and employees or achieve the anticipated benefits of the acquisition. The acquired companies may also have legal contingencies,
beyond those that we are aware of, that could result in unexpected costs. The Company may need to make additional investment in equipment
and personnel to manage higher asset levels and loan balances as a result of any significant acquisition, which may adversely impact earnings.
We may fail to realize the anticipated cost savings and other financial benefits of recent acquisitions in the timeframe we expect, or at all.
The Company has completed three acquisitions of regional banks since the beginning of 2019, including the acquisition of Southwest
Georgia Financial Corporation (“SWG”) on April 2, 2020, resulting in each bank merging with and into The First. Achieving the anticipated
cost savings and financial benefits of the mergers will depend, in part, on whether we can successfully integrate these businesses with and into
the business of The First. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s
ongoing businesses or inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships
with clients, customers, depositors, and employees or to achieve the anticipated benefits of the mergers. In addition, the integration of certain
operations following the mergers has required and will continue to require the dedication of significant management resources, which may
temporarily distract management’s attention from the day-to-day business of the combined company. Any inability to realize the full extent of,
or any of, the anticipated cost savings and financial benefits of the mergers, as well as any delays encountered in the integration process, could
have an adverse effect on the business and results of operations of the combined company.
We have incurred and may continue to incur significant transaction and merger-related costs in connection with our recent acquisitions.
We have incurred and may continue to incur a number of non-recurring costs associated with our recent acquisitions. These costs and
expenses include fees paid to financial, legal and accounting advisors, severance, retention bonus and other potential employment-related costs,
filing fees, printing expenses and other related charges. There are also a large number of processes, policies,
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procedures, operations, technologies and systems that must be integrated in connection with the integration of these companies’ businesses.
While we have assumed that a certain level of expenses would be incurred in connection with the acquisitions, there are many factors beyond
our control that could affect the total amount or the timing of the integration and implementation expenses.
There may also be additional unanticipated significant costs in connection with the acquisitions that we may not recoup. These costs
and expenses could reduce the realization of efficiencies, strategic benefits and additional income we expect to achieve from the acquisitions.
Although we expect that these benefits will offset the transaction expenses and implementation costs over time, the net benefit may not be
achieved in the near term or at all, which could have a material adverse impact on our financial results.
We may incur impairment to goodwill.
We review our goodwill at least annually. Significant negative industry or economic trends, reduced estimates of future cash flows or
disruptions to our business, could indicate that goodwill might be impaired. Our valuation methodology for assessing impairment requires
management to make judgements and assumptions based on historical experience and to rely on projections of future operating performance.
We operate in a competitive environment and projections of future operating results and cash flows may vary significantly from actual results.
In addition, if our analysis results is an impairment to our goodwill, we would be required to record a non-cash charge to earnings in our
financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on
our results of operations.
Risks Relating to Our Securities
The price of our common stock may fluctuate significantly, which may make it difficult for investors to resell shares of common stock at a
time or price they find attractive.
Our stock price may fluctuate significantly as a result of a variety of factors, many of which are beyond our control. In addition to
those described in “Special Cautionary Notice Regarding Forward-Looking Statements,” these factors include, among others:
●
●
●
●
●
●
●
●
●
●
●
●
actual or anticipated quarterly fluctuations in our operating results, financial condition or asset quality;
changes in financial estimates or the publication of research reports and recommendations by financial analysts or actions taken by
rating agencies with respect to us or other financial institutions;
failure to declare dividends on our common stock from time to time;
failure to meet analysts’ revenue or earnings estimates;
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;
fluctuations in the stock price and operating results of our competitors or other companies that investors deem comparable to us;
future sales of our common stock or other securities;
proposed or final regulatory changes or developments;
anticipated or pending regulatory investigations, proceedings, or litigation that may involve or affect us;
reports in the press or investment community generally relating to our reputation or the financial services industry;
domestic and international economic and political factors unrelated to our performance;
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●
●
●
●
general market conditions and, in particular, developments related to market conditions for the financial services industry;
adverse weather conditions, including floods, tornadoes and hurricanes;
public health emergencies, including disease pandemics; and
geopolitical conditions such as acts or threats of terrorism or military conflicts.
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had
a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their operating performance.
These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results. We expect that the market price of
our common stock will continue to fluctuate and there can be no assurances about the levels of the market prices for our common stock.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns
or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.
We may need to rely on the financial markets to provide needed capital.
Our common stock is listed and traded on the Nasdaq stock market. Although we anticipate that our capital resources will be adequate
for the foreseeable future to meet our capital requirements, at times we may depend on the liquidity of the capital markets to raise additional
capital. Our historical ability to raise capital through the sale of capital stock and debt securities may be affected by economic and market
conditions or regulatory changes that are beyond our control. Adverse changes in our operating performance or financial condition could make
raising additional capital difficult or more expensive or limit our access to customary sources of funding. If the market should fail to operate, or
if conditions in the capital markets are adverse, our efforts to raise capital could require the issuance of securities at times and with maturities,
conditions and rates that are disadvantageous, and which could have a dilutive impact on our current stockholders. Should these risks
materialize, the ability to further expand our operations through organic or acquisitive growth may be limited.
Securities issued by the Company, including the Company’s common stock, are not FDIC insured.
Securities issued by the Company, including the Company’s common stock, are not savings or deposit accounts or other obligations of
any bank and are not insured by the FDIC, the Deposit Insurance Fund, or any other governmental agency or instrumentality, or any private
insurer, and are subject to investment risk, including the possible loss of principal.
Anti-takeover laws and certain agreements and charter provisions may adversely affect the price of our common stock.
Certain provisions of state and federal law and our articles of incorporation may make it more difficult for someone to acquire control
of the Company. Under federal law, subject to certain exemptions, a person, entity, or group must notify the federal banking agencies before
acquiring 10% or more of the outstanding voting stock of a bank holding company, including the Company’s shares. Banking agencies review
the acquisition to determine if it will result in a change of control. The banking agencies have 60 days to act on the notice, and take into account
several factors, including the resources of the acquiror and the antitrust effects of the acquisition. There also are Mississippi statutory provisions
and provisions in our articles of incorporation that may be used to delay or block a takeover attempt. As a result, these statutory provisions and
provisions in our articles of incorporation could result in the Company being less attractive to a potential acquiror.
The trading volume in our common stock is less than that of other larger financial services companies.
Although our common stock is listed for trading on the Nasdaq Global Market, the trading volume for our common stock is low
relative to other larger financial services companies, and you are not assured liquidity with respect to transactions in our common stock. A
public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing
buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of
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investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock,
significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.
You may not receive dividends on our common stock.
Although we have historically declared quarterly cash dividends on our common stock, we are not required to do so and may reduce or
cease to pay common stock dividends in the future. If we reduce or cease to pay common stock dividends, the market price of our common
stock could be adversely affected.
The principal source of funds from which we pay cash dividends are the dividends received from The First. Federal banking laws and
regulations restrict the amount of dividends and loans a bank may make to its parent company. Under certain conditions, dividends paid to us by
The First are subject to approval by the OCC. A national bank may not pay dividends from its capital. All dividends must be paid out of
undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless the bank has transferred to surplus no
less than one-tenth of its net profits of the preceding two consecutive half-year periods (in the case of an annual dividend). The approval of the
OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year
combined with its retained net profits for the preceding two years, less any required transfers to surplus. In addition, under The FDICIA, a bank
may not pay a dividend if, after paying the dividend, the bank would be undercapitalized.
If we fail to pay dividends, capital appreciation, if any, of our common stock may be the sole opportunity for gains on an investment in
our common stock. In addition, in the event The First becomes unable to pay dividends to us, we may not be able to service our debt or pay our
other obligations or pay dividends on our common stock and preferred stock. Accordingly, our inability to receive dividends from The First
could also have a material adverse effect on our business, financial condition and results of operations and the value of your investment in our
common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our Company’s main office, which is the holding company headquarters, is located at 6480 U.S. Highway 98 West in Hattiesburg,
Mississippi. As of year-end, we had 81 full service banking and financial service offices, one motor bank facility and two loan production
offices across Mississippi, Alabama, Florida, Georgia and Louisiana. Management ensures that all properties, whether owned or leased, are
maintained in suitable condition.
The following table sets forth banking office locations that are leased by the Company.
· Bayley’s Corner
· Dauphin Island
· Destin
· Fairhope
· Gulfport Downtown
· Hardy Court
· Killern
· Mary Esther
· Metairie
· Niceville – 700 John Sims Parkway East
· Niceville – 750 John Sims Parkway East
· Ocean Springs
· Panama City Beach
· Pascagoula
· Pensacola Downtown
· Spanish Fort
· Tallahassee – Apalachee Parkway
· The Mortgage Connection - Petal
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ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and/or The First may be named as defendants in various lawsuits arising out of the normal course of
business. At present, the Company is not aware of any legal proceedings that it anticipates may materially adversely affect its business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Shares of our common stock are traded on the Nasdaq global market under the symbol “FBMS.”
There were approximately 3,244 record holders of the Company’s common stock at March 3, 2021 and 21,018,319 shares outstanding.
Subject to the approval of the Board of Directors and applicable regulatory requirements, the Company expects to continue its policy
of paying regular cash dividends on a quarterly basis. A discussion of certain limitations on the ability of the First’s to pay dividends to the
Company and the ability of the Company to pay dividends on its common stock is set forth in “Part 1 – Item 1. Business – Supervision and
Regulation” of this report.
Issuer Purchases of Equity Securities
The following table sets forth shares of our common stock we repurchased during the period ended December 31, 2020.
Period
1st Quarter 2020
2nd Quarter 2020
3rd Quarter 2020
4th Quarter 2020
Total
Total
Number of
Shares
Purchased
Average
Price Paid
Per Share
10,991
2,652
$
—
291,349
304,992 (a) $
34.42
20.10
—
27.41
27.31
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs
—
—
—
289,302
289,302
—
—
—
251,103
(a) Total includes 10,991 shares from 1st quarter, 2,652 shares from 2nd quarter, and 2,047 shares from 4th quarter that were withheld by the
Company in order to satisfy employee tax obligations for vesting of restricted stock awards.
Stock Performance Graph
The following performance graph and related information are neither “soliciting material” nor “filed’ with the SEC, nor shall such
information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each
as amended, except to the extent the Company specifically incorporates it by reference to such filing.
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The performance graph compares the cumulative five-year shareholder return on the Company’s common stock, assuming an
investment of $100 on December 31, 2015 and the reinvestment of dividends thereafter, to that of the common stocks of United States
companies reported in the Nasdaq Composite-Total Returns Index and the common stocks of the Nasdaq OMX Banks Index. The Nasdaq
OMX Banks Index contains securities of Nasdaq-listed companies classified according to the Industry Classification Benchmark as banks.
They include banks providing a broad range of financial services, including retail banking, loans and money transmissions.
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ITEM 6. SELECTED FINANCIAL DATA
The following unaudited consolidated financial data is derived from The First Bancshares’ audited consolidated financial statements as
of and for the five years ended December 31, 2020:
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
($ in thousands, except per share data)
Earnings:
Net interest income
Provision for loan losses
2020
2019
December 31,
2018
2017
2016
$
152,684
25,151
$
121,806
3,738
$
84,887
2,120
$
59,160
506
$
40,289
625
Non-interest income
Non-interest expense
Net income
Net income available to common stockholders
41,876
106,341
52,505
52,505
26,947
88,569
43,745
43,745
20,561
76,311
21,225
21,225
14,363
55,446
10,616
10,616
11,247
36,862
10,119
9,666
Per common share data:
Basic net income per share
Diluted net income per share
Per share data:
Basic net income per share
Diluted net income per share
Selected year end balances:
Total assets
Securities
Loans, net of allowance (1)
Deposits
Stockholders’ equity
$
$
$
$
2.53
2.52
2.53
2.52
$
$
2.57
2.55
2.57
2.55
$
$
1.63
1.62
1.63
1.62
$
$
1.12
1.11
1.12
1.11
1.78
1.57
1.86
1.64
$ 5,152,760
1,049,657
3,109,290
4,215,280
644,815
$ 3,941,863
791,777
2,597,260
3,076,533
543,658
$ 3,003,986
514,928
2,055,195
2,457,459
363,254
$ 1,813,238
372,862
1,221,808
1,470,565
222,468
$ 1,277,367
255,799
865,424
1,039,191
154,527
(1)
- Loans, net of allowance includes mortgage loans held for sale.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following provides a narrative discussion and analysis of The First Bancshares’ financial condition and results of operations for
the years ended December 31, 2020, 2019, and 2018. This discussion should be read in conjunction with the consolidated financial statements
and the supplemental financial data included in Part II. Item 8. Financial Statements and Supplementary Data included elsewhere in this report.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial
statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses.
Accounting policies considered critical to our financial results include the allowance for loan losses and related provision, income taxes,
goodwill and business combinations. 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
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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.
As a result of the Company's immediate response to COVID-19, including loan modifications/payment deferral programs and the PPP,
as well as acquisition and integration of SWG, and increased uncertainty related to certain judgments and estimates, the Company has elected to
temporarily defer or suspend the application of two provisions of U.S. Generally Accepted Accounting Principles (GAAP), as allowed by the
CARES Act, which was signed into law by the President on March 27, 2020. Sections 4013 and 4014 of the CARES Act provide the Company
with temporary relief from troubled debt restructurings and from CECL, which the Company believes prudent to elect in these challenging
times to allow us time to provide consistent, high-quality financial information to our investors and other stakeholders.
COVID-19 IMPACT
In March 2020, the World Health Organization recognized the novel COVID-19 as a pandemic. The spread of COVID-19 has created
a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental,
commercial and consumer activity in the United States and globally. In response to the outbreak, federal and state authorities in the U.S.
introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-
home orders, and strict social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and
individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss
of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply
chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an
expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. These disruptions may result in
a decline in demand for banking products or services, including loans and deposits, which could impact our future financial condition, result of
operations and liquidity. The impacts of the COVID-19 pandemic on the economy and the banking industry are rapidly evolving and the future
effects are unknown at this time. The Company is working to adapt to the changing environment and proactively plan for contingencies. To that
end, the Company has and is taking steps to protect the health of our employees and to work with our customers experiencing difficulties as a
result of this virus. The Company has many non-branch personnel working remotely. We have also been working through loan modifications
and payment deferral programs to assist affected customers, and have increased our allowance for loan and lease losses.
The pandemic is having an adverse impact on certain industries the Company serves, including hotels, restaurants, retail, and direct
energy. As of December 31, 2020, the Company's aggregate outstanding exposure in these segments was $436.9 million, or 14.0% of total
loans. While it is not yet possible to know the full effect that the pandemic will have on the economy, or to what extent this crisis will impact
the Company, all available current industry statistics and internal monitoring of loan repayment ability and payment forgiveness across the
portfolio has been analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration. This analysis of
the possibility of increasing credit losses resulted in the need for a higher than normal provision expense to provide the required allowance
reserve for this situation. Based on management's current assessment of the increased inherent risk in the loan portfolio, the provision for loan
and leases losses as of December 31, 2020 totaled $25.2 million of which $20.5 million was related to the anticipated economic effects of
COVID-19. If economic conditions continue to worsen, further funding to the allowance may be required in future periods.
On March 27, 2020, the CARES Act was signed into law. The CARES Act is a $2 trillion stimulus package that is intended to provide
relief to U.S businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes a $349 billion fund for
the creation of the PPP through the Small Business Administration ("SBA") and Treasury Department. The PPP is intended to provide loans to
small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing
payroll deductions evidencing their compliant use of funds and otherwise complying with the terms of the program. The PPP was amended in
April to include an additional $320 billion in funding. On June 5, 2020, President Trump signed into law the Paycheck Protection Program
Flexibility Act of 2020 ("PPPFA") that amends the CARES Act. The PPPFA extended the covered period in which to use PPP loans, extended
the forgiveness period from eight weeks to a maximum of 24 weeks and increased flexibility for small businesses that have had issues with
rehiring employees and attempting to fill vacant positions due to COVID-19. The program reduced the proportion of proceeds that must be
spent on payroll costs from 75% to 60%. In addition, the PPPFA also extended the payment deferral period for the PPP loans until the date
when the amount of loan forgiveness is determined and remitted to the lender. For PPP recipients who do not apply for forgiveness, the loan
deferral period is 10 months after the applicable forgiveness period ends.
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Section 4013 of the CARES Act, "Temporary Relief from Troubled Debt Restructurings," provides banks the option to temporarily
suspend certain requirements under U.S. GAAP related to troubled debt restructurings ("TDRs") for a limited period of time to account for the
effects of COVID-19. To qualify for Section 4013 of the CARES Act, borrowers must have been current at December 31, 2019. All
modifications are eligible as long as they are executed between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) the 60th day after
the end of the COVID-19 national emergency declared by the President of the U.S. Loans that were current as of December 31, 2019 are not
TDRs. In addition, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to
COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40, "Troubled Debt Restructuring by
Creditors." These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of
repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their
contractual payments at the time a modification program is implemented. We began receiving requests from our borrowers for loan and lease
deferrals in March. Payment modifications include the deferral of principal payments or the deferral of principal and interest payments for terms
generally 90-180 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each
borrower. For the year ended December 31, 2020, we have modified approximately 1,627 loans for $672.3 million, of which 1,390 loans for
$512.6 million were modified to defer monthly principal and interest payments and 237 loans for $159.7 million were modified from monthly
principal and interest payments to interest only. For the year ended December 31, 2020, we have approximately 2,961 PPP loans approved
through the SBA for $239.7 million.
During the first quarter of 2020, the Company elected to delay the adoption of CECL afforded through the CARES Act. The Company
currently anticipates CECL adoption to occur as of January 1, 2021.
Effective January 1, 2021, the Company adopted ASU 2016-13, Financial Instruments – Measurement of Current Expected Credit
Losses on Financial Instruments (“CECL”), which will modify the accounting for the allowance for loan losses from an incurred loss model to
an expected loss model, as discussed more fully under “Part II – Item 8. Financial Statements and Supplementary Data – Note B – Summary of
Significant Accounting Policies” of this report.
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 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. Other intangibles are also assessed for
impairment, both annually and when events or circumstances occur, that make it more likely than not that impairment has occurred. During the
first quarter of 2020, management determined that the deterioration in the general economic conditions as a result of the COVID-19 pandemic
represented a triggering event prompting an evaluation of goodwill impairment. Based on the analyses performed in the first quarter of 2020, we
determined that goodwill was not impaired. Due to the ongoing economic uncertainty present at the end of the second quarter, the Company
prepared a Step 1 goodwill impairment analysis as of June 30, 2020. In testing goodwill for impairment, the Company compared the estimated
fair value of its reporting unit to its carrying amount, including goodwill. The estimated fair value of the reporting unit exceeded its book value.
In December 2020, the Company assessed the qualitative factors and determined that it was not more likely than not that fair value of the
reporting unit was less than the carrying amount. As a result, we do not believe there exists any impairment to goodwill and intangible assets,
long-lived assets, or available-for-sale securities due to the COVID-19 pandemic. In addition, in future periods the Company will be required to
evaluate the impact of COVID-19 on the carrying value of certain of its assets, including goodwill, and to conduct impairments tests on those
assets, which may result in impairment charges on these assets in future periods that could be material.
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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 now incorporated within the city of Hattiesburg. Currently, the First has 84 locations in
Mississippi, Alabama, Florida, Georgia and Louisiana. 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.
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.
Highlights for the year ended December 31, 2020 include:
● On April 2, 2020, the Company closed its acquisition of SWG, parent company of Southwest Georgia Bank, headquartered in
Moultrie, GA. The acquisition added 8 full service offices servicing the areas of Moultrie, Valdosta, Albany and Tifton, Georgia.
Systems integration was completed during the second quarter of 2020.
●
●
●
In year-over-year comparison, net income available to common shareholders increased $8.8 million, or 20.0%, from $43.7 million for
the year ended December 31, 2019 to $52.5 million for the year ended December 31, 2020.
Excluding the bargain purchase and the sale of land gain of $8.3 million, net of tax, and the increased provision expense of $16.5
million, net of tax, net income available to common shareholders increased $17.0 million in year-over-year comparison.
Provision for loan losses totaled $25.2 million for the year ended December 31, 2020 as compared to $3.7 million for the year ended
December 31, 2019, an increase of $21.4 million or 572.8%, primarily resulting from the economic effects of the COVID-19
pandemic.
● On September 25, 2020, the Company announced the completion of a private placement of $65.0 million of its 4.25% fixed to floating
rate subordinated notes due 2030 to certain qualified institutional buyers.
● As of December 31, 2020, total COVID related modifications were $82.0 million, representing 2.6% of the loan portfolio and down
from a peak of $672 million or 21% of the loan portfolio.
● During the first quarter of 2020, the Company elected to delay the adoption of CECL afforded through the CARES Act. The Company
currently anticipates CECL adoption to occur as of January 1, 2021.
At December 31, 2020, the Company had approximately $5.153 billion in total assets, an increase of $1.211 billion compared to
$3.942 billion at December 31, 2019. Loans, including mortgage loans held for sale and net of the allowance for loan losses, increased to
$3.109 billion at December 31, 2020 from $2.597 billion at December 31, 2019. Deposits increased to $4.215 billion at December 31, 2020
from $3.077 billion at December 31, 2019. Stockholders’ equity increased to $644.8 million at December 31, 2020 from $543.7 million at
December 31, 2019. The addition of Southwest Georgia Bank during 2020 contributed, at acquisition, $543.9 million, $392.3 million and
$476.1 million in assets, loans, and deposits, respectively.
The First (Bank only) reported net income of $60.0 million, $51.1 million and $26.9 million for the years ended December 31, 2020,
2019, and 2018, respectively. For the years ended December 31, 2020, 2019 and 2018, the Company reported consolidated net income
available to common stockholders of $52.5 million, $43.7 million and $21.2 million, respectively. The following discussion
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should be read in conjunction with the “Selected Consolidated Financial Data” and the Company's consolidated financial statements and the
Notes thereto and the other financial data included elsewhere.
The following is a summary of the results of operations for The First (Bank only) the years ended December 31, 2020, 2019, and 2018
Results of Operations
($ in thousands):
Interest income
Interest expense
Net interest income
Provision for loan losses
2020
$ 179,328
21,071
158,257
2019
$ 148,503
21,805
126,698
$
2018
99,967
11,637
88,330
25,151
3,738
2,120
Net interest income after provision for loan losses
133,106
122,960
86,210
Non-interest income
Non-interest expense
Income tax expense
Net income
40,984
100,966
25,885
82,750
18,697
70,724
13,108
15,085
7,288
$
60,016
$
51,010
$
26,895
The following reconciles the above table to the amounts reflected in the consolidated financial statements of the Company at
December 31, 2020, 2019, and 2018 ($ in thousands):
Net interest income:
Net interest income of The First
Interest expense
Net income available to common shareholders:
Net income of The First
Net loss of the Company
Consolidated Net Income
2020
2019
2018
$
$
$
$
158,257
(5,573)
152,684
60,016
(7,511)
52,505
$
$
$
$
126,699
(4,893)
121,806
51,103
(7,358)
43,745
$
$
$
$
88,330
(3,443)
84,887
26,895
(5,670)
21,225
The Company reported consolidated net income available to common stockholders of $52.5 million for the year ended December 31,
2020, compared to a consolidated net income of $43.7 million for the year ended December 31, 2019. Excluding the bargain purchase and sale
of land gains of $8.3 million, net of tax, and the increased provision expense of $16.5 million, net of tax, net income available to common
shareholders increased $17.0 million in year-over-year comparison. Net interest income increased $30.9 million in year-over-year comparison,
primarily due to interest income earned on a higher volume of loans and securities. Non-interest income increased $6.5 million in year-over-
year comparison excluding the awards and gains mentioned above. Mortgage income increased $4.5 million and interchange fee income
increased $1.4 million in the year-over-year comparison. Non-interest expense was $106.3 million at December 31, 2020, an increase of $17.8
million in year-over-year comparison, of which $12.3 million is related to the operations of First Florida Bank (“FFB”) and SWG.
The Company reported consolidated net income available to common stockholders of $43.7 million for the year ended December 31,
2019, compared to a consolidated net income of $21.2 million for the year ended December 31, 2018. Operating net earnings increased $18.0
million or 59.9% from $30.0 million for the twelve months ended December 31, 2018 to $48.0 million for the same period ended December 31,
2019. Operating net earnings excludes merger-related costs of $4.9 million, net of tax, and financial
35
Table of Contents
assistance grants of $697 thousand, net of tax, for the year ended December 31, 2019, and merger-related costs of $10.6 million, net of tax,
financial assistance grants of $1.6 million, net of tax, and gain on sale of securities of $256 thousand, net of tax, for the year ended December
31, 2018. Net interest income increased $36.9 million in year-over-year comparison, primarily due to interest income earned on a higher
volume of loans and securities. Non-interest income was $26.9 million at December 31, 2019, an increase of $6.4 million in year-over-year
comparison consisting of increases in service charges on deposit accounts, interchange fee income, mortgage income, as well as other charges
and fees. Non-interest expense was $88.6 million at December 31, 2019, an increase of $12.3 million in year-over-year comparison, of which
$4.3 million is related to the operations of Southwest Banc Shares (“Southwest”), Sunshine Financial, Inc. (“Sunshine”), Farmers and
Merchants Bank (“FMB”), Florida Parish Bank (“FPB”) and FFB. The remaining increase of $8.0 million in expenses are related to increases
in salaries and employee benefits of $3.7 million and increases in other expenses of $4.3 million.
See Note C – Business Combinations in the accompanying notes to the consolidated financial statements included elsewhere in this
report for more information on how the Company accounts for business combinations.
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 $152.7 million for the year ended December 31, 2020, as compared to $121.8
million for the year ended December 31, 2019. This increase was the direct result of higher volume of loans and securities during 2020 as
compared to 2019. Average interest-bearing liabilities for the year 2020 were $3.902 billion compared to $2.345 billion for the year 2019. At
December 31, 2020, the fully tax equivalent (“FTE”) net interest spread, which is the difference between the yield on earning assets and the
rates paid on interest-bearing liabilities, was 3.59% compared to 3.75% at December 31, 2019. Net interest margin, which is net interest income
divided by average earning assets, was 3.64% for the year 2020 compared to 4.02% for the year 2019. At December 31, 2020, the FTE average
yield on all earning assets decreased 62 basis points to 4.27% compared to 4.89% at December 31, 2019. Rates paid on average interest-bearing
liabilities decreased to 0.68% for the year 2020 compared to 1.14% for the year 2019. 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 71.0% of average
earnings assets for the year 2020 compared to 76.5% for the year 2019.
Consolidated net interest income was approximately $121.8 million for the year ended December 31, 2019, as compared to $84.9
million for the year ended December 31, 2018. This increase was the direct result of higher volume of loans and securities during 2019 as
compared to 2018. Average interest-bearing liabilities for the year 2019 were $2.345 billion compared to $1.712 billion for the year 2018. At
December 31, 2019, the FTE net interest spread, which is the difference between the yield on earning assets and the rates paid on interest-
bearing liabilities, was 3.75% compared to 3.75% at December 31, 2018. Net interest margin, which is net interest income divided by average
earning assets, was 4.02% for the year 2019 compared to 3.94% for the year 2018. At December 31, 2019, the FTE average yield on all earning
assets increased 26 basis points to 4.89% compared to 4.63% at December 31, 2018. Rates paid on average interest-bearing liabilities increased
to 1.14% for the year 2019 compared to 0.88% for the year 2018. Interest earned on assets and interest accrued on liabilities is significantly
influenced by market factors, specifically interest rates as set by Federal agencies. Average loans comprised 76.5% of average earnings assets
for the year 2019 compared to 77.0% the year 2018.
Average Balances, Income and Expenses, and Rates. The following tables depict, for the periods indicated, certain information related
to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense
by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
36
Table of Contents
($ in thousands)
Assets
Earning Assets
Loans (1)(2)
Securities (4)
Federal funds sold and interest bearing
deposits with other banks (3)
Total earning assets
Other
Total assets
Liabilities
Interest-bearing liabilities
Demand deposits (1)
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Average Balances, Income and Expenses, and Rates
2020
Years Ended December 31,
2019
2018
Average Income/ Yield/ Average Income/ Yield/ Average Income/
Expenses
Expenses
Expenses
Balance
Balance
Balance
Rate
Rate
Yield/
Rate
$ 3,020,280
917,858
$ 157,564
23,747
5.22 % $ 2,341,202
635,967
2.59 %
$ 128,857
20,616
5.50 % $ 1,678,746
442,722
3.24 %
$ 86,822
13,521
5.17 %
3.05 %
317,848
4,255,986
523,412
$ 4,779,398
$ 3,901,797
260,435
10,056
607,110
$ 4,779,398
378
181,689
84,171
0.12 %
4.27 % 3,061,340
401,614
$ 3,462,954
264
149,737
58,900
0.31 %
4.89 % 2,180,368
248,289
$ 2,428,657
631
100,974
1.07 %
4.63 %
$ 26,664
$ 26,723
0.68 % $ 2,344,755
327,805
331,693
458,701
$ 3,462,954
1.14 % $ 1,712,255
254,118
182,525
279,759
$ 2,428,657
$ 15,091
0.88 %
Net interest spread
Net yield on interest-earning assets
$ 155,025
3.59 %
3.64 %
$ 123,014
3.75 %
4.02 %
$ 85,883
3.75 %
3.94 %
(1) All loans and deposits were made to borrowers or received from depositors in the United States. Includes nonaccrual loans of $33,774, $38,835, and $25,073 for the
years ended December 31, 2020, 2019, and 2018, respectively. Loans include held for sale loans.
(2)
Includes loan fees of $9,899, $4,322, and $3,603 for the years ended December 31, 2020, 2019, and 2018, respectively.
(3)
Includes Excess Balance Account-Mississippi National Banker’s Bank.
(4) Fully tax equivalent yield assuming a 25.3% tax rate.
Analysis of Changes in Net Interest Income. The following table presents the consolidated dollar amount of changes in interest income
and interest expense attributable to changes in volume and to changes in rate. The combined effect in both volume and rate which cannot be
separately identified has been allocated proportionately to the change due to volume and due to rate.
($ in thousands)
Earning Assets
Loans
Securities (1)
Analysis of Changes in Consolidated Net Interest Income
Year Ended December 31,
2020 versus 2019
Increase (decrease) due to
Rate
Volume
Net
Year Ended December 31,
2019 versus 2018
Increase (decrease) due to
Rate
Volume
Net
$
37,283
9,122
$
(8,576)
(5,991)
$
28,707
3,131
$
34,294
5,894
$
7,737
1,208
$
42,031
7,102
Federal funds sold and interest bearing deposits
with other banks
Total interest income
Interest-Bearing Liabilities
Interest-bearing transaction accounts
Money market accounts and savings
Time deposits
Borrowed funds
Total interest expense
Net interest income
721
47,126
(1,202)
1,992
1,487
1,443
3,720
43,406
(607)
(15,174)
1,835
(1,901)
(2,345)
(1,368)
(3,779)
$ (11,395)
$
114
31,952
633
91
(858)
75
(59)
32,011
$
270
40,458
1,489
424
1,953
2,299
6,165
34,303
$
(640)
8,305
(370)
48,763
1,821
1,828
1,579
239
5,467
2,828
3,310
2,252
3,532
2,538
11,632
37,131
$
$
37
Table of Contents
(1) Fully tax equivalent yield assuming a 25.3% tax rate.
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.
The following tables illustrate the Company’s consolidated interest rate sensitivity and consolidated cumulative gap position by
maturity at December 31, 2020, 2019, and 2018 ($ in thousands):
December 31, 2020
Within
Three
Months
After Three
Through
Twelve
Months
Within
One
Year
Greater Than
One Year or
Nonsensitive
Total
$
$
$
Assets
Earning Assets:
Loans
Securities (2)
Funds sold and other
Total earning assets
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)
Money market accounts
Savings deposits (1)
Time deposits
Total interest-bearing deposits
Borrowed funds (3)
Total interest-bearing liabilities
Interest-sensitivity gap per period
Cumulative gap at December 31, 2020
Ratio of cumulative gap to total earning assets at
December 31, 2020
220,572
9,211
$
—
$
229,783
222,176
24,012
424,870
671,058
$
$
442,748
33,223
424,870
900,841
$ 2,702,362
1,016,434
$ 3,718,796
—
$ 3,145,110
1,049,657
424,870
$ 4,619,637
— $
2,003,410
—
116,796
2,120,206
110,182
2,230,388
$ (2,000,605)
$
664,626
$
—
395,116
303,571
1,363,313
554
1,363,867
(692,809)
664,626
2,003,410
395,116
420,367
3,483,519
110,736
3,594,255
$ (2,693,414)
$
— $
—
—
160,682
160,682
3,911
164,593
$ 3,554,203
664,626
2,003,410
395,116
581,049
3,644,201
114,647
3,758,848
860,789
860,789
$
$
$ (2,000,605)
$ (2,693,414)
$ (2,693,414)
$
860,789
(43.3)%
(58.3)%
(58.3)%
18.6 %
—
38
Table of Contents
Assets
Earning Assets:
Loans
Securities (2)
Funds sold and other
Total earning assets
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)
Money market accounts
Savings deposits (1)
Time deposits
Total interest-bearing deposits
Borrowed funds (3)
Total interest-bearing liabilities
Interest-sensitivity gap per period
Cumulative gap at December 31, 2019
Ratio of cumulative gap to total earning assets at
December 31, 2019
Assets
Earning Assets:
Loans
Securities (2)
Funds sold and other
Total earning assets
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)
Money market accounts
Savings deposits (1)
Time deposits
Total interest-bearing deposits
Borrowed funds (3)
Total interest-bearing liabilities
Interest-sensitivity gap per period
Cumulative gap at December 31, 2018
Ratio of cumulative gap to total earning assets at
December 31, 2018
December 31, 2019
Within
Three
Months
After Three
Through
Twelve
Months
Within
One
Year
Greater Than
One Year or
Nonsensitive
Total
$ 179,998
9,125
$
—
$
$ 189,123
272,741
25,282
79,128
377,151
$
$
452,739
34,407
79,128
566,274
$ 2,158,429
757,370
$ 2,915,799
—
$ 2,611,168
791,777
79,128
$ 3,482,073
$
— $
462,810
941,597
$
—
—
123,978
586,788
207,965
794,753
$ (605,630)
$ (605,630)
287,200
378,170
1,606,967
1,000
1,607,967
$ (1,230,816)
$ (1,836,466)
941,597
462,810
287,200
502,148
2,193,755
208,965
2,402,720
$ (1,836,446)
$ (1,836,446)
$
— $
—
—
159,570
159,570
5,354
164,924
$ 2,750,875
914,429
$
$
$
941,517
462,810
287,200
661,718
2,353,325
214,319
2,567,644
914,429
914,429
(17.4)%
(52.7)%
(52.7)%
26.3 %
December 31, 2018
Within
Three
Months
After Three
Through
Twelve
Months
Within
One
Year
Greater Than
One Year or
Nonsensitive
Total
$ 345,703
18,627
$
—
$
$ 364,330
175,228
19,616
87,751
282,595
$
$
520,931
38,243
87,751
646,925
$ 1,544,329
476,685
$ 2,021,014
—
$ 2,065,260
514,928
87,751
$ 2,667,939
— $
$
312,552
835,433
$
—
—
69,655
382,207
75,000
457,207
$ (92,877)
$ (92,877)
253,724
228,930
1,318,087
10,500
1,328,587
$ (1,045,992)
$ (1,138,869)
835,433
312,552
253,724
298,585
1,700,294
85,500
1,785,794
$ (1,138,869)
$ (1,138,869)
$
— $
—
—
187,017
187,017
—
187,017
$ 1,833,997
695,128
$
$
$
835,433
312,552
253,724
485,602
1,887,311
85,500
1,972,811
695,128
695,128
(3.5)%
(42.7)%
(42.7)%
26.1 %
(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 fairly stable. Therefore, these deposits are included in the
39
Table of Contents
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 $144,592, $80,678, $80,521 for the years ended December 31, 2020, 2019, and 2018,
respectively.
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 asset sensitive within the one-year time frame based
on effective GAP which uses behavioral assumptions that model the rate sensitivity of non-maturity deposits by looking at the deposits’
behavior rather than their contractual ability to re-price. The cash flows used in the analysis are the projected dollars of assets and liabilities that
“reprice” (including maturities, repricing, likely calls, prepayments, etc.). 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.
The following tables depict, for the periods indicated, certain information related to interest rate sensitivity in net interest income and
market value of equity:
December 31, 2020
Up 400 bps
Up 300 bps
Up 200 bps
Up 100 bps
Down 100 bps
Down 200 bps
December 31, 2019
Up 400 bps
Up 300 bps
Up 200 bps
Up 100 bps
Down 100 bps
Down 200 bps
Change in Interest
Rates
Change in Interest
Rates
Net Interest Income at Risk
% Change
from Base
Bank
Policy Limit
Market Value of Equity
Bank
Policy Limit
% Change
from Base
14.7 %
12.4 %
9.2 %
5.1 %
(2.1)%
(3.0)%
(20.0)%
(15.0)%
(10.0)%
(5.0)%
(5.0)%
(10.0)%
36.5 %
31.9 %
24.6 %
14.1 %
(19.7)%
(31.2)%
(40.0)%
(30.0)%
(20.0)%
(10.0)%
(10.0)%
(20.0)%
Net Interest Income at Risk
Market Value of Equity
% Change
from Base
Policy Limit
% Change
from Base
Policy Limit
0.7 %
2.1 %
2.3 %
1.6 %
(3.0)%
(5.1)%
(20.0)%
(15.0)%
(10.0)%
(5.0)%
(5.0)%
(10.0)%
21.3 %
19.9 %
16.3 %
9.8 %
(6.4)%
0.1 %
(40.0)%
(30.0)%
(20.0)%
(10.0)%
(10.0)%
(20.0)%
40
Table of Contents
December 31, 2018
Up 400 bps
Up 300 bps
Up 200 bps
Up 100 bps
Down 100 bps
Down 200 bps
Change in Interest
Rates
Net Interest Income at Risk
Market Value of Equity
% Change
from Base
Policy Limit
% Change
from Base
Policy Limit
3.1 %
4.2 %
3.9 %
2.5 %
(4.8)%
(9.6)%
(20.0)%
(15.0)%
(10.0)%
(5.0)%
(5.0)%
(10.0)%
19.0 %
17.9 %
14.6 %
8.8 %
(13.7)%
(20.8)%
(40.0)%
(30.0)%
(20.0)%
(10.0)%
(10.0)%
(20.0)%
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 for loan losses is based upon a number of
assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. 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.
The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the
FASB regarding the allowance. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors.
The Company uses a loan loss history based upon the prior eleven years to determine the appropriate allowance. Historical loss factors are
calculated and allocated to 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 and problem loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge
of the loan portfolio. These factors require judgment on the part of management and are based upon state and national economic reports
received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of
Labor Statistics, meetings with the Company’s loan officers and loan committees, and data and guidance received or obtained from the
Company’s regulatory authorities.
The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. Impaired
loans are determined based upon ongoing review by senior management in the areas of Credit Administration and Portfolio Management.
Impaired loans are loans for which the Bank does not expect to receive all contractually obligated repayment 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 ALLL Committee and Audit Committee of the Board for review and approval on a
quarterly basis.
Our allowance for loan loss model’s quantitative methodology is focused on establishing a loss probability using the Bank’s historical
default and net charge off data. The quantitative portion of the loss estimation model also includes specific impairments individually reserved
for credits that the Bank determines the ultimate repayment source will be liquidation of the subject collateral. The other qualitative component
used in calculating a loss estimate takes into account other factors such as local and national economic factors, portfolio composition and
collateral concentrations, asset quality, lending personnel knowledge and experience, as well as loan policy guidelines and their effect on
underwriting standards. These trends are measured by analyzing the following variables:
41
Table of Contents
Local Trends:
Local Unemployment Rate
Insurance Issues (Windpool Areas)
Bankruptcy Rates (Increasing/Declining)
Local Commercial R/E Vacancy Rates
Established Market/New Market
Hurricane Threat
National Trends:
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:
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:
Delinquency Trends
Nonaccrual Trends
Net Charge Offs
Loan Volume Trends
Non-Performing Assets
Underwriting Standards/Lending Policies
Experience/Depth of Bank Lending
Management
The bank wide information and metrics, along with the local and national economic trends listed above, are all measured quarterly. As
of December 31, 2020, the economy showed continued signs of a gradual return to pre-pandemic performance levels through the 4th quarter.
The rollout of a COVID vaccine helped in this progress, but the uncertainty in the upcoming change of the presidential administration and
possible new waves of COVID infections continued to slow down any chance for a total economic recovery. This warranted the overall
Qualitative and Environmental (“Q&E”) adjustment factor to remain higher than normal, but it was a decrease in the adjustment from the three
previous quarters.
At December 31, 2020, the consolidated allowance for loan losses was approximately $35.8 million, or 1.16% of outstanding loans
excluding mortgage loans held for sale. At December 31, 2019, the allowance for loan losses amounted to approximately $13.9 million, which
was 0.53% of outstanding loans excluding mortgage loans held for sale. The provision for loan losses is a charge to earnings to maintain the
allowance for loan losses at a level consistent with management’s assessment of the collectability of the loan portfolio in light of current
economic conditions and market trends. The Company maintains the allowance at a level that management believes is adequate to absorb
probable incurred losses inherent in the loan portfolio. Specifically, identifiable and quantifiable losses
42
Table of Contents
are immediately charged-off against the allowance; recoveries are generally recorded only when sufficient cash payments are received
subsequent to the charge off. The Company’s provision for loan losses was $25.2 million for the year ended December 31, 2020, $3.7 million
for the year ended December 31, 2019, and $2.1 million for the year ended December 31, 2018. The increase of $21.4 million in 2020 was
primarily related to the economic effects of the COVID-19 pandemic. The $1.6 million increase in 2019 was primarily related to our internal
assessment of the credit quality of the loan portfolio which included additional impairments of certain loans. The overall allowance for loan
losses results from consistent application of our loan loss reserve methodology as described above. At December 31, 2020, management
believes the allowance is appropriate and has been derived from consistent application of our methodology. Should any of the factors
considered by management in evaluating the appropriateness of the allowance for loan losses change, management’s estimate of inherent losses
in the portfolio could also change, which would affect the level of future provisions for loan losses.
During the first quarter of 2020, the World Health Organization declared the spread of the COVID-19 virus to be a global pandemic.
That has caused significant disruptions to the U.S. economy across all industries. With the number of diagnosed cases of the virus rising
throughout the year, it is still impossible to foresee how long the pandemic will last and what effect it will have on the economy, or to what
extent this crisis will impact the Company. All available industry statistics and trends, as well as internal tracking of loan repayment ability and
payment forgiveness across the portfolio is being analyzed in an attempt to understand the correlation with asset quality and degree of possible
deterioration. This ongoing analysis of the possibility of increasing credit losses resulted in the need for a provision expense that will continue
to provide an adequate allowance reserve for this situation. If economic conditions continue to worsen, further funding to the allowance may
be required in future periods.
During the first quarter of 2020, the Company elected to delay the adoption of CECL afforded through the CARES Act. The Company
currently anticipates CECL adoption to occur as of January 1, 2021.
Non-Performing Assets
A loan is reviewed for impairment when, based on all available information and events, it displays characteristics causing management
to determine that the collection of all principal, interest, and other related fees due according to the contractual terms of the loan agreement is
not probable. Also at this time, the accrual of interest is discontinued. Along with these loans in nonaccrual status, all loans determined by
management to be labelled as “troubled debt restructure” based on regulatory guidance are reviewed for impairment. Loans that are identified as
criticized or classified based on unsatisfactory repayment performance, or other evidence of deteriorating credit quality, are not reviewed until
being placed in nonaccrual status or when considered to be troubled debt restructure.
Once these loans are identified, they are analyzed to determine whether the ultimate repayment source will be liquidation of collateral
or some future source of cash flow. If the only source of repayment will come from the liquidation of collateral, impairment worksheets are
prepared to document the amount of impairment that exists. This method takes into account collateral exposure, as well as all expected expenses
related to the disposal of the collateral. Specific allowances for these loans are then accounted for on a per loan basis.
The following tables illustrate the Company’s past due and nonaccrual loans, including purchased credit impaired (“PCI”) loans, at
December 31, 2020, 2019 and 2018 ($ in thousands):
Past Due 30 to
89 Days
December 31, 2020
Past Due 90
Days or more and
still accruing
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
$
$
1,007
2,116
5,389
419
8,931
$
$
43
$
244
1,553
895
—
$
2,692
Nonaccrual
2,418
22,887
8,434
35
33,774
Table of Contents
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Past Due 30 to
89 Days
December 31, 2019
Past Due 90
Days or more and
still accruing
515
2,447
4,569
226
7,757
$
$
$
61
1,046
1,608
—
$
2,715
Past Due 30 to
89 Days
December 31, 2018
Past Due 90
Dys or more and
still accruing
1,650
5,137
5,529
506
12,822
$
$
— $
570
650
45
1,265
$
$
$
$
$
Nonaccrual
2,234
26,286
10,050
265
38,835
Nonaccrual
1,208
14,592
9,192
81
25,073
Total nonaccrual loans at December 31, 2020, were $33.8 million, a decrease of $5.0 million compared to $38.8 million at December
31, 2019. Total nonaccrual loans at December 31, 2019 increased $13.7 million from $25.1 million at December 31, 2018. The majority of the
increase was related to two legacy relationships that were moved to nonaccrual status during 2019. Management believes these relationships
were adequately reserved at December 31, 2020. Restructured loans not reported as past due or nonaccrual at December 31, 2020 totaled $6.2
million. See Note E – Loans in the accompanying notes to the consolidated financial statements included elsewhere in this report for a
description of restructured loans.
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 and does not include the category of special mention. 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, 2020, 2019 and 2018, The First had potential problem loans of $161.7 million,
$67.9 million and $55.2 million, respectively. The increase of $93.8 million during 2020 was largely attributable to loans that were modified
interest only or deferred monthly principal and interest related to the COVID-19 pandemic and certain loans acquired in the SWG transaction
that were identified as classified or criticized based on repayment performance or credit quality.
Summary of Loan Loss Experience
Consolidated Allowance For Loan Losses
($in thousands)
Average loans outstanding, excluding mortgage loans held for sale
Loans outstanding at year end
2020
$ 3,020,280
$ 3,145,110
2019
$ 2,341,202
$ 2,611,168
Years Ended December 31,
2018
$ 1,678,746
$ 2,065,260
2017
$ 1,168,882
$ 1,230,096
Total nonaccrual loans
Beginning balance of allowance
Prior period reclassification – Mortgage Reserve Funding
Beginning balance of allowance restated
Loans charged-off
Total recoveries
Net loans (charged-off) recoveries
Provision for loan losses
Balance at year end
Net charge-offs (recoveries) to average loans
Allowance as percent of total loans
Nonaccrual loans as a percentage of total loans
Allowance as a multiple of nonaccrual loans
$
$
$
33,774
$
38,835
$
25,073
13,908
$
—
10,065
$
—
13,908
(4,479)
1,240
(3,239)
25,151
35,820
$
10,065
(664)
769
105
3,738
13,908
$
8,288
(181)
8,107
(581)
419
(162)
2,120
10,065
$
$
$
0.11 %
1.14 %
1.07 %
1.06 X
(0.004)%
0.53 %
1.47 %
0.36 X
0.01 %
0.49 %
1.06 %
0.46 X
44
$
$
$
5,673
7,510
$
—
7,510
(405)
677
272
506
8,288
$
(0.02)%
0.67 %
0.46 %
1.5 X
2016
820,881
872,934
3,264
6,747
—
6,747
(771)
909
138
625
7,510
(0.02)%
0.86 %
0.37 %
2.3 X
Table of Contents
At December 31, 2020, the components of the allowance for loan losses consisted of the following ($ in thousands):
Allocated:
Impaired loans
Loans collectively evaluated
Allowance
$
$
5,669
30,151
35,820
Loan collectively evaluated are those loans or pools of loans assigned a grade by internal loan review.
The following table represents the activity of the allowance for loan losses for the years 2020, 2019, 2018, 2017, and 2016 ($ in
thousands):
Analysis of the Allowance for Loan Losses
($ in thousands)
Balance at beginning of period
Prior period reclassification - Mortgage Reserve Funding
Beginning balance of allowance restated
Loans charged-off:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Recoveries on loans previously charged-off:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Net (Charge-offs) Recoveries
Provision for Loan Losses
Balance at end of period
$
2020
13,908
$
—
13,908
2019
10,065
$
—
10,065
2018
2017
2016
$
8,288
(181)
8,107
7,510
$
—
7,510
6,747
—
6,747
(1,496)
(2,256)
(280)
(447)
(4,479)
169
418
251
402
1,240
(3,239)
25,151
35,820
$
(141)
(54)
(163)
(306)
(664)
85
142
240
302
769
105
3,738
13,908
$
(265)
(222)
(7)
(87)
(581)
44
44
183
148
419
(162)
2,120
10,065
$
$
(62)
(111)
(151)
(81)
(405)
50
294
228
105
677
272
506
8,288
$
(71)
(274)
(353)
(73)
(771)
84
236
519
70
909
138
625
7,510
The following tables represents how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the
category to total loans, gross of purchase discounts at December 31, 2020, 2019 and 2018 ($ in thousands):
Allocation of the Allowance for Loan Losses
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Installment and other
Total
45
December 31, 2020
% of loans
in each
category
to total loans
18.4 %
63.0 %
17.3 %
1.3 %
100 %
Amount
6,214
24,319
4,736
551
35,820
$
$
Table of Contents
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Installment and other
Unallocated
Total
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Installment and other
Unallocated
Total
Non-interest Income
December 31, 2019
% of loans
in each
category
to total loans
13.1 %
65.5 %
19.8 %
1.6 %
—
100 %
Amount
3,043
8,836
1,694
296
39
13,908
December 31, 2018
% of loans
in each
category
to total loans
14.8 %
64.6 %
18.9 %
1.7 %
—
100 %
Amount
2,060
6,258
1,743
201
(197)
10,065
$
$
$
$
The Company’s primary sources of non-interest income are mortgage banking operations and service charges on deposit accounts.
Other sources of non-interest income include bankcard fees, commissions on check sales, safe deposit box rent, wire transfer fees, official check
fees and bank owned life insurance income.
Non-interest income was $41.9 million at December 31, 2020, an increase of $14.9 million or 55.4% compared to December 31, 2019.
The increase includes an $8.3 million, net of tax, bargain purchase gain and sale of land, an increase in mortgage income of $4.5 million and an
increase in interchange fee income of $1.4 million. Non-interest income was $26.9 million at December 31, 2019, an increase of $6.4 million or
31.1% compared to December 31, 2018, primarily consisting of increases in service charges on deposit accounts of $2.0 million, interchange fee
income of $2.8 million on the increased deposit base related to the acquisitions, as well as mortgage income and other charges and fees. Other
service charges increased by $308 thousand or 29.4% for the year ended 2020 to $1.4 million from $1.0 million for the year ended December
31, 2019 and other service charges increased $51 thousand or 5.1% for the year ended December 31, 2019, compared to $996 thousand for the
year ended December 31, 2018.
Non-interest Expense
Non-interest expense was $106.3 million at December 31, 2020, an increase of $17.8 million in year-over-year comparison, of which
$12.3 million is related to the operations of FFB and SWG. The remaining increase of $5.5 million in expenses are related to increases in
salaries and employee benefits of $6.3 million and increases in occupancy of $386 thousand. Other expenses decreased $1.2 million in the year-
over-year comparison.
Non-interest expense was $88.6 million at December 31, 2019, an increase of $12.3 million in year-over-year comparison, of which
$4.3 million is related to the operations of Southwest, Sunshine, FMB, FPB and FFB. The remaining increase of $8.0 million in expenses are
related to increases in salaries and employee benefits of $3.7 million and increases in other expenses of $4.3 million.
46
Table of Contents
The following table sets forth the primary components of non-interest expense for the periods indicated ($ in thousands):
Non-interest Expense
Salaries and employee benefits
Occupancy
Furniture and equipment
Supplies and printing
Professional and consulting fees
Marketing and public relations
FDIC and OCC assessments
ATM expense
Bank communications
Data processing
Acquisition expense
Other
Total
$
$
$
$
Years ended December 31,
2019
47,016
8,775
2,021
798
3,558
859
632
2,794
1,779
898
6,275
13,164
88,569
2020
61,230
11,282
2,551
925
3,897
512
1,351
3,042
2,028
1,137
3,315
15,071
106,341
$
$
2018
36,893
6,575
1,551
553
1,926
508
1,382
1,811
1,664
1,051
13,810
8,587
76,311
Amounts previously reported have been adjusted to reflect the breakout of acquisition expenses. Total non-interest expense did not
change.
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 income/deductible amounts resulting from differences in the
financial statement and tax bases of assets and liabilities. Income tax expense was $10.6 million at December 31, 2020, $12.7 million at
December 31, 2019 and $5.8 million at December 31, 2018. The Company’s effective income tax rate was 16.8%, 22.5% and 21.4% for the
years ended December 31, 2020, 2019 and 2018, respectively. The effective tax rate differs each year primarily due to our investments in bank-
qualified municipal securities, bank-owed life insurance, and certain merger related expenses. The reduction in the Company’s effective rate for
2020 compared to 2019 was primarily due to the $7.8 million, non-taxable, bargain purchase gain related to the SWG acquisition and the
CARES Act that was signed into law on March 27, 2020. The CARES Act includes several significant provisions for corporations including
increasing the amount of deductible interest under section 163(j), allowing companies to carryback certain net operating losses, and increasing
the amount of net operating loss that corporations can use to offset income. Income taxes are discussed more fully under Note K – Income Tax
of this report.
Earning Assets
Analysis of Financial Condition
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, 2020, 2019 and 2018, respectively, average loans accounted for
71.0%, 76.5% and 77.0% 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 , excluding mortgage loans held for
sale, averaged $3.020 billion during 2020 and $2.341 billion during 2019, as compared to $1.679 billion during 2018.
47
Table of Contents
The following table shows the composition of the loan portfolio by category ($ in thousands):
Composition of Loan Portfolio
2020
December 31,
2019
2018
Mortgage loans held for sale
Commercial, financial and agriculture (1)
$
Commercial real estate
Consumer real estate
Consumer installment
Lease financing receivable
Obligation of states and subdivisions
Total loans
Allowance for loan losses
Net loans
(1) Loan amount as of December 31, 2020 includes $239.7 million in PPP loans.
$ 3,109,290
Amount
Percent
of Total
Amount
Percent
of Total
Amount
21,432
561,341
1,652,993
850,206
41,036
2,733
15,369
3,145,110
(35,820)
10,810
0.7 % $
332,600
17.8 %
52.6 % 1,387,207
814,282
27.0 %
42,458
1.3 %
3,095
0.1 %
20,716
0.5 %
100 %
2,611,168
(13,908)
$ 2,597,260
4,838
0.4 % $
301,182
12.7 %
53.2 % 1,100,142
593,260
31.2 %
46,006
1.6 %
2,891
0.1 %
16,941
0.8 %
100 %
2,065,260
(10,065)
$ 2,055,195
Percent
of Total
0.3 %
14.6 %
53.3 %
28.7 %
2.2 %
0.1 %
0.8 %
100 %
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.
The following table sets forth the Company’s commercial and construction real estate loans maturing within specified intervals at
December 31, 2020 ($ in thousands):
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
Commercial, financial and agricultural
Real estate – commercial and consumer construction
Type
Total
Loans maturing after one year with:
Commercial, financial and agricultural
Fixed interest rates
Floating interest rates
Total
One Year
or Less
66,898
117,538
184,436
$
$
Over One
Year
Through
Five Years
409,497
99,283
508,780
$
$
Over Five
Years
84,946
84,463
169,409
$
$
Total
561,341
301,284
862,625
$
$
$
$
456,716
37,727
494,443
48
Table of Contents
Real estate – commercial and consumer construction
Fixed interest rates
Floating interest rates
Total
$
$
124,387
59,359
183,746
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 $917.9 million in 2020, as compared to $636.0 million in 2019, and $442.7 million in 2018. This represents 21.6%, 20.8%,
and 20.3% of the average earning assets for the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020,
investment securities, including equity securities, were $1.050 billion and represented 21.1% of earning assets. The Company attempts to
maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations.
This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of
U.S. Government agencies, municipals, and corporate obligations with maturities up to ten years.
The following table summarizes the carrying value of securities, excluding other securities, for the dates indicated ($ in thousands):
Securities Portfolio
Available-for-sale
U.S. Treasury
U. S. Government agencies and Mortgage-backed Securities
States and municipal subdivisions
Corporate obligations
Total available-for-sale
Held-to-maturity
U.S. Government agencies
States and municipal subdivisions
Total held-to-maturity
Total
2020
December 31,
2019
$
$
9,383
501,402
480,374
31,023
1,022,182
$
4,894
473,265
258,982
27,946
765,087
—
—
—
$
$ 1,022,182
—
—
—
$
765,087
2018
—
334,812
150,064
7,348
492,224
6,000
6,000
498,224
The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2020 ($ in
thousands):
Investment Securities Maturity Distribution and Yields
Within One Year
Amount Yield
After One But
Within Five Years
Amount
Yield
After Five But
Within Ten Years
Amount
Yield
After Ten Years
Amount
Yield
Available-for-sale (1):
U.S. Treasury
U.S. Government agencies (2)
States and municipal subdivisions
Corporate obligations and other
Total investment securities available-for-sale $ 37,739
$ 3,006
7,423
27,310
—
0.2 % $
0.9 %
2.8 %
—
—
42,482
88,809
16,368
$ 147,659
— $
1.9 %
2.7 %
2.1 %
6,377
48,955
135,216
14,420
$ 204,968
1.1 % $
2.5 %
2.8 %
3.3 %
—
1,310
229,039
235
$ 230,584
—
0.7 %
2.8 %
2.1 %
49
Table of Contents
(1)
Investments with a call feature are shown as of the contractual maturity date.
(2) Excludes mortgage-backed securities totaling $401.2 million with a yield of 2.3%.
Short-Term Investments. Short-term investments, consisting of Federal Funds Sold, funds due from banks and interest-bearing deposits
with banks, averaged $317.8 million in 2020, $84.2 million in 2019, and $58.9 million in 2018. There were no federal funds sold at December
31, 2020, 2019, and 2018. 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 at December 31, 2020 were $3.918 billion, an increase of $1.118 billion, or 39.9% compared to 2019.
Average total deposits at December 31, 2019 were $2.799 billion, an increase of $756.0 million, or 37.0% compared to $2.043 billion in 2018.
At December 31, 2020, total deposits were $4.215 billion, compared to $3.077 billion at December 31, 2019, an increase of $1.139 billion, or
37.0%, and $2.457 billion at December 31, 2018. Deposits of $476.1 million were acquired in 2020 with the acquisition of SWG. Deposits of
$686.4 million were acquired in 2019 with the acquisitions of FPB and FFB.
The Company implemented Deposit Reclassification at the beginning of 2020. This program reclassifies non-interest bearing deposits
and NOW deposit balances to money market accounts. This program reduces our reserve balance required at the Federal Reserve Bank of
Atlanta and provides additional funds for liquidity or lending. At December 31, 2020, $614.9 million in non-interest deposit balances and
$683.2 million in NOW deposit accounts were reclassified as money market accounts. A distribution of the Company’s deposits without
reclassification showing the balance and percentage of total deposits by type is presented for the noted periods in the following table:
($ in thousand)
Non-interest-bearing accounts
NOW accounts
Money market accounts
Savings accounts
Time deposits less than $100,000
Time deposits of $100,000 or over
Total deposits
Deposits
2020
December 31,
2019
2018
Percent of
Deposits
Amount
Percent of
Deposits
Percent of
Deposits
$ 1,185,980
1,347,778
705,357
395,116
218,418
362,631
$ 4,215,280
Amount
723,208
28.1 % $
941,598
32.0 %
462,810
16.7 %
287,200
9.4 %
235,367
5.2 %
8.6 %
426,350
100 % $ 3,076,533
Amount
570,148
23.5 % $
835,434
30.6 %
312,552
15.1 %
253,724
9.3 %
194,006
7.6 %
13.9 %
291,595
100 % $ 2,457,459
23.2 %
34.0 %
12.7 %
10.3 %
7.9 %
11.9 %
100 %
The Company’s loan-to-deposit ratio,which excludes mortgage loans held for sale, was 74.1% at December 31, 2020, 84.5% at
December 31, 2019 and 83.8% at December 31, 2018. The loan-to-deposit ratio averaged 77.1% during 2020. 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 $3.853 billion at December 31, 2020, $2.650 billion at December 31, 2019, and $2.166 billion at December 31,
2018. Management anticipates that a stable base of deposits will be the Company’s primary source of funding to meet both its short-term and
long-term liquidity needs in the future. The Company has purchased brokered deposits from time to time to help fund loan growth. Brokered
deposits and jumbo certificates of deposit generally carry a higher interest rate than traditional core deposits. Further, brokered deposit
customers typically do not have loan or other relationships with the Company. The Company has adopted a policy not to permit brokered
deposits to represent more than 10% of all of the Company’s deposits. Transaction account balances were above normal as of December 31,
2020, due to PPP loan proceeds.
50
Table of Contents
($ in thousands)
December 31, 2020
Borrowed Funds
Maturities of Certificates of Deposit
of $100,000 or More
After Three
Within Three
Through
After Twelve
Months
Twelve Months Months
$
71,761
$
198,397
$
92,473
$
Total
362,631
Borrowed funds consist of advances from the Federal Home Loan Bank of Dallas (“FHLB”), loans from First Horizon Bank, federal
funds purchased and reverse repurchase agreements. At December 31, 2020, advances from the FHLB totaled $110.0 million compared to
$206.3 million at December 31, 2019 and $85.5 million at December 31, 2018. 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 $0, $2.7
million and $0 federal funds purchased at December 31, 2020, 2019, and 2018, respectively. As part of the FFB acquisition, the Company
assumed two loans in the amount of $3.5 million and $2.0 million with First Horizon Bank. Principal and interest is payable quarterly at rates
ranging from 3.80% - 4.10%.
Subordinated Debentures
In 2006, the Company issued subordinated debentures of $4.1 million 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 $6.2 million 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.
In 2018, the Company acquired FMB’s Capital Trust 1 (“Trust 1”), which consisted of $6.1 million of floating rate junior subordinated
deferrable interest debentures in which the Company owns all of the common equity. The Company is the sole owner of the equity of Trust 1.
The Trust 1 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 1. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any
time beginning in 2008 and thereafter, and mature in 2033.
Subordinated Notes
April 30, 2018, The Company entered into two Subordinated Note Purchase Agreements pursuant to which the Company sold and
issued $24.0 million in aggregate principal amount of 5.875% fixed-to-floating rate subordinated notes due 2028 and $42.0 million in aggregate
principal amount of 6.40% fixed-to-floating rate subordinated notes due 2033 (collectively, the “Notes”). Deferred issuance costs included in
the subordinated debt were $961 thousand and $1.1 million at December 31, 2020 and December 31, 2019.
The Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The
Notes are not subject to redemption at the option of the holder. Principal and interest on the Notes are subject to acceleration only in limited
circumstances. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current
and future senior indebtedness, and each Note is pari passu in right to payment with respect to the other Notes. The Company entered into this
arrangement to provide funding for expected growth.
On September 25, 2020, The Company entered into a Subordinated Note Purchase Agreement with certain qualified institutional
buyers pursuant to which the Company sold and issued $65.0 million in aggregate principal amount of its 4.25% Fixed to Floating Rate
Subordinated Notes due 2030. The Notes are unsecured and have a ten-year term, maturing October 1, 2030, and will bear
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interest at a fixed annual rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will
reset quarterly to an interest rate per annum equal to a benchmark rate (which is expected to be the Three-Month Term Secured Overnight
Financing Rate ("SOFR") plus 412.6 basis points, payable quarterly in arrears. As provided in the Notes, under specified conditions the interest
rate on the Notes during the applicable floating rate period may be determined based on a rate other than Three-Month Term SOFR. The
Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after October 1, 2025, and to redeem the Notes
at any time in whole upon certain other specified events.
The Company had $144.6 million of subordinated debt, net of deferred issuance costs $2.2 million and unamortized fair value mark
$700 thousand, at December 31, 2020, compared to $80.7 million, net of deferred issuance costs $1.1 million and unamortized fair value mark
$754 thousand, at December 31, 2019.
Capital
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% for U.S
government and agency securities, to 600% for certain equity exposures. In November 2019, the federal banking agencies adopted a
rule revising the scope of commercial real estate mortgages subject to a 150% risk weight. Under the risk-based standard, capital is classified
into two tiers. Tier 1 capital consists of common stockholders’ 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 6% 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,
2020, 2019 and 2018.
The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, that substantially
amended the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on
Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the
Dodd-Frank Act.
Under the Basel III capital rules, the Company is required to meet certain minimum capital requirements that differ from past capital
requirements. The rules implement a new capital ratio of common equity Tier 1 capital to risk-weighted assets. Common equity Tier 1 capital
generally consists of retained earnings and common stock (subject to certain adjustments) as well as accumulated other comprehensive income
(“AOCI”), however, the Company exercised a one-time irrevocable option to exclude certain components of AOCI as of March 31, 2015. The
Company is required to establish a “conservation buffer,” consisting of a common equity Tier 1 capital amount equal to 2.5% of risk-weighted
assets effective January 2019. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities
including payment of dividends, stock repurchases, and discretionary bonuses to executive officers.
The prompt corrective action rules have been modified to include the common equity Tier 1 capital ratio and to increase the Tier 1
capital ratio requirements for the various thresholds. For example, the requirements for the Company to be considered well-capitalized under the
rules include a 5.0% leverage ratio, a 6.5% common equity Tier 1capital ratio, an 8.0% Tier 1 capital ratio, and a 10.0% total capital ratio.
The rules modify the manner in which certain capital elements are determined. The rules make changes to the methods of calculating
the risk-weighting of certain assets, which in turn affects the calculation of the risk-weighted capital ratios. Higher risk weights are assigned to
various categories of assets, including commercial real estate loans, credit facilities that finance the acquisition, development or construction of
real property, certain exposures or credit that are 90 days past due or are nonaccrual, securitization exposures, and in certain cases mortgage
servicing rights and deferred tax assets.
The Company was required to comply with the new capital rules on January 1, 2015, with a measurement date of March 31, 2015. The
conservation buffer was phased-in beginning in 2016, and took full effect on January 1, 2019. Certain calculations under the
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rules will also have phase-in periods. Under this guidance banking institutions with a CETI, Tier 1 Capital Ratio and Total Risk Based Capital
above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay
dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.
The Company has elected to delay its adoption of ASU 2016-13, as provided by the CARES Act. The Company currently anticipates
adoption of ASU 2016-13 to occur as of January 1, 2021. In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final
rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated
impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-
year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year
transition in total).
Capital Ratios
Leverage
Risk-based capital:
Common equity Tier 1
Tier 1
Total
Analysis of Capital
Adequately
Well
Capitalized Capitalized
5.0 %
4.0 %
The Company
December 31,
2020
2019
2018
9.2 % 10.3 % 10.2 %
The First
December 31,
2019
11.8 %
2020
10.4 %
2018
12.2 %
4.5 %
6.0 %
8.0 %
6.5 % 13.5 % 12.5 % 11.5 %
8.0 % 14.0 % 13.0 % 12.2 %
10.0 % 19.1 % 15.8 % 15.6 %
15.8 %
15.8 %
16.9 %
15.1 %
15.1 %
15.6 %
14.8 %
14.8 %
15.2 %
Ratios
Return on assets (net income available to common stockholders divided by
average total assets)
2020
2019
2018
1.1 %
1.3 %
0.9 %
Return on equity (net income available to common stockholders divided by
average equity)
8.7 %
9.5 %
7.6 %
Dividend payout ratio (dividends per share divided by net income per
common share)
16.7 %
12.2 %
12.3 %
Equity to asset ratio (average equity divided by average total assets)
12.7 %
13.3 %
11.5 %
Liquidity and Capital Resources
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 due from banks and interest-bearing deposits with banks, is typically
its primary source of liquidity. Federal funds sold averaged $317.8 million during the year ended December 31, 2020 and averaged $84.2
million at December 31, 2019. In addition, the Company has available advances from the FHLB. Advances available are generally based upon
the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2020, advances available totaled approximately
$1.198 billion, of which $215.2 million had been drawn, or used for letters of credit.
As of December 31, 2020, the market value of unpledged debt securities plus pledged securities in excess of current pledging
requirements comprised $513.2 million of the Company’s investment balances, compared to $348.3 million at December 31, 2019. The
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increase in unpledged debt from December 2020 compared to December 2019 is primarily due to an increase in acquired deposits. Other forms
of balance sheet liquidity include but are not necessarily limited to any outstanding federal funds sold and vault cash. Management believes that
available investments and other potentially liquid assets, along with the standby funding sources it has arranged, are more than sufficient to
meet the Company’s current and anticipated short-term liquidity needs.
The Company’s liquidity ratio as of December 31, 2020 was 26.4%, as compared to internal liquidity policy guidelines of 10%
minimum. Other liquidity ratios reviewed include the following along with policy guidelines for the periods indicated:
Loans to Deposits (including FHLB advances)
Net Non-core Funding Dependency Ratio
Fed Funds Purchased / Total Assets
FHLB Advances / Total Assets
FRB Advances / Total Assets
Pledged Securities to Total Securities
Loans to Deposits (including FHLB advances)
Net Non-core Funding Dependency Ratio
Fed Funds Purchased / Total Assets
FHLB Advances / Total Assets
FRB Advances / Total Assets
Pledged Securities to Total Securities
Loans to Deposits (including FHLB advances)
Net Non-core Funding Dependency Ratio
Fed Funds Purchased / Total Assets
FHLB Advances / Total Assets
FRB Advances / Total Assets
Pledged Securities to Total Securities
December 31, 2020 Policy Maximum
90.0 %
20.0 %
10.0 %
20.0 %
10.0 %
90.0 %
70.9 %
(4.4)%
0.0 %
2.1 %
0.0 %
54.9 %
December 31, 2019 Policy Maximum
90.0 %
20.0 %
10.0 %
20.0 %
10.0 %
90.0 %
79.2 %
8.9 %
0.1 %
5.2 %
0.0 %
56.5 %
December 31, 2018 Policy Maximum
90.0 %
20.0 %
10.0 %
20.0 %
10.0 %
90.0 %
80.5 %
3.8 %
0.0 %
2.9 %
0.0 %
77.8 %
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
In Policy
Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our
liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.
The holding company’s primary uses of funds are ordinary operating expenses and stockholder dividends, and its primary source of
funds is dividends from the Bank since the holding company does not conduct regular banking operations. Management anticipates that the
Bank will have sufficient earnings to provide dividends to the holding company to meet its funding requirements for the foreseeable future.
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.
During March 2020, in response to COVID-19, the Federal Reserve lowered the primary credit rate by 150 basis points to 0.25 percent
and extended terms to 90 days to enhance market liquidity and encourage use of the discount window. In addition, the Federal Reserve
announced it would begin quantitative easing, or large-scale asset purchases, consisting primarily of Treasury securities and mortgage-backed
securities to stem the effects of the pandemic on the financial markets. A prolonged outbreak of the COVID-19 pandemic could cause a
widespread liquidity crisis, and the availability of these funds or the options to sell securities currently held could be hindered. The full impact
and duration of COVID-19 on our business is unknown but if it continues to curtail economic activity, it could impact our ability to obtain
funding and result in the reduction of or the cessation of dividends.
On March 28, 2019, the Company announced that its Board of Directors authorized a share repurchase program to purchase up to an
aggregate of $20 million of the Company’s common stock (the “March 2019 program”). This share repurchase program had an
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expiration date of December 31, 2019. Under the March 2019 program, the Company could repurchase shares of its common stock periodically
in a manner determined by the Company’s management. The actual means and timing of purchase, target number of shares and maximum price
or range of prices under the program was determined by management at its discretion and depended on a number of factors, including the
market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The
Company repurchased 168,188 shares under the March 2019 program in 2019.
On May 7, 2020, the Company announced the renewal of its share repurchase program that previously expired on December 31, 2019.
Under the program, the Company could from time to time repurchase up to $15 million of shares of its common stock in any manner
determined appropriate by the Company's management. The actual timing and method of any purchases, the target number of shares and the
maximum price (or range of prices) under the program, was determined by management at its discretion and depended on a number of factors,
including the market price of the Company's common stock, general market and economic conditions, and applicable legal and regulatory
requirements. The renewed share repurchase program expired on December 31, 2020. The Company repurchased 289,302 shares in 2020
pursuant to the program.
On December 16, 2020, the Company announced that its Board of Directors has authorized a share repurchase program (the
"Repurchase Program"), pursuant to which the Company may purchase up to an aggregate of $30 million in shares of the Company's issued and
outstanding common stock. Under the program, the Company may, but is not required to, from time to time repurchase up $30 million of shares
of its own common stock in any manner determined appropriate by the Company's management. The actual timing and method of any
purchases, the target number of shares and the maximum price (or range of prices) under the program, will be determined by management at is
discretion and will depend on a number of factors, including the market price of the Company's common stock, general market and economic
conditions, and applicable legal and regulatory requirements. The Repurchase Program will have an expiration date of December 31, 2021.
Commitments and Contractual Obligations
The following table presents, as of December 31, 2020, fixed and determinable contractual obligations to third parties by payment
date. Amounts in the table do not include accrued or accruing interest. Payments related to leases are based on actual payments specified in the
underlying contracts. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial
statements included elsewhere in this Form 10-K.
($ in thousands)
Deposits without a stated maturity
Time deposits
Borrowings
Lease obligations
Trust preferred subordinated debentures
Subordinated note purchase agreement
Total Contractual obligations
Subprime Assets
Within One
Year
$ 3,634,231
420,367
110,735
1,807
Note
Reference
G
G
H
I
N
N
After One
But Within
After Three
But Within
Three Years Five Years
— $
— $
After Five
Years
$
126,027
1,560
2,841
23,316
1,685
1,822
Total
— $ 3,634,231
581,049
114,647
8,312
15,796
128,796
$ 4,482,671
11,339
667
1,842
15,796
128,796
$ 158,440
—
—
—
—
—
—
$ 4,166,980
$ 130,428
$ 26,823
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 Note B – Summary of Significant Accounting Policies in the accompanying
notes to the consolidated financial statements included elsewhere in this report. This information is incorporated herein by reference.
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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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage
in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of
interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in
interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in
a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.
To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform
earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios every month. The
model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration,
and optionality for anticipated new volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order
to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial
instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental
increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged
from current actual levels).
We use seven standard interest rate scenarios in conducting our 12-month net interest income simulations: “static,” upward shocks of
100, 200, 300 and 400 basis points, and downward shocks of 100, and 200 basis points. Pursuant to policy guidelines, we typically attempt to
limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate
shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock. As of December 31, 2020, the Company had the
following estimated net interest income, without factoring in any potential negative impact on spreads resulting from competitive pressures or
credit quality deterioration:
December 31, 2020
($in thousands)
Net Interest Income
Dollar Change
NII @ Year 1
-200 bp
130,713
-100 bp
131,908
(4,080)
(2,885)
STATIC +100 bp
141,628
Net Interest Income at Risk – Year 1
+200 bp
147,180
12,387
134,793
6,835
+300 bp
151,440
16,647
+400 bp
154,580
19,787
(3.0)%
(2.1)%
5.1 %
9.2 %
12.4 %
14.7 %
If there were an immediate and sustained downward adjustment of 200 basis points in interest rates, all else being equal, net interest
income over the next twelve months would likely be approximately $4.1 million lower than in a stable interest rate scenario, for a negative
variance of 3.0%. The unfavorable variance increases if rates were to drop below 200 basis points, due to the fact that certain deposit rates are
already relatively low (on NOW accounts and savings accounts, for example), and will hit a natural floor of close to zero while non-floored
variable-rate loan yields continue to drop. This effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed
securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While we view
further interest rate reductions as highly unlikely, the potential percentage drop in net interest income exceeds our internal policy guidelines in
declining interest rate scenarios and we will continue to monitor our interest rate risk profile and take corrective action as deemed appropriate.
Net interest income would likely increase by $12.4 million, or 9.2%, if interest rates were to increase by 200 basis points relative to a
stable interest rate scenario, with the favorable variance expanding the higher interest rates rise. The initial increase in rising rate scenarios will
be limited to some extent by the fact that some of our variable-rate loans are currently at rate floors, resulting in a re-
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pricing lag while base rates are increasing to floored levels, but we believe the Company still would benefit from a material upward shift in the
yield curve.
The Company’s one year cumulative GAP ratio was approximately 211.7% at December 31, 2020, 151.9% at December 31, 2019 and
191.6% at December 31, 2018. The Company is considered “asset-sensitive” which means that there are more assets repricing than liabilities
within the first year.
In addition to the net interest income simulations shown above, we run stress scenarios modeling the possibility of no balance sheet
growth, the potential runoff of “surge” core deposits which flowed into the Company in the most recent economic cycle, and potential
unfavorable movement in deposit rates relative to yields on earning assets. Even though net interest income will naturally be lower with no
balance sheet growth, the rate-driven variances projected for net interest income in a static growth environment are similar to the changes noted
above for our standard projections. When a greater level of non-maturity deposit runoff is assumed or unfavorable deposit rate changes are
factored into the model, projected net interest income in declining rate and flat rate scenarios does not change materially relative to standard
growth projections. However, the benefit we would otherwise experience in rising rate scenarios is minimized and net interest income remains
relatively flat.
The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate
scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its
financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are
effectively a gauge of the Company’s longer-term exposure to interest rate risk. Fair values for financial instruments are estimated by
discounting projected cash flows (principal and interest) at projected replacement interest rates for each account type, while the fair value of
non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing
balance sheet accounts at a given point in time, and the measurement can change substantially over time as the characteristics of the Company’s
balance sheet evolve and interest rate and yield curve assumptions are updated.
The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial
instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of
principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule,
fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial
liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the
greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial
instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s
best estimates. The table below shows estimated changes in the Company’s EVE as of the periods indicated under different interest rate
scenarios relative to a base case of current interest rates:
($in thousands)
Market Value of Equity
Change in EVE from base
% Change
Policy Limits
($in thousands)
Market Value of Equity
Change in EVE from base
% Change
Policy Limits
-200 bp
663,134
(301,168)
-100 bp
774,745
(189,557)
STATIC (Base)
December 31, 2020 - Balance Sheet Shock
+200 bp
+100 bp
1,201,063
1,100,056
964,302
+300 bp
1,272,207
135,754
236,761
307,905
+400 bp
1,316,039
351,737
(31.2)%
(20.0)%
(19.7)%
(10.0)%
14.1 %
(10.0)%
24.6 %
(20.0)%
31.9 %
(30.0)%
36.5 %
(40.0)%
-200 bp
834,772
813
0.1 %
(20.0)%
December 31, 2019 - Balance Sheet Shock
-100 bp STATIC (Base) +100 bp +200 bp +300 bp
916,032
780,800
82,073
(53,159)
999,703
165,744
969,472
135,513
833,959
+400 bp
1,011,517
177,558
(6.4)%
(10.0)%
9.8 %
(10.0)%
16.3 %
(20.0)%
19.9 %
(30.0)%
21.3 %
(40.0)%
The tables show that our EVE will generally deteriorate in declining rate scenarios, but should benefit from a parallel shift upward in
the yield curve. As noted previously, however, Management is of the opinion that the potential for a significant rate decline is low. We also run
stress scenarios for EVE to simulate the possibility of higher loan prepayment rates, unfavorable changes in deposit rates, and higher deposit
decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of The First Bancshares
Hattiesburg, Mississippi
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The First Bancshares, Inc (the "Company") as of December 31, 2020 and
2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). We also
have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control
– Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on
the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether
effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. In
situations in which the SEC allows management to limit its assessment of internal control over financial reporting by excluding certain entities,
the auditor may limit the internal control audit in the same manner. As permitted, the Company has excluded the operations of Southwest
Georgia Financial Corporation acquired during 2020, which is described in Note C of the consolidated financial statements, from the scope of
management’s report on internal control over financial reporting. As such, it has also been excluded from the scope of our audit of internal
control over financial reporting. Our audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses – Qualitative and Economic Factors
The allowance for loan losses is a valuation allowance reserved for probable incurred credit losses. As described in Note B “Summary of
Significant Accounting Policies” to the consolidated financial statements, the Company’s allowance for loan losses consists of two components:
a reserve for general pool (or formula pool) loans that are collectively evaluated for impairment and a reserve for loans individually evaluated
for impairment based on expected loan specific losses. The general pool component is calculated using the Bank’s actual loan loss history by
portfolio, by grouping together loans with similar risk characteristics into four major segments. These loss factors are also supplemented with
other qualitative and economic factors. The allowance for loan losses is material to the financial statements in total and is management’s largest
valuation estimate.
Significant judgment is exercised by the Company in the determination of the qualitative and economic factors, including the following:
● Assessing changes in national and local economic and business conditions and developments that affect the collectability of the
portfolio such as real gross domestic product, unemployment rates and labor force participation
● Assessing changes in the nature and volume of the portfolio
● Assessing changes in credit concentration
● Measuring internal risk encompassing changes in lending policies, management and staff
We identified auditing management’s estimate of the qualitative and economic factors as a critical audit matter as it involved significant audit
effort and especially subjective auditor judgment. Our primary audit procedures related to auditing this critical audit matter included the
following:
We tested the operating effectiveness of management’s controls over the qualitative and economic factors including controls over:
● Reasonableness of the applied qualitative factors
● Math accuracy of the allowance calculation
●
● Changes in risk ratings of commercial loans
Loan review
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Past due monitoring
●
● Completeness and accuracy of inputs including queries and reports used in the computation of the allowance for loan losses
We also performed substantive testing over the allowance qualitative and economic factors including:
●
Tested qualitative and economic factor adjustments to historical loss rates including comparison to external data and evaluating the
reasonableness of management’s significant assumptions and accuracy of qualitative and economic factors applied
Performed data validation of inputs and tested mathematical accuracy of management’s calculation.
Tested completeness and accuracy of reports utilized in the allowance for loan loss calculation
●
●
● Analytically evaluated the qualitative and economic factor allocation year over year for reasonableness
Business Combinations – Fair Value of Acquired Loans
As described in Note C – Business Combinations to the consolidated financial statements, on April 3, 2020 the Company completed its
acquisition of Southwest Financial Corporation (“SWG”) for total consideration of $47.9 million. Determination of the acquisition date fair
values of the assets acquired and liabilities assumed required management to make significant estimates and assumptions. The fair value of a
loan portfolio acquired in a business combination requires significant estimates and assumptions, specifically the determination of the fair value
of acquired loans . In determining the fair value of loans acquired, management estimated the amount and timing of principal and interest cash
flows expected to be collected on the loans and discounted those cash flows at a market rate of interest, among other assumptions. Management
relied on a third party valuation specialist to assist them in developing their estimates. Changes in these assumptions could have a significant
impact on the fair value of the loans acquired and the bargain purchase gain recorded as a result of the acquisition.
We identified auditing the acquisition date fair value of acquired loans as a critical audit matter as auditing this estimate is especially complex
and requires subjective auditor judgment. The principal considerations for our determination that this is a critical audit matter is the level of
judgment involved in evaluating management’s identification of loans with evidence of credit deterioration, the need for specialized skill to
evaluate the development and application of subjective assumptions in estimated cash flows, and the size of the acquired loan portfolio.
To this critical audit matter, we performed auditing procedures including the following:
●
●
Tested the operating effectiveness of controls over the Company’s identification of loans with credit deterioration at acquisition date
and valuation of these loans, assessment of work performed by the third-party valuation specialist including application of subjective
assumptions in estimating cash flows, and completeness and accuracy of the data utilized in the fair value determination by the third-
party specialist.
Evaluated the significant assumptions and methods utilized in developing the fair value of the loan portfolio, including assessment of
significant assumptions, and evaluating whether the assumptions used were reasonable considering past acquisitions and current
market participant views and other factors.
● Utilized internal valuation specialists to assist in testing the Company’s calculation of the fair value of the loan portfolio acquired and
●
certain significant assumptions, including prepayment speeds and discount rates.
Tested the completeness and accuracy of loans determined to have credit deterioration at acquisition and evaluated the reasonableness
of the criteria utilized by management in the determination.
We have served as the Company’s auditor since 2018.
/s/ Crowe LLP
Atlanta, GA
March 12, 2021
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THE FIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND 2019
($ in thousands except per share data)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Total cash and cash equivalents
Debt securities available-for-sale securities, at fair value
Other securities
Total securities
Loans held for sale
Loans, net of allowance of $35,820 in 2020 and $13,908 in 2019
Interest receivable
Premises and equipment
Operating lease right-of-use assets
Finance lease right-of-use assets
Cash surrender value of life insurance
Goodwill
Other real estate owned
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Interest payable
Borrowed funds
Subordinated debentures
Operating lease liabilities
Finance lease liabilities
Other liabilities
Total liabilities
Stockholders' Equity:
Common stock, par value $1 per share: 40,000,000 shares authorized; 21,598,993 shares issued in 2020, 40,000,000 shares
authorized and 18,996,948 shares issued in 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost (483,984 shares - 2020; 194,682 shares - 2019)
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these statements.
61
2020
2019
$
$
$
$
137,684
424,870
562,554
1,022,182
27,475
1,049,657
21,432
3,087,858
26,344
114,823
5,969
2,658
73,732
156,944
5,802
44,987
5,152,760
571,079
3,644,201
4,215,280
2,134
114,647
144,592
6,031
2,281
22,980
4,507,945
21,599
456,919
154,241
25,816
(13,760)
644,815
5,152,760
$
$
$
$
89,736
79,128
168,864
765,087
26,690
791,777
10,810
2,586,450
14,802
98,458
6,518
—
59,572
158,572
7,299
38,741
3,941,863
723,208
2,353,325
3,076,533
2,508
214,319
80,678
6,518
—
17,649
3,398,205
18,997
409,805
110,460
10,089
(5,693)
543,658
3,941,863
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
($ in thousands, except per share amount)
INTEREST INCOME
Interest and fees on loans
Interest and dividends on securities:
Taxable interest and dividends
Tax-exempt interest
Interest on federal funds sold
Interest on deposits in banks
Total interest income
INTEREST EXPENSE
Interest on deposits
Interest on borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NON-INTEREST INCOME
Service charges on deposit accounts
Other service charges and fees
Interchange fees
Secondary market mortgage income
Bank owned life insurance income
Gain (loss) on sale of premises
Securities gains
Gain (loss) on sale of other real estate
Financial assistance and bank enterprise awards
Bargain purchase gain
Other
Total non-interest income
NON-INTEREST EXPENSE
Salaries
Employee benefits
Occupancy
Furniture and equipment
Supplies and printing
Professional and consulting fees
Marketing and public relations
FDIC and OCC assessments
ATM expense
Bank communications
Data processing
Acquisition expense
Other
62
2020
2019
2018
$
157,564
$
128,858
$
86,822
13,961
6,913
8
902
179,348
19,608
7,056
26,664
152,684
25,151
127,533
7,213
1,355
9,433
10,446
1,514
443
281
(537)
968
7,835
2,925
41,876
50,853
10,377
11,282
2,551
925
3,897
512
1,351
3,042
2,028
1,137
3,315
15,071
14,244
3,566
7
1,854
148,529
19,763
6,960
26,723
121,806
3,738
118,068
7,838
1,047
8,024
5,988
1,414
13
122
(144)
947
—
1,698
26,947
40,152
6,864
8,775
2,021
798
3,558
859
632
2,794
1,779
898
6,275
13,164
9,020
2,939
206
991
99,978
10,785
4,306
15,091
84,887
2,120
82,767
5,792
996
5,247
4,048
937
(137)
334
60
2,098
—
1,186
20,561
32,233
4,660
6,575
1,551
553
1,926
508
1,382
1,811
1,664
1,051
13,810
8,587
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
Continued:
Total non-interest expense
Income before income taxes
Income taxes
Net income available to common stockholders
Earnings per share:
Basic
Diluted
2020
106,341
63,068
10,563
52,505
2.53
2.52
$
$
$
2019
88,569
56,446
12,701
43,745
2.57
2.55
$
$
$
$
$
$
2018
76,311
27,017
5,792
21,225
1.63
1.62
The accompanying notes are an integral part of these statements.
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($ in thousands)
Net income
Other comprehensive income:
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
2020
2019
2018
$
52,505
$
43,745
$
21,225
Unrealized holding gain/(loss) arising during the period on available-for-sale securities
Reclassification adjustment for (gains) included in net income
21,345
(281)
16,084
(122)
(1,484)
(334)
Unrealized holding gain/(loss) arising during the period on available-for-sale securities
21,064
15,962
(1,818)
Income tax benefit (expense)
Other comprehensive income (loss)
Comprehensive income
(5,337)
(4,077)
460
15,727
11,885
(1,358)
$
68,232
$
55,630
$
19,867
The accompanying notes are an integral part of these statements.
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
($ in thousands except per share amount)
Balance, January 1, 2018
Net income
Other comprehensive income
Dividend on common stock, $.20 per common share
Issuance of shares for Southwest acquisition
Issuance of shares for Sunshine acquisition
Issuance of shares for FMB acquisition
Issuance restricted stock grant
Restricted stock grant forfeited
Expense associated with common stock issuance
Compensation expense
ASU 2016-01 implementation
Repurchase of restricted stock for payment of taxes
Balance, December 31, 2018
Common Stock
Additional
Paid-in
Amount Capital
$ 158,456
$ 11,193
Shares
11,192,401
Accumulated
Other
Retained Comprehensive
Treasury Stock
Earnings Income (Loss) Shares Amount Total
$ 53,721
$
(438)
(26,494)
$
(464)
$ 222,468
—
—
—
1,134,010
726,461
1,763,042
60,984
(19,236)
—
—
—
(570)
—
—
—
1,134
726
1,763
61
(19)
—
—
—
(1)
—
—
—
21,225
—
(2,600)
34,871
22,702
61,777
(61)
19
(237)
1,154
—
(22)
—
—
—
—
—
—
—
(348)
—
—
(1,358)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21,225
—
(1,358)
—
(2,600)
—
36,005
—
23,428
—
—
—
—
—
—
—
63,540
—
—
(237)
1,154
(348)
(23)
14,857,092
$ 14,857
$ 278,659
$ 71,998
$
(1,796)
(26,494)
$
(464)
$ 363,254
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
($ In Thousands except per share amount)
Net income, 2019
Common stock repurchased
Other comprehensive income
Dividend on common stock, $.31 per common
share
Issuance of shares for FPB acquisition
Issuance of shares for FFB acquisition
Issuance restricted stock grant
Restricted stock grant forfeited
Compensation expense
Shares
Common Stock
Additional
Paid-in
Amount Capital
—
—
—
—
—
—
—
—
—
Accumulated
Other
Retained Comprehensive
Treasury Stock
Earnings Income (Loss) Shares
—
—
— (168,188)
—
43,745
—
—
11,885
Amount Total
—
2,377,501
—
2,378
—
75,842
(5,283)
—
1,682,889
1,683
53,785
89,315
(7,931)
—
89
(8)
—
(89)
8
1,661
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,229)
—
—
—
—
—
—
—
43,745
(5,229)
11,885
(5,283)
78,220
55,468
—
—
1,661
Repurchase of restricted stock for payment of taxes
Balance, December 31, 2019
(1,918)
18,996,948
(2)
$ 18,997
(61)
$ 409,805
—
$ 110,460
$
—
10,089
—
(194,682)
$
—
(5,693)
(63)
$ 543,658
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
($ In Thousands except per share amount)
Net income, 2020
Common stock repurchased
Other comprehensive income
Dividend on common stock, $.42 per common share
Issuance of shares for SWG acquisition
Issuance restricted stock grant
Restricted stock grant forfeited
Compensation expense
Repurchase of restricted stock for payment of taxes
Balance, December 31, 2020
Common Stock
Shares
—
—
—
—
Amount
—
—
—
—
2,547
78
(7)
—
(16)
$ 21,599
2,546,967
78,189
(7,421)
—
(15,690)
21,598,993
Additional
Paid-in
Capital
—
—
—
—
45,311
(78)
7
2,352
(478)
$ 456,919
Retained
Earnings
52,505
—
—
(8,724)
—
—
—
—
—
$ 154,241
$
Treasury Stock
Shares
—
—
— (289,302)
—
—
—
—
—
—
—
(483,984)
15,727
—
—
—
—
—
—
25,816
Amount
—
(8,067)
—
—
—
—
—
—
—
$ (13,760)
Total
52,505
(8,067)
15,727
(8,724)
47,858
—
—
2,352
(494)
$ 644,815
Accumulated
Other
Comprehensive
Income
(Loss)
See Notes to Consolidated Financial Statements
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2020
2019
2018
$
52,505
$
43,745
$
21,225
Depreciation and amortization
FHLB Stock dividends
Provision for loan losses
Deferred income taxes
Restricted stock expense
Increase in cash value of life insurance
Amortization and accretion, net, related to acquisitions
Bank premises and equipment (gain)/loss
Acquisition gain
Securities gains
Loss on sale/writedown of other real estate
Residential loans originated and held for sale
Proceeds from sale of residential loans held for sale
Changes in:
Interest receivable
Other assets
Interest payable
Operating lease liability
Other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities
Purchases of other securities
Proceeds from maturities and calls of available-for-sale securities
Proceeds from sales of securities available-for-sale
Proceeds from redemption of other securities
Increase in loans
Net additions to premises and equipment
Purchase of bank owned life insurance
Proceeds from sale of other real estate owned
Proceeds from sale of land
Proceeds from sale of other assets
Cash received in excess of cash paid for acquisition
Net cash used in investing activities
12,354
(133)
25,151
(3,015)
2,352
(1,514)
(3,945)
(443)
(7,835)
(281)
1,352
(318,969)
308,347
(9,185)
(5,313)
(374)
(1,545)
1,676
51,185
(356,755)
(3,056)
203,670
579
3,407
(131,589)
(4,398)
(5,683)
4,036
1,416
—
29,245
(259,128)
5,314
(171)
3,738
912
1,661
(1,414)
(1,791)
(13)
—
(122)
680
(186,132)
180,120
(1,203)
1,157
914
(898)
(1,797)
44,700
(180,502)
(11,085)
109,189
32,976
2,712
(44,102)
(7,892)
—
5,097
—
65
30,860
(62,682)
4,300
(97)
2,120
2,523
1,154
(937)
(680)
137
—
(334)
342
(137,287)
137,293
(671)
2,401
144
—
(133)
31,500
(66,350)
(8,644)
61,587
40,289
5,714
(81,193)
(4,057)
—
1,396
—
—
42,450
(8,808)
The accompanying notes are an integral part of these statements.
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
Continued:
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(Decrease) in deposits
Proceeds from borrowed funds
Repayment of borrowed funds
Dividends paid on common stock
Net proceeds from issuance of stock
Cash paid to repurchase common stock
Repurchase of restricted stock for payment of taxes
Principal payment on finance lease liabilities
Issuance of subordinated debt, net
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures:
Cash paid during the year for:
Interest
Income taxes, net of refunds
Non-cash activities:
Transfers of loans to other real estate
Issuance of restricted stock grants
Stock issued in connection with Southwest acquisition
Stock issued in connection with Sunshine acquisition
Stock issued in connection with FMB acquisition
Stock issued in connection with FPB acquisition
Stock issued in connection with FFB acquisition
Stock issued in connection with SWG acquisition
Dividends on restricted stock grants
Right-of-use assets obtained in exchange for operating lease liabilities
2020
2019
2018
664,413
212,000
(321,172)
(8,589)
—
(8,067)
(494)
(183)
63,725
601,633
393,690
168,864
562,554
22,476
13,971
$
$
(67,821)
364,715
(258,673)
(5,190)
—
(5,229)
(63)
—
—
27,739
9,757
159,107
168,864
20,673
11,102
$
$
$
$
3,595
78
—
—
—
—
—
47,858
135
3,162
1,706
89
—
—
—
78,220
55,468
—
93
6,717
46,224
105,000
(168,680)
(2,557)
(237)
—
(23)
—
64,766
44,493
67,185
91,922
159,107
10,982
2,120
1,528
61
36,005
23,428
63,540
—
—
—
43
—
The accompanying notes are an integral part of these statements.
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NOTE A - NATURE OF BUSINESS
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Mississippi, Louisiana, Alabama, Florida and Georgia. 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).
The principal products produced and services rendered by the Company and are as follows:
Commercial Banking – The Company provides a full range of commercial banking services to corporations and other business
customers. Loans are provided for a variety of general corporate purposes, including financing for commercial and industrial projects,
income producing commercial real estate, owner-occupied real estate and construction and land development. The Company also
provides deposit services, including checking, savings and money market accounts and certificate of deposit as well as treasury
management services.
Consumer Banking – The Company provides banking services to consumers, including checking, savings and money market accounts
as well as certificate of deposit and individual retirement accounts. In addition, the Company provides consumers with installment and
real estate loans and lines of credit.
Mortgage Banking – The Company provides residential mortgage banking services, including construction financing, for conventional
and government insured home loans to be sold in the secondary market.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of 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 credit losses, acquisition accounting, intangible assets, deferred tax assets, and fair value of financial
instruments. It is reasonably possible the Company’s estimate of the allowance for credit losses and determination of impairment of goodwill or
intangible assets could change as a result of the continued impact of the COVID-19 pandemic on the economy. The resulting change in these
estimates could be material to the Company’s consolidated financial statements.
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Debt Securities
Investments in debt securities are accounted for as follows:
Available-for-Sale Securities
Debt 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 component of accumulated other
comprehensive income (loss), net of tax, 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.
Securities to be Held-to-Maturity
Debt 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. There
were no held-to-maturity securities on hand at December 31, 2020 and 2019.
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, 2020 and 2019.
Equity Securities
Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily
determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly
transactions for the identical or a similar investment. There were no equity securities on hand at December 31, 2020 and 2019.
Other Securities
Other securities are carried at cost and are restricted in marketability. Other securities consist of investments in the FHLB, Federal
Reserve Bank and First National Bankers’ Bankshares, Inc. Management reviews for impairment based on the ultimate recoverability of the
cost basis.
Shares of FHLB, Federal Reserve Bank and First National Bankers’ Bankshares, Inc. common stock are equity securities that do not
have a readily determinable fair value because their ownership is restricted and lacks marketability. The common stock is carried at cost and
evaluated for impairment. The Company’s investment in member bank stock is included in other securities in the accompanying consolidated
balance sheets. Management reviews for impairment based on the ultimate recoverability of the cost basis. No other-than-temporary impairment
was noted for the years ended December 31, 2020, 2019 and 2018.
Interest Income
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and
losses on sales are recorded on the trade date and determined using the specific identification method.
Other-than-Temporary Impairment (“OTTI”)
Management evaluates debt securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic
or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of
the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses
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whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of
its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and
fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of
impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2)
OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the
present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is
recognized through earnings.
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 mortgage servicing rights being 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.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the
principal amount outstanding, net of the allowance for loan losses, unearned income, any unamortized deferred fees or costs on originated loans
and unamortized premiums or discounts on purchased loans. 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. Premiums and discounts on purchased loans not deemed purchase credit impaired are deferred and
amortized as a level yield adjustment over the respective term of the loan.
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, and the accrual of interest on such loan is discontinued, when principal or interest is
past due ninety days or when specifically determined to be impaired unless the loan is well-secured and in the process of collection. When a
loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. If collectability 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. Loans are returned to accrual status when the obligation is brought current or has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in
doubt.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance reserved for probable incurred credit losses. A charge is taken against the
allowance for loan losses when management believes the collectibility of the loan principal is confirmed to be unlikely. Subsequent recoveries,
if any, are credited back to the allowance. Management evaluates the adequacy of the allowance for loan losses on a regular basis. These
evaluations are based upon a periodic review of the historical loan loss experience, the nature and value of the loan portfolio, underlying
collateral values, internal and independent loan reviews, and prevailing economic conditions.
The allowance consists of two components, a reserve for general pool (or formula pool) loans that are collectively evaluated for
impairment, and a reserve for loans individually evaluated for impairment based on expected loan specific losses. These components represent
an estimation performed pursuant to either ASC Topic 450, Contingencies, or ASC Subtopic 310-10, Receivables. Loans individually evaluated
for specific impairment are loans where management has determined that all amounts due according to the
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contractual terms of the loan agreement are unable to be collected. Loans that are considered to be TDRs are individually evaluated for specific
impairment as well. Factors considered in determining impairment include the present value of estimated future cash flows when there is a
possibility of collecting principal and interest payments as scheduled, or by using the fair value less liquidation costs of collateral if it is
expected that this is the only future possibility of repayment. The general pool (or formula pool) loan impairment is calculated using the Bank’s
actual loan loss history segregated by portfolio segment grouping together loans with similar risk characteristics. The four major segments or
“bands” are Commercial Real Estate, Commercial Non-Real Estate, Consumer Real Estate, and Consumer Non-Real Estate. These loss factors
are also supplemented with other qualitative and economic factors including but not limited to current local and national economic conditions,
changes in lending policies/management/staff, changes in credit concentrations, as well as trends in the volume and size of loans.
The Bank also has acquired loan portfolios accounted for under the acquisition method of accounting. Within these portfolios are
purchased credit impaired loans accounted for under ASC Topic 310-30. Impairment may be determined specifically at an individual loan level,
or estimated on various pools of loans having common risk characteristics.
Purchased Credit Impaired Loans
The Company purchases individual loans and groups of loans, some of which have shown evidence of credit deterioration since
origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for
loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.
Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk
characteristics such as credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for
each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or
pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded
(nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than
the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying
amount, it is recognized as part of future interest income.
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. Building and related components are depreciated using the straight-line method with useful lives ranging from 10 to
39 years. Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to
10 years.
Other Real Estate Owned
Other real estate owned consists of properties acquired through foreclosure and, as held for sale property, are initially recorded at fair
value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a
consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the
property to satisfy the loan through completion of a deed in lieu of foreclosure or through similar legal agreement. These assets are subsequently
accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Operation costs after acquisition are expensed. 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, 2020 and 2019, other real estate owned totaled $5.8 million and $7.3 million, respectively.
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Goodwill and Other Intangible Assets
The change in goodwill during the year is as follows ($ in thousands):
Beginning of year
Acquired goodwill
End of year
2020
$ 158,572
(1,628)
$ 156,944
$
2019
89,750
68,822
$ 158,572
2018
$ 19,960
69,790
$ 89,750
Goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is
performed to determine whether the existence of events or circumstances leads to a determination that is more likely than not the fair value is
less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is
less than the carrying value, then goodwill is tested further for impairment. The goodwill impairment loss, if any, is measured as the amount by
which the carrying amount of the reporting unit, including goodwill, exceeds its fair value. Subsequent increases in goodwill value are not
recognized in the consolidated financial statements. During the first quarter of 2020, management determined that the deterioration in the
general economic conditions as a result of the COVID-19 pandemic represented a triggering event prompting an evaluation of goodwill
impairment. Based on the analyses performed in the first quarter of 2020, we determined that goodwill was not impaired. Due to the ongoing
economic uncertainty present at the end of the second quarter, the Company prepared a Step 1 goodwill impairment analysis as of June 30,
2020. In testing goodwill for impairment, the Company compared the estimated fair value of its reporting unit to its carrying amount, including
goodwill. The estimated fair value of the reporting unit exceeded its book value. As of December 31, 2020, the Company's reporting unit had
positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the
reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair
value of the reporting unit exceeded its carrying value, resulting in no impairment. For the goodwill impairment analysis, the Commercial/Retail
Bank segment of the Company is the only reporting unit.
The Company’s acquisition method recognized intangible assets, which are subject to amortization, and included in other assets in the
accompanying consolidated balance sheets, are core deposit intangibles, amortized on a straight-line basis, over a 10 year average life. Such
assets are periodically evaluated as to the recoverability of carrying values. The definite-lived intangible assets had the following carrying
values at December 31, 2020 and 2019:
2020
($ in thousands)
Core deposit intangibles
Core deposit intangibles
74
Gross
Carrying
Net
Carrying
Amount Amortization Amount
(11,895) $ 30,756
Accumulated
$ 42,651
$
2019
Gross
Carrying Accumulated
Net
Carrying
Amount Amortization Amount
(7,802) $ 30,293
$ 38,095
$
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The related amortization expense of business combination related intangible assets is as follows:
($ in thousands)
Aggregate amortization expense for the year ended December 31:
2018
2019
2020
Estimated amortization expense for the year ending December 31:
2021
2022
2023
2024
2025
Thereafter
Amount
1,656
3,216
4,093
Amount
4,137
3,967
3,921
3,891
3,876
10,964
30,756
$
$
$
Cash Surrender Value of Life Insurance
The Company invests in bank owned life insurance (“BOLI”). BOLI involves the purchase 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.
Deferred Financing Costs
Financing costs related to the issuance of junior subordinated debentures are being amortized over the life of the instruments and are
included in other liabilities.
Restricted Stock
The Company accounts for stock based compensation in accordance with ASC Topic 718, Compensation - Stock Compensation.
Compensation cost is recognized for all restricted stock granted based on the weighted average fair value stock price at the grant date.
Treasury Stock
Common stock shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the first-in, first-out
method.
Income Taxes
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.
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.
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, 2020 and 2019, had no uncertain tax
positions that qualify for either recognition or disclosure in the financial statements.
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Advertising Costs
Advertising costs are expensed in the period in which they are incurred. Advertising expense for the years ended December 31, 2020,
2019 and 2018, was $333 thousand, $648 thousand, and $382 thousand, respectively.
Statements of Cash Flows
Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds
sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal
funds purchased and repurchase agreements.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the subsidiary bank enters into off-balance sheet financial instruments consisting of commitments to
extend credit, credit card lines and standby letters of credit. The face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded in the financial statements when they are funded.
Earnings Available to Common Stockholders
Per share amounts are presented in accordance with ASC Topic 260, Earnings Per Share. Under ASC Topic 260, two per share
amounts are considered and presented, if applicable. Basic per share data is calculated based on the weighted-average number of common
shares outstanding during the reporting period. Diluted per share data includes any dilution from securities that may be converted into common
stock, such as outstanding restricted stock. There were no anti-dilutive common stock equivalents excluded in the calculations.
The following tables disclose the reconciliation of the numerators and denominators of the basic and diluted computations available to
common stockholders ($ in thousands, except per share amount):
For the Year Ended December 31, 2020
Basic per common share
Effect of dilutive shares:
Restricted Stock
Basic per common
share
Effect of dilutive shares:
Restricted Stock
Net
Income
(Numerator)
Weighted Average
Shares
(Denominator)
Per Share
Amount
$
52,505
20,718,544
—
52,505
$
104,106
20,822,650
$
$
2.53
2.52
For the Year Ended December 31, 2019
Net
Income
(Numerator)
Weighted Average
Shares
(Denominator)
Per Share
Amount
$
43,745
17,050,095
$
2.57
—
43,745
$
133,990
17,184,085
$
2.55
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Basic per common share
Effect of dilutive shares:
Restricted Stock
For the Year Ended December 31, 2018
Net
Income
(Numerator)
21,225
$
Weighted Average
Shares
(Denominator)
12,985,733
$
Per Share
Amount
1.63
—
21,225
$
108,192
13,093,925
$
1.62
The diluted per share amounts were computed by applying the treasury stock method.
Mergers and Acquisitions
Business combinations are accounted for under ASC 805, “Business Combinations”, using the acquisition method of accounting. The
acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date
measured at their fair values as of that date. To determine the fair values, the Company relies on third party valuations, such as appraisals, or
internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the
Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are
costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or
consulting fees. Some other examples of costs to the Company include systems conversion, integration planning consultants and advertising
costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are
received, with one exception. The costs to issue debt or equity securities is recognized in accordance with other applicable GAAP. These
acquisition-related costs have been and will be included within the Consolidated Statements of Income classified within the non-interest
expense caption.
Investment in Limited Partnership
The Company invested $4.4 million in a limited partnership that provides low-income housing. The Company is not the general
partner and does not have controlling ownership. The carrying value of the Company’s investment in the limited partnership was $2.5 million at
December 31, 2020 and $3.0 million at December 31, 2019, net of amortization, using the proportional method and is reported in other assets on
the Consolidated Balance Sheets. The Company’s maximum exposure to loss is limited to the carrying value of its investment. The Company
received $481 thousand in low-income housing tax credits during 2020, 2019 and 2018.
Reclassifications
Certain reclassifications have been made to the 2019 and 2018 financial statements to conform with the classifications used in 2020.
These reclassifications did not impact the Company’s consolidated financial condition or results of operations.
Accounting Standards
During the year ended December 31, 2020, there were no significant accounting pronouncements applicable to the Company that
became effective.
New Accounting Standards That Have Not Yet Been Adopted
In October 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-08, “Codification Improvements to Subtopic 310-
20 Receivables – Nonrefundable Fees and Other Costs.” ASU 2020-08 clarifies the accounting for the amortization of purchase premiums for
callable debt securities with multiple call dates. ASU 2020-08 will be effective on January 1, 2021 and is not expected to have a material
impact on the Company’s Consolidated Financial Statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): “Facilitation of the Effects of Reference
Rate Reform on Financial Reporting.” This ASU provides temporary optional guidance to ease the potential burden in accounting for reference
rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting
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principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference
rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance
is effective for all entities as of March 12, 2020 through December 31, 2022.
In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 clarifies that
certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected
by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the
scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The guidance is effective
as of January 1, 2021. The Company is assessing ASU 2020-04 and ASU 2021-01 and their impact on the Company’s transition away from
LIBOR for its loan and other financial instruments.
In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU makes narrow-
scope improvements to various aspects of the financial instruments guidance, including the current expected credit losses (“CECL”) standard
issued in 2016. ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
and subsequent ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This
amendment is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained
earnings, as of the beginning of the first reporting period in which the guidance is effective. The Company elected to delay the adoption of
CECL afforded through the CARES Act. The Company currently anticipates CECL adoption to occur as of January 1, 2021.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes.”
ASU 2019-12 removes specific exceptions to the general principles in Topic 740. This update simplifies the accounting for income taxes by
eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating
income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The ASU also improves financial
statement preparers’ application for income tax-related guidance, simplifies GAAP for franchise taxes and enacted changes in tax laws or rates,
and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will be effective on January 1,
2021 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments” (“ASU 2016-13”). The FASB issued new guidance (Topic 326) to replace the incurred loss model for loans and other
financial assets with an expected loss model, which is referred to as the CECL model. The CECL model is applicable to the measurement of
credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to
off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other
similar instruments) and net investments in certain leases recognized by a lessor. In addition, the amendments in Topic 326 require credit losses
on available-for-sale debt securities to be presented as a valuation allowance rather than as a direct write-down. The standard will be effective
for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years. For calendar year-end SEC filers, it is
effective for March 31, 2020 interim financial statements. For debt securities with OTTI, the guidance will be applied prospectively. Existing
PCI assets will be grandfathered and classified as purchased credit deteriorated (“PCD”) assets at the date of adoption. The assets will be
grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit
discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be
recorded through the allowance. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained
earnings as of the beginning of the first reporting period in which the guidance is effective. The Company elected to delay the adoption of
CECL afforded through the CARES Act. The Company currently anticipates CECL adoption to occur as of January 1, 2021.
The Company’s Allowance for Credit Loss Committee (“ACL Committee”), made up of executive and senior management from
corporate administration, accounting, risk management, and credit and portfolio administration, have reviewed and approved the methodology
and initial setup of the CECL Model. All historical data used in the model’s calculation, the mathematical accuracy of that calculation, and any
inputs provided externally that affect the calculation have been independently validated. Internal controls necessary in maintaining accuracy to
estimate an adequate reserve have been designed but not tested for operating effectiveness. The Company elected to delay the adoption of
CECL afforded through the CARES Act. The Company currently anticipates CECL adoption to occur as of January 1, 2021. The delayed
adoption will allow extra time to document and test controls over this standard and will allow us time to provide consistent, high-quality
financial information to our investors and other stakeholders.
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Upon adopting ASU 2016-13, the Company will not record an allowance as of January 1, 2021 with respect to its available-for-sale
debt securities as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. In the first
quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the
2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital
determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the
capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). The Company has elected to delay its adoption of
ASU 2016-13, as provided by the CARES Act. The Company currently anticipates CECL adoption to occur as of January 1, 2021. The
Company plans to elect and utilize the five-year CECL transition. The adoption of ASU 2016-13 is not expected to have a significant impact on
the Company's regulatory capital ratios.
NOTE C – BUSINESS COMBINATIONS
The Company accounts for its business combinations using the acquisition method. Acquisition accounting requires the total purchase
price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be
recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill.
Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations
accounted for under the acquisition method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized using
the straight-line method over their estimated useful lives of up to ten years. Loans that the Company acquires in connection with acquisitions are
recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the loans involves estimating the amount and
timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
The excess or deficit of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount or amortizable
premium and is recognized into interest income over the remaining life of the loan.
Acquisitions
Southwest Georgia Financial Corporation
On April 3, 2020, the Company completed its acquisition of SWG, and immediately thereafter merged its wholly-owned subsidiary,
Southwest Georgia Bank with and into The First. The Company paid a total consideration of $47.9 million to the SWG shareholders as
consideration in the merger, which included 2,546,967 shares of Company common stock and approximately $2 thousand in cash. As a result
of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to
reduce costs through economies of scale.
In connection with the acquisition, the Company recorded a $7.8 million bargain purchase gain and $4.6 million core deposit
intangible. The bargain purchase gain was generated as a result of the estimated fair value of net assets acquired exceeding the merger
consideration, based on provisional fair values, which is reflected as an adjustment to retained earnings. The bargain purchase gain is
considered non-taxable for income taxes purposes. The core deposit intangible will be amortized to expense over 10 years.
The Company acquired the $394.6 million loan portfolio at an estimated fair value discount of $2.3 million. The discount represents
expected credit losses, adjusted for market interest rates and liquidity adjustments.
Expenses associated with the SWG acquisition were $2.5 million and $257 thousand for the twelve months period ended December 31,
2020 and 2019, respectively. These costs included system conversion and integrating operations charges and legal and consulting expenses,
which have been expensed as incurred.
The assets acquired and liabilities assumed and consideration paid in the acquisition of SWG were recorded at their estimated fair
values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to
one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates,
accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement
period, which runs through April 3, 2021 in respect of SWG, in the measurement period in which the adjustment amounts are determined. The
acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any,
as a result of changes to the provisional amounts, calculated as if the accounting had been
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completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit
intangible and the deferred income tax assets resulting from the acquisition.
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed and the goodwill (bargain
purchase gain) generated from the transaction ($ in thousands):
Purchase price:
Cash and stock
Total purchase price
Identifiable assets:
Cash and due from banks
Investments
Loans
Core deposit intangible
Personal and real property
Bank owned life insurance
Other assets
Total assets
Liabilities and equity:
Deposits
Borrowed funds
Other liabilities
Total liabilities
Net assets acquired
Bargain purchase gain
$
$
$
47,860
47,860
29,247
89,737
392,292
4,556
18,558
6,963
3,402
544,755
476,099
9,500
3,461
489,060
55,695
(7,835)
The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of
acquisition and at December 31, 2020, are as follows ($ in thousands):
Outstanding principal balance
Carrying amount
$
297,528
295,772
PCI loans are discussed more fully under Part II – Item 8. Financial Statements and Supplementary Data – Note E – Loans of this
report.
First Florida Bancorp, Inc.
On November 1, 2019, the Company completed its acquisition of FFB, and immediately thereafter merged its wholly-owned
subsidiary, First Florida Bank with and into The First. The Company paid a total consideration of $89.5 million in stock to the FFB
shareholders as consideration in the merger, which included 1,682,889 shares of Company common stock and approximately $34.1 million in
cash.
In connection with the acquisition, the Company recorded approximately $38.4 million of goodwill and $3.7 million of core deposit
intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.
The Company acquired the $248.9 million loan portfolio at an estimated fair value discount of $1.7 million. The discount represents
expected credit losses, adjusted for market interest rates and liquidity adjustments.
Expenses associated with the acquisition were $668 thousand and $2.4 million for the twelve months period ended December 31, 2020
and 2019, respectively. These costs included system conversion and integrating operations charges and legal and consulting expenses, which
have been expensed as incurred.
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The following table summarizes the finalized fair values of the assets acquired and liabilities assumed on November 1, 2019, along
with valuation adjustments that have been made since initially reported ($ in thousands):
Identifiable assets:
Cash and due from banks
Investments
Loans
Core deposit intangible
Personal and real property
Other assets
Total assets
Liabilities and equity:
Deposits
Borrowed funds
Other liabilities
Total liabilities
Net assets acquired
Consideration paid
Goodwill resulting from acquisition
As Initially
Measurement
Period
Reported Adjustments As Adjusted
$
$
50,169
122,084
247,263
3,745
4,991
2,283
430,535
373,908
5,527
1,619
381,054
49,481
89,520
40,039
$
—
—
—
—
—
1,336
1,336
—
—
(295)
(295)
1,631
—
(1,631) $
$
50,169
122,084
247,263
3,745
4,991
3,619
431,871
373,908
5,527
1,324
380,759
51,112
89,520
38,408
The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets at December 31,
2020, are as follows ($ in thousands):
Outstanding principal balance
Carrying amount
$
160,641
159,628
PCI loans are discussed more fully under Part II – Item 8. Financial Statements and Supplementary Data – Note E – Loans of this
report.
FPB Financial Corp.
On March 2, 2019, the Company completed its acquisition of FPB, and immediately thereafter merged its wholly-owned subsidiary,
Florida Parishes Bank with and into The First. The Company paid a total consideration of $78.2 million in stock to the FPB shareholders as
consideration in the merger, which included 2,377,501 shares of Company common stock and $5 thousand in cash.
In connection with the acquisition, the Company recorded approximately $28.8 million of goodwill and $6.6 million of core deposit
intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.
The Company acquired the $247.8 million loan portfolio at an estimated fair value discount of $3.1 million. The discount represents
expected credit losses, adjusted for market interest rates and liquidity adjustments.
Expenses associated with the acquisition were $77 thousand and $2.3 million for the twelve months period ended December 31, 2020
and 2019, respectively. These costs included system conversion and integrating operations charges and legal and consulting expenses, which
have been expensed as incurred.
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Supplemental Pro Forma Information
The following table presents certain supplemental pro forma information, for illustrative purposes only, for the years December 31,
2020 and 2019 as if the FPB, FFB and SWG acquisitions had occurred on January 1, 2019. The pro forma financial information is not
necessarily indicative of the results of operations had the acquisitions been effective as of this date.
($ in thousands)
Net interest income
Non-interest income
Total revenue
Income before income taxes
Pro Forma for the Year Ended
December 31,
2020
(unaudited)
158,241
$
43,077
201,318
66,283
$
2019
(unaudited)
158,179
35,342
193,521
84,666
Supplemental pro-forma earnings were adjusted to exclude acquisition costs incurred.
Non-credit impaired loans acquired in the acquisitions were accounted for in accordance with ASC 310-20, Receivables-
Nonrefundable Fees and Other Costs. Purchased credit impaired loans acquired in the FPB, FFB and SWG acquisitions were accounted for in
accordance with ASC 310-30 Accounting for Purchased Loans with Deteriorated Credit Quality.
NOTE D – SECURITIES
The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at
December 31, 2020 and 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss) and gross unrecognized gains and losses:
Amortized Unrealized
Gross
December 31, 2020
Gross
Unrealized
Losses
Gains
Fair
Value
($ in thousands)
Available-for-sale securities:
U.S Treasury
Obligations of U.S. government agencies and sponsored entities
Tax-exempt and taxable obligations of states and municipal subdivisions
Mortgage-backed securities - residential
Mortgage-backed securities - commercial
Corporate obligations
Total available-for-sale
Cost
$
9,063
97,107
464,348
228,257
158,784
30,063
$ 987,622
$
$
320
3,130
16,326
8,206
6,087
976
35,045
$
$
— $
67
300
42
60
16
485
9,383
100,170
480,374
236,421
164,811
31,023
$ 1,022,182
($ in thousands)
Available-for-sale securities:
U.S Treasury
Obligations of U.S. government agencies and sponsored entities
Tax-exempt and taxable obligations of states and municipal subdivisions
Mortgage-backed securities - residential
Mortgage-backed securities - commercial
Corporate obligations
Total available-for-sale
82
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
— $
1,475
5,602
4,726
2,398
218
14,419
$
$
73
224
147
107
223
149
923
Fair
Value
$
4,894
77,950
258,982
267,848
127,467
27,946
$ 765,087
Amortized
Cost
$
4,967
76,699
253,527
263,229
125,292
27,877
$ 751,591
Table of Contents
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from
contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)
Available-for-Sale
Within one year
One to five years
Five to ten years
Beyond ten years
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Total
December 31, 2020
Fair
Value
Amortized
Cost
$ 37,504
142,110
198,583
222,384
228,257
158,784
$ 987,622
$
37,739
147,659
204,968
230,584
236,421
164,811
$ 1,022,182
The proceeds from sales and calls of securities and the associated gains and losses are listed below
($ in thousands):
Gross gains
Gross losses
Realized net gain
2020
2019
2018
$
$
289
8
281
$
$
147
25
122
$
$
880
546
334
Securities with a carrying value of $576.0 million and $447.0 million at December 31, 2020 and 2019, respectively, were pledged to
secure public deposits, repurchase agreements, and for other purposes as required or permitted by law.
The following table summarizes available-for-sale securities with unrealized and unrecognized losses at December 31, 2020 and
December 31, 2019, aggregated by major security type and length of time in a continuous unrealized or unrecognized loss position:
($ in thousands)
U.S. Treasury
Obligations of U.S. government agencies and sponsored
entities
Tax-exempt and taxable obligations of states and
municipal subdivisions
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Corporate obligations
Total available-for-sale
Less than 12 Months
2020
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
— $
— $
— $
— $
— $
6,593
10,193
30,202
10,134
5,217
$ 62,339
$
65
300
42
29
8
444
326
2
6,919
—
11
3,596
40
3,973
$
$
—
—
31
8
41
10,193
30,213
13,730
5,257
$ 66,312
$
—
67
300
42
60
16
485
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($in thousands)
U.S. Treasury
Obligations of U.S. government agencies and sponsored
entities
Tax-exempt and taxable obligations of states and municipal
subdivisions
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Corporate obligations
Total available-for-sale
Less than 12 Months
2019
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
4,894
$
73
$
— $
— $
4,894
$
22,987
27,913
22,328
10,787
10,636
$ 99,545
$
224
146
55
166
49
713
—
322
7,602
17,649
436
$ 26,009
$
—
1
52
57
100
210
22,987
28,235
29,930
28,436
11,072
$ 125,554
$
73
224
147
107
223
149
923
At December 31, 2020 and December 31, 2019, the Company’s security portfolio consisted of 71 and 156 securities, respectively, that
were in an unrealized loss position. The Company reviews its investment portfolio quarterly for indications of OTTI, with attention given to
securities in a continuous loss position of at least ten percent for over twelve months. Management believes that none of the losses on available-
for-sale securities noted above constitute an OTTI and does not have the intent to sell these securities and it is likely that it will not be required
to sell the securities before their anticipated recovery. The noted losses are considered temporary due to market fluctuations in available interest
rates. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the
collectability of all contractual principal and interest payments is reasonably expected. No OTTI losses were recognized at December 31, 2020
and 2019.
NOTE E – LOANS
The Company uses four different categories to classify loans in its portfolio based on the underlying collateral securing each loan. The
loans grouped together in each category have been determined to share similar risk characteristics with respect to credit quality. Those four
categories are commercial, financial and agriculture, commercial real estate, consumer real estate, consumer installment;
Commercial, financial and agriculture – Commercial, financial and agriculture loans include loans to business entities issued for
commercial, industrial, or other business purposes. This type of commercial loan shares a similar risk characteristic in that unlike
commercial real estate loans, repayment is largely dependent on cash flow generated from the operation of the business.
Commercial real estate – Commercial real estate loans are grouped as such because repayment is mainly dependent upon either the
sale of the real estate, operation of the business occupying the real estate, or refinance of the debt obligation. This includes both owner
occupied and non-owner occupied CRE secured loans, because they share similar risk characteristics related to these variables.
Consumer real estate – Consumer real estate loans consist primarily of loans secured by 1-4 family residential properties and/or
residential lots. This includes loans for the purpose of constructing improvements on the residential property, as well as home equity
lines of credit.
Consumer installment – Consumer installment loans are all loans issued to individuals that are not for any purpose related to operation
of a business, and not secured by real estate. Repayment on these loans is mostly dependent on personal income, which may be
impacted by general economic conditions.
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The following table shows the composition of the loan portfolio by category ($in thousands):
December 31, 2020
December 31, 2019
Mortgage loans held for sale
Commercial, financial and agriculture (1)
Commercial real estate
Consumer real estate
Consumer installment
Lease financing receivable
Obligation of states and subdivisions
Total loans
Allowance for loan losses
Net loans
Amount
$
21,432
561,341
1,652,993
850,206
41,036
2,733
15,369
3,145,110
(35,820)
$ 3,109,290
Percent
of
Total
Percent
of
Total
Amount
10,810
0.7 % $
17.8 %
332,600
52.6 % 1,387,207
814,282
27.0 %
42,458
1.3 %
3,095
0.1 %
0.5 %
20,716
100 % 2,611,168
(13,908)
$ 2,597,260
0.4 %
12.7 %
53.2 %
31.2 %
1.6 %
0.1 %
0.8 %
100 %
(1) Loan amount as of December 31, 2020 includes $239.7 million in PPP loans.
Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from
investors to purchase the loans are obtained upon origination.
Activity in the allowance for loan losses for December 31, 2020, 2019 and 2018 was as follows:
($ in thousands)
Balance at beginning of period
Prior period reclassification – Mortgage Reserve Funding
Beginning balance of allowance restated
Loans charged-off:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Recoveries on loans previously charged-off:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Net (Charge-offs) Recoveries
Provision for Loan Losses
Balance at end of period
85
$
2020
13,908
$
—
2019
10,065
$
—
13,908
10,065
2018
8,288
(181)
8,107
(1,496)
(2,256)
(280)
(447)
(4,479)
169
418
251
402
1,240
(3,239)
25,151
35,820
$
(141)
(54)
(163)
(306)
(664)
85
142
240
302
769
105
3,738
13,908
$
(265)
(222)
(7)
(87)
(581)
44
44
183
148
419
(162)
2,120
10,065
$
Table of Contents
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, 2020 and 2019. The tables also provide additional detail as to the amount of
our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the
Company's systematic methodology for estimating its Allowance for Loan Losses ($ in thousands).
December 31, 2020
Loans
Individually evaluated
Collectively evaluated
PCI Loans
Total
Allowance for Loan Losses
Individually evaluated
Collectively evaluated
Total
December 31, 2019
Loans
Individually evaluated
Collectively evaluated
PCI Loans
Total
Allowance for Loan Losses
Individually evaluated
Collectively evaluated
Total
Commercial,
Financial and
Commercial
Agriculture Real Estate
Consumer
Real Estate
Consumer
Installment
Unallocated
Total
$
$
$
$
2,241
574,152
244
576,637
23,857
$
1,971,292
9,056
$ 2,004,205
1,235
4,979
6,214
$
$
4,244
20,075
24,319
$
$
$
$
1,248
494,833
5,185
501,266
176
4,560
4,736
$
$
$
$
49
41,498
23
41,570
14
537
551
$
$
$
$
27,395
— $
— 3,081,775
—
14,508
— $ 3,123,678
— $
—
— $
5,669
30,151
35,820
Commercial,
Financial and
Commercial
Agriculture Real Estate
Consumer
Real Estate
Consumer
Installment
Unallocated
Total
$
2,493
339,003
191
$ 341,687
25,984
$
1,773,934
10,471
$ 1,810,389
1,181
$
398,471
7,204
$ 406,856
$
$
1,182
1,861
3,043
$
$
3,021
5,815
8,836
$
$
141
1,553
1,694
$
$
$
$
281
41,112
33
41,426
80
216
296
$
$
$
$
29,939
— $
2,552,520
—
—
17,899
— $ 2,600,358
— $
39
39
$
4,424
9,484
13,908
For those PCI loans disclosed above, no impairment has been provided through the allowance for loan losses.
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The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2020, 2019 and
2018. The tables do not include PCI loans. The recorded investment included in the following table represents customer balances net of any
partial charge-offs recognized on the loans, net of any deferred fees and costs. Recorded investment excludes any insignificant amount of
accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any
partial charge-offs.
December 31, 2020
($ in thousands)
Impaired loans with no related allowance:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Impaired loans with a related allowance:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Total Impaired Loans:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total Impaired Loans
Recorded
Unpaid
Investment Balance
Related
Allowance
Average
Recorded
Investment
YTD
Interest
Income
Recognized
YTD
— $
198
— 11,433
—
790
17
—
— $ 12,438
1,235
4,244
176
14
5,669
1,235
4,244
176
14
5,669
2,186
$
13,687
734
86
$ 16,693
$
2,384
25,120
1,524
103
$ 29,131
$
$
$
$
$
$
—
47
5
—
52
58
36
4
—
98
58
83
9
—
150
$
$
$
$
$
$
$
— $
— $
5,884
712
23
6,619
6,087
758
24
6,869
$
2,241
$
17,973
536
26
$ 20,776
2,254
$
18,248
544
26
$ 21,072
$
2,241
23,857
1,248
49
$ 27,395
$
2,254
24,335
1,302
50
$ 27,941
87
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December 31, 2019
($ in thousands)
Impaired loans with no related allowance:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Impaired loans with a related allowance:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Total Impaired Loans:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total Impaired Loans
December 31, 2018
($ in thousands)
Impaired loans with no related allowance:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Impaired loans with a related allowance:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Total Impaired Loans:
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total Impaired Loans
Recorded
Unpaid
Investment Balance
Related
Allowance
Average
Recorded
Investment
YTD
Interest
Income
Recognized
YTD
59
$
13,556
542
21
$ 14,178
62
$
13,671
594
21
$ 14,348
$
2,434
12,428
639
260
$ 15,761
$
2,434
12,563
657
260
$ 15,914
$
2,493
25,984
1,181
281
$ 29,939
$
2,496
26,234
1,251
281
$ 30,262
$
$
$
$
$
$
294
— $
— 10,473
2,173
—
—
23
— $ 12,963
1,182
3,021
141
80
4,424
1,182
3,021
141
80
4,424
$
2,039
10,026
560
164
$ 12,789
$
2,333
20,499
2,733
187
$ 25,752
$
$
$
$
$
$
7
591
—
—
598
13
49
3
2
67
20
640
3
2
665
Recorded
Unpaid
Investment Balance Allowance
Related
Average
Recorded
Investment
YTD
Interest
Income
Recognized
YTD
$
$
$
$
709
6,441
445
—
$
7,595
$
709
8,170
760
—
$
9,639
— $
379
—
7,685
—
4,522
82
—
— $ 12,668
960
4,512
$
960
4,512
$
329
758
$
968
2,868
366
26
5,846
$
366
26
5,864
$
$
1,669
10,953
811
26
$ 13,459
$
1,669
12,682
1,126
26
$ 15,503
66
26
1,179
555
24
4,415
$
329
758
66
26
1,179
$
1,347
10,553
5,077
106
$ 17,083
$
$
$
$
$
$
$
$
$
27
427
69
3
526
3
176
16
—
195
30
603
85
3
721
The cash basis interest earned in the chart above is materially the same as the interest recognized during impairment for the years
ended December 31, 2020, 2019 and 2018.
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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, 2020, 2019 and 2018, was $1.5 million, $348 thousand and $782 thousand, respectively. The Company had
no loan commitments to borrowers in nonaccrual status at December 31, 2020 and 2019.
We acquired loans with deteriorated credit quality in 2014, 2017, 2018,2019 and 2020. These loans were recorded at estimated fair
value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition
date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (purchased credit
impaired loans). Acquired loans are considered to be impaired if it is probable, based on current available information, that the Company will be
unable to collect all cash flows as expected. If expected cash flows cannot reasonably be estimated as to what will be collected, there will not be
any interest income recognized on these loans.
The following presents information regarding the contractually required payments receivable, cash flows expected to be collected and
the estimated fair value of PCI loans acquired in the acquisitions from 2019 and 2020.
($ in thousands)
Contractually required payments at acquisition
Cash flows expected to be collected at acquisition
Fair value of loans at acquisition
$
FPB
4,715
4,295
3,916
$
FFB
SWG
Total
$
947
955
809
$
882
570
526
6,544
5,820
5,251
Total carrying amount purchased credit impaired loans were $11.6 million and the related purchase accounting discount was $2.9
million as of December 31, 2020, and $14.5 million and $3.4 million as of December 31, 2019, respectively. The outstanding balance of these
loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at
the reporting date, whether or not currently due and whether or not any such amounts have been charged off.
Changes in the carrying amount and accretable yield for purchased credit impaired loans were as follows for the year ended December
31, 2020 and 2019 ($ in thousands):
2020
Accretable Carrying Amount
Yield
of Loans
2019
Accretable Carrying Amount
Yield
of Loans
Balance at beginning of period
Additions, including transfers from non-accretable
Accretion
Payments received, net
Balance at end of period
$
$
$
3,417
569
(1,079)
—
$
2,907
14,482
526
1,079
(4,486)
11,601
$
$
$
3,835
525
(943)
—
$
3,417
13,817
5,251
943
(5,529)
14,482
Troubled Debt Restructuring
The following tables provide details of TDRs during the twelve months ended December 31, 2020, 2019 and 2018. The modifications
included one of the following or a combination of the following: maturity date extensions, interest only payments,
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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.
($ in thousands, except for number of loans)
December 31, 2020
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
December 31, 2019
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
December 31, 2018
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
Pre-Modification Post-Modification
$
$
12
2,067
—
1
2,080
$
$
9
2,042
—
1
2,052
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
Number of
Loans
Interest
Income
Recognized
$
1
7
—
1
9
$
2
40
—
—
42
Interest
Income
$
$
Pre-Modification Post-Modification Number of Loans Recognized
19
1,023
137
16,122
12
553
—
11
168
17,709
979
15,953
551
10
17,493
7
14
3
2
26
$
$
$
$
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
Pre-Modification Post-Modification
$
$
681
3,536
—
—
$
4,217
$
Number of
Loans
Interest
Income
Recognized
$
2
3
—
—
$
5
23
80
—
—
103
663
3,532
—
—
4,195
The TDRs presented above increased the allowance for loan losses $127 thousand, $1.4 million and $105 thousand and resulted in no
charge-offs for the years ended December 31, 2020, 2019 and 2018, respectively.
In response to the COVID-19 pandemic and its economic impact to its customers, the Company implemented a short-term
modification program in accordance with interagency regulatory guidance to provide temporary payment relief to those borrowers directly
impacted by COVI-19 who were not more than 30 days past due at the time of the modification. This program allowed for a deferral of
payments for up two successive 90 day periods for a cumulative maximum of 180 days. Pursuant to interagency guidance, such short-term
deferrals are not deemed to meet the criteria for reporting as TDRs. For borrowers requiring a longer-term modification following the short-term
loan modification program the Company worked with these borrowers whose loans were not more 30 days past due at December 31, 2019 and
who required modification as a result of COVID-19 to modify such loans under Section 4013 of the CARES Act. The balance of TDRs at
December 31, 2020, 2019 and 2018, was $27.5 million, $32.0 million and $14.3 million, respectively. As of December 31, 2020, the Company
had no additional amount committed on any loan classified as a TDR.
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The following tables represents the Company’s TDRs for the year ended December 31, 2020, 2019 and 2018:
December 31, 2020
($ in thousands)
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Allowance for loan losses
December 31, 2019
($ in thousands)
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Allowance for loan losses
December 31, 2018
($ in thousands)
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Total
Allowance for loan losses
Current
Loans
Past Due
30‑‑89
Past Due 90
days and still
accruing
Nonaccrual
Total
$
$
$
59
4,560
1,559
23
6,201
163
$
$
$
— $
49
269
3
321
29
$
$
765
18,076
2,161
— $
—
—
—
— $ 21,002
3,936
— $
—
$
824
22,685
3,989
26
$ 27,524
4,128
$
Current
Loans
Past Due days and still
30‑‑89
accruing
Past Due 90
$
583
4,299
1,905
37
$ 6,824
128
$
$
$
$
$
64
809
112
—
985
$
— $
Nonaccrual
1,062
19,991
2,940
$ 23,993
1,997
— $
109
58
—
167
— $
—
Total
$
1,709
25,208
5,015
37
$ 31,969
2,125
$
Current
Loans
Past Due
30‑‑89
Past Due 90
days and still
accruing
$
$
$
13
4,827
442
25
5,307
80
$
$
$
646
$
—
86
—
$
732
$
13
Nonaccrual
18
5,425
2,801
13
8,257
110
— $
—
—
—
— $
— $
Total
$
676
10,252
3,329
38
$ 14,295
203
$
The following table presents loans modified as troubled debt restructurings for which there was a payment default within twelve
months following the modification during the year ending December 2020, 2019 and 2018 ($ in thousands, except for number of loans):
Troubled Debt Restructurings
That Subsequently Defaulted:
Commercial, financial and agriculture
Commercial real estate
Total
2020
2019
2018
Number of
Recorded
Number of
Recorded
Number of
Loans
Investment Loans
Investment Loans
Recorded
Investment
0
4
4
$
$
—
1,121
1,121
10
4
14
$
458
15,423
$ 15,881
2
2
4
$
$
663
3,419
4,082
The modifications described above included one of the following or a combination of the following: maturity date extensions, interest
only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate
concessions were given on these loans nor were any of these loans written down. The TDRs presented above increased the allowance for loan
losses $81 thousand, $1.3 million, $99 thousand and resulted in no charge-offs as of December 31, 2020, 2019 and 2018, respectively.
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The following tables summarize by class our loans (excluding mortgage loans held for sale) classified as past due in excess of 30 days
or more in addition to those loans classified as nonaccrual including PCI loans:
December 31,2020
Past Due
30 to 89
Days
Past Due 90
Days or
More and Still
Accruing
Total
Past Due,
Non accrual
and PCI
PCI
($ in thousands)
Commercial, financial and agriculture (1)
Commercial real estate
Consumer real estate
Consumer installment
Lease financing receivable
Obligations of states and subdivisions
Total
$
$
$
1,007
2,116
5,389
419
—
—
$
8,931
244
1,553
895
—
—
—
$
2,692
Non accrual
2,197
$
19,499
2,480
32
—
—
24,208
$
$
$
221
3,388
5,954
3
—
—
$
9,566
$
Total
Loans
561,341
1,652,993
850,206
41,036
2,733
15,369
$ 3,123,678
3,669
26,556
14,718
454
—
—
45,397
(1) Total loan amount as of December 31, 2020 includes $239.7 million in PPP loans.
December 31, 2019
($ in thousands)
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Consumer installment
Lease financing receivable
Obligations of states and subdivisions
Total
$
$
Past Due 90
Days or More
and
Past Due
30 to 89
Days
515
2,447
4,569
226
$
Still Accruing
61
1,046
1,608
—
—
—
$
Non accrual
2,137
$
22,441
1,902
260
—
—
26,740
2,715
—
—
$
7,757
Total
Past Due,
Non accrual
and PCI
PCI
$
$
$
97
3,844
8,148
6
—
—
$
12,095
$
Total
Loans
332,600
1,387,207
814,282
42,458
3,095
20,716
$ 2,600,358
2,810
29,778
16,227
492
—
—
49,307
Additionally, the Company is working with borrowers impacted by COVID-19 and providing short-term (180 days or less)
modifications in the form of interest only modifications or principal and interest deferrals. For the year ended December 31, 2020, we have
modified approximately 1,627 loans for $672.3 million, of which 1,390 loans for $512.6 million were modified to defer monthly principal and
interest payments and 237 loans for $159.7 million were modified from monthly principal and interest payments to interest only. As of
December 31, 2020, the Bank had 70 deferred loans totaling approximately $82.0 million, of which 42 loans for $33.1 million were principal
and payment deferrals and 28 loans for $48.9 million were interest only modifications.
The following table summarizes by class the deferred loans as of December 31, 2020 ($ in thousands):
Commercial, financial and agriculture
Commercial real estate
Consumer real estate
Total
Number
of Loans
16
44
10
70
Unpaid
Principal
Balance
$
$
7,701
69,718
4,589
82,008
As of December 31, 2020, there were 33 loans for $37.3 million downgraded to special mention and 13 loans for $8.3 million
downgraded to substandard. As of December 31, 2020, accrued interest receivable related to the short-term modifications totaled $9.2 million.
For the year ended December 31, 2020, we have approximately 2,961 PPP loans approved through the SBA for $239.7 million. These
modifications are excluded from troubled debt restructuring classification under Section 4013 of the CARES Act or under applicable
interagency guidance of the federal banking regulators. PPP loans were excluded from the allowance for loan losses.
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In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the
borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under
the Company’s internal underwriting policy.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt,
such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends,
among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory
guidance:
Pass: Loans classified as pass are deemed to possess average to superior credit quality, requiring no more than normal attention.
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left
uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit
position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor
or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of
the debt. They are characterized by the distinct possibility that the 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.
As of December 31, 2020 and 2019, and based on the most recent analysis performed, the risk category of loans by class of loans
(excluding mortgage loans held for sale) was as follows:
December 31, 2020
($ in thousands)
Pass
Special Mention
Substandard
Doubtful
Subtotal
Less:
Unearned Discount
$
Commercial,
Financial and
Agriculture
560,966
2,143
11,875
1,653
576,637
$
Commercial
Real Estate
Consumer
Real Estate
Consumer
Installment
$ 1,841,110
64,012
66,535
23
$ 1,971,680
$
$
$
526,448
1,889
13,397
—
$
541,734
41,418
20
132
41,570
—
Total
$ 2,969,942
68,064
91,939
1,676
$ 3,131,621
—
7,943
—
—
7,943
Loans, net of unearned discount
$
576,637
$ 1,963,737
$
541,734
$
41,570
$ 3,123,678
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December 31, 2019
($ in thousands)
Pass
Special Mention
Substandard
Doubtful
Subtotal
Less:
Unearned Discount
$
Commercial,
Financial and
Agriculture
327,205
3,493
10,972
16
341,686
$
Commercial
Real Estate
Consumer
Real Estate
Consumer
Installment
$ 1,645,496
8,876
50,554
77
$ 1,705,003
$
$
$
499,426
1,194
13,244
—
$
513,864
41,008
21
397
41,426
—
Total
$ 2,513,135
13,584
75,167
93
$ 2,601,979
—
1,621
—
—
1,621
Loans, net of unearned discount
$
341,686
$ 1,703,382
$
513,864
$
41,426
$ 2,600,358
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment owned and utilized in the operations of the Company are stated at cost, less accumulated depreciation and
amortization as follows:
($ in thousands)
Premises:
Land
Buildings and improvements
Equipment
Construction in progress
Less accumulated depreciation and amortization
2020
2019
$
$
34,976
78,490
26,992
521
140,979
26,156
114,823
$
$
30,094
63,346
22,394
6,258
122,092
23,634
98,458
The amounts charged to operating expense for depreciation were $4.9 million, $3.8 million and $2.6 million in 2020, 2019 and 2018,
respectively.
NOTE G - DEPOSITS
Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at December 31, 2020 and 2019, were $149.4 million and
$187.8 million, respectively.
At December 31, 2020, the scheduled maturities of time deposits included in interest-bearing deposits were as follows ($ in
thousands):
Year
2021
2022
2023
2024
2025
Thereafter
94
Amount
420,367
101,645
24,382
13,942
9,374
11,339
581,049
$
$
Table of Contents
NOTE H - BORROWED FUNDS
At December 31, 2020 and 2019, borrowed funds consisted of the following:
($ in thousands)
Fed Funds Purchased
FHLB advances
First Horizon Bank
2020
2019
$
$
— $
110,000
4,647
114,647
$
2,715
206,250
5,354
214,319
Each advance from the FHLB is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances will
mature in March 2021. Interest is payable monthly at rates ranging from 0.72% to 0.77%. 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.
Advances due to the FHLB are collateralized by $3.120 billion in loans. Based on this collateral and holdings of FHLB stock, the Company is
eligible to borrow up to a total of $1.421 billion at December 31, 2020.
As part of the FFB acquisition, the Company assumed two borrowings in the amount of $3.5 million and $2.0 million with First
Horizon Bank. Principal and interest is payable quarterly at rates ranging from 3.80% - 4.10%.
Future annual principal repayment requirements on the borrowings at December 31, 2020, were as follows ($ in thousands):
Year
2021
2022
2023
2024
2025
Thereafter
Amount
110,735
765
795
826
859
667
114,647
$
$
NOTE I – LEASE OBLIGATIONS
The Company enters into leases in the normal course of business primarily for financial centers, back office operations locations and
business development offices. The Company’s leases have remaining terms ranging from 1 to 11 years.
The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is
reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its
real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of
12 months or less (short-term leases) on the Company’s balance sheet.
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-
term leases is recognized on a straight-line basis over the lease term, and is recorded in net occupancy and equipment expense in the
consolidated statements of income and other comprehensive income. Right-of-use assets represent our right to use an underlying asset for the
lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities
are recognized at the lease commencement date and based on the estimated present value of lease payments over the lease term.
The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the
rate implicit in a lease is not known. The Company’s incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for
the lease term and other factors.
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The following table details balance sheet information, as well as weighted-average lease terms and discount rates, related to leases at
December 31, 2020 and 2019 ($ in thousands):
Right-of-use assets:
Operating leases
Finance leases, net of accumulated depreciation
Total right-of-use assets
Lease liabilities:
Operating lease
Finance lease
Total lease liabilities
Weighted average remaining lease term
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
The table below summarizes our net lease costs ($ in thousands):
Operating lease cost
Finance lease cost:
Interest on lease liabilities
Amortization of right-of-use
Net lease cost
December 31,
2020
December 31,
2019
$
$
$
$
5,969
2,658
8,627
6,031
2,281
8,312
$
$
$
$
6,518
—
6,518
6,518
—
6,518
4.4 years
11.2 years
5.0 years
—
2.3 %
2.0 %
2.5 %
— %
December 31,
2020
2019
$
1,763
$
7
183
1,953
$
$
898
—
—
898
The table below summarizes the maturity of remaining lease liabilities at December 31, 2020 and 2019 ($ in thousands):
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
96
December 31, 2020
Operating Leases
Finance Leases
$
$
1,741 $
1,574
1,058
846
666
480
6,365
(334)
6,031
$
193
220
220
220
220
1,460
2,533
(252)
2,281
Table of Contents
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
NOTE J - REGULATORY MATTERS
December 31, 2019
$
Operating Leases Finance Leases
—
—
—
—
—
—
—
—
—
1,643
1,527
1,359
844
631
981
6,985
(467)
6,518
$
$
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.
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 1 capital (as defined) to risk-weighted
assets (as defined), Tier 1 capital to adjusted total assets (leverage) and common equity Tier 1.
Management believes, as of December 31, 2020, that the Company met all capital adequacy requirements to which they are subject.
Under Basel III requirements, 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 1 risk-based capital ratio of 8% or more, has a common equity Tier 1 of 6.5%, and has a Tier 1 leverage capital ratio of 5% or more.
The actual capital amounts and ratios, excluding unrealized losses, at December 31, 2020 and 2019 are presented in the following table ($in
thousands). No amount was deducted from capital for interest-rate risk exposure.
December 31, 2020
Total risk-based
Common equity Tier 1
Tier 1 risk-based
Tier 1 leverage
December 31, 2019
Total risk-based
Common equity Tier 1
Tier 1 risk-based
Tier 1 leverage
Company
(Consolidated)
Subsidiary
The First
Amount
Ratio
Amount
Ratio
$ 618,025
438,109
453,409
453,409
19.1 % $ 549,273
13.5 % 513,453
14.0 % 513,453
9.2 % 513,453
16.9 %
15.8 %
15.8 %
10.4 %
Amount
Ratio
Amount
Ratio
$ 446,571
352,481
367,727
367,727
15.8 % $ 439,538
12.5 % 425,630
13.0 % 425,630
10.3 % 425,630
15.6 %
15.1 %
15.1 %
11.8 %
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Table of Contents
The minimum amounts of capital and ratios, not including Accumulated Other Comprehensive Income, as established by banking
regulators at December 31, 2020, and 2019, were as follows ($ in thousands):
December 31, 2020
Total risk-based
Common equity Tier 1
Tier 1 risk-based
Tier 1 leverage
December 31, 2019
Total risk-based
Common equity Tier 1
Tier 1 risk-based
Tier 1 leverage
Company
(Consolidated)
Subsidiary
The First
Amount
Ratio
Amount
Ratio
$ 258,896
145,629
194,172
129,448
8.0 % $ 259,136
4.5 % 145,764
6.0 % 194,352
4.0 % 129,568
8.0 %
4.5 %
6.0 %
4.0 %
Amount
Ratio
Amount
Ratio
$ 225,932
127,087
169,449
143,460
8.0 % $ 225,413
4.5 % 126,795
6.0 % 169,060
4.0 % 143,940
8.0 %
4.5 %
6.0 %
4.0 %
The principal sources of funds to the Company to pay dividends are the dividends received from The First, A National Banking
Association, Hattiesburg, Mississippi. Consequently, dividends are dependent upon The First’s earnings, capital needs, regulatory policies, as
well as statutory and regulatory limitations. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to
executive officers if the Company's regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.
Federal and state banking laws and regulations restrict the amount of dividends and loans a bank may make to its parent company. Approval by
the Company’s regulators is required if the total of all dividends declared in any calendar year exceed the total of its net income for that year
combined with its retained net income of the preceding two years. In 2020, the Bank had available $55.2 million to pay dividends.
In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address
changes to the credit loss accounting under GAAP, including banking organizations implementation of CECL. The final rule provides banking
organizations the option to phase in over a three year period the day one adverse effects on regulatory capital that may result from the adoption
of the new accounting standard. Based on the Company’s assessment of the CECL accounting standard and the impact of adoption on the
consolidated financial statements and regulatory capital calculations, the Company is planning to adopt the capital transition relief over the
permissible three year period.
NOTE K - INCOME TAXES
The components of income tax expense are as follows ($ in thousands):
Current:
Federal
State
Deferred
Total income tax expense
2020
Years Ended December 31,
2019
2018
$
$
11,270
2,308
(3,015)
10,563
$
$
9,477
2,312
912
12,701
$
$
2,435
834
2,523
5,792
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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 ($ in thousands):
Income taxes at statutory rate
Tax-exempt income
Bargain purchase gain
Nondeductible expenses
State income tax, net of federal tax effect
Tax credits, net
Other, net
2020
Years Ended December 31,
2019
2018
Amount
%
Amount
%
Amount
%
$
$
13,244
(1,868)
(1,645)
188
1,600
(715)
(241)
10,563
21 % $
(2) %
(3) %
— %
3 %
(1) %
(1) %
17 % $
11,854
(1,176)
—
348
1,969
(334)
40
12,701
21 % $
(2) %
—
1 %
4 %
(1) %
— %
23 % $
5,674
(867)
—
403
1,058
(334)
(142)
5,792
21 %
(3)%
—
1 %
4 %
(1)%
(1)%
21 %
The components of deferred income taxes included in the consolidated financial statements were as follows ($ in thousands):
Deferred tax assets:
Allowance for loan losses
Net operating loss carryover
Nonaccrual loan interest
Other real estate
Deferred Compensation
Loan Purchase Accounting
Right-of-use asset
Other
Deferred tax liabilities:
Unrealized gain on available-for-sale securities
Securities
Premises and equipment
Core deposit intangible
Goodwill
Right-of-use liability
Other
Net deferred tax asset/(liability), included in other assets/(liabilities)
December 31,
2020
2019
$
$
9,062
2,147
1,356
252
1,285
2,268
2,103
2,046
20,519
(8,743)
(880)
(7,698)
(7,051)
(1,906)
(2,103)
(550)
(28,931)
(8,412)
$
$
3,430
2,830
895
506
1,190
3,467
1,650
2,146
16,114
(3,417)
(81)
(5,002)
(6,864)
(1,631)
(1,650)
(331)
(18,976)
(2,862)
During 2020, the Company assumed a deferred tax liability of $2.5 million in its acquisition of SWG as well as utilized provisions of
the CARES Act to carryback $712 thousand of net operating losses acquired as part of its 2019 acquisition of FPB.
With the acquisition of Baldwin in 2013, Bay in 2014, Gulf Coast in 2017, Sunshine 2018, and FPB in 2019, the Company assumed
federal tax net operating loss carryovers. $14.7 million of net operating losses remain available to the Company and begin to expire in 2026.
The Company expects to fully utilize the net operating losses.
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, 2020, 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 2016.
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NOTE L - EMPLOYEE BENEFITS
The Company and the Bank provide a deferred compensation arrangement (401k 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 $990 thousand in 2020, $771 thousand in 2019 and $628 thousand in 2018.
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, 2020, the ESOP held 5,728 shares valued at $177 thousand 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 $26 thousand
for 2020, $11 thousand for 2019 and $4 thousand for 2018.
In 2014, the Company established a Supplemental Executive Retirement Plan (“SERP”) for three active key executives. During 2016,
the Company established a SERP for eight additional active key executives. Pursuant to the SERP, these officers are entitled to receive 180
equal monthly payments commencing at the later of obtaining age 65 or separation from service. The costs of such benefits, assuming a
retirement date at age 65, are accrued by the Company and included in other liabilities in the Consolidated Balance Sheets. The SERP balance at
December 31, 2020 and 2019 was $1.8 million and $1.1 million, respectively. The Company accrued to expense $676 thousand for 2020 and
$257 thousand for 2019 and $259 thousand for 2018 for future benefits payable under the SERP. The SERP is an unfunded plan and is
considered a general contractual obligation of the Company.
Upon the acquisition of Iberville Bank, Southwest, FMB, and SWG, the Bank assumed deferred compensation agreements with
directors and employees. At December 31, 2020, the total liability of the deferred compensation agreements was $980 thousand, $1.1 million,
$3.0 million, and $492 thousand, respectively. Deferred compensation expense totaled $23 thousand, $55 thousand, $180 thousand, and $0,
respectively for 2020.
NOTE M - STOCK PLANS
In 2007, the Company adopted the 2007 Stock Incentive Plan. The 2007 Plan provided for the issuance of up to 315,000 shares of
Company Common Stock, $1.00 par value per share. In 2015, the Company adopted an amendment to the 2007 Stock Incentive Plan which
provided for the issuance of an additional 300,000 shares of Company Common Stock, $1.00 par value per share, for a total of 615,000 shares.
In, 2020, the Company adopted an amendment to the 2007 Stock Incentive Plan which provided for the issuance of an additional 500,000 shares
of Company Common Stock, $1.00 par value per share, for a total of 1,115,000 shares. Shares issued under the 2007 Plan may consist in whole
or in part of authorized but unissued shares or treasury shares. Total shares issuable under the plan are 564,149 at year-end 2020, and 78,189
and 89,315 shares were issued in 2020 and 2019, respectively.
A summary of changes in the Company’s nonvested shares for the year follows:
Nonvested shares
Nonvested at January 1, 2020
Nonvested shares related to SWG merger
Granted
Vested
Forfeited
Nonvested at December 31, 2020
Weighted-
Average
Grant-Date
Fair Value
25.61
$
$
28.13
Shares
329,139
15,239
78,189
(99,815)
(7,421)
315,331
As of December 31, 2020, there was $4.8 million of total unrecognized compensation cost related to nonvested shares granted under
the Plan. The costs is expected to be recognized over the remaining term of the vesting period (approximately 5 years). The total fair value of
shares vested during the years ended December 31, 2020, 2019 and 2018 was $3.2 million, $240 thousand, and $90 thousand.
Compensation cost in the amount of $2.3 million was recognized for the year ended December 31, 2020, $1.7 million was recognized
for the year ended December 31, 2019 and $1.2 million for the year ended December 31, 2018. Shares of restricted stock
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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 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. The dividends are held by the
Company and only paid if and when the grants are vested. The 2007 Plan also contains a double trigger change-in-control provision pursuant to
which unvested shares of stock granted through the plan will be accelerated upon a change in control if the executive is terminated without
cause as a result of the transaction (as long as the shares granted remain part of the Company or are transferred into the shares of the new
company).
NOTE N - SUBORDINATED DEBT
Debentures
On June 30, 2006, the Company issued $4.1 million 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 Trust 2. The Trust
issued $4,000,000 of Trust Preferred Securities to investors. The Company’s obligations under the debentures and related documents, taken
together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred
securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036.
Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of
the subordinated debentures are identical to those of the preferred securities.
On July 27, 2007, the Company issued $6.2 million 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 to investors. The Company’s obligations under the debentures and related documents, taken
together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred
securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037.
Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are
identical to those of the preferred securities.
In 2018, the Company acquired FMB’s Capital Trust 1, which consisted of $6.1 million of floating rate junior subordinated deferrable
interest debentures in which the Company owns all of the common equity. The debentures are the sole asset of Trust 1. The Trust issued
$6,000,000 of Trust Preferred Securities to investors. The Company’s obligations under the debentures and related documents, taken together,
constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities
are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2033. Interest on
the preferred securities is the three month LIBOR plus 2.85% and is payable quarterly. The terms of the subordinated debentures are identical to
those of the preferred securities. In accordance with the provisions of ASC Topic 810, Consolidation, the trusts are not included in the
consolidated financial statements.
Notes
On April 30, 2018, The Company entered into two Subordinated Note Purchase Agreements pursuant to which the Company sold and
issued $24.0 million in aggregate principal amount of 5.875% fixed-to-floating rate subordinated notes due 2028 and $42.0 million in aggregate
principal amount of 6.40% fixed-to-floating rate subordinated notes due 2033 (collectively, the “Notes”).
The Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The
Notes are not subject to redemption at the option of the holder. Principal and interest on the Notes are subject to acceleration only in limited
circumstances. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current
and future senior indebtedness, and each Note is pari passu in right to payment with respect to the other Notes.
On September 25, 2020, The Company entered into a Subordinated Note Purchase Agreement with certain qualified institutional
buyers pursuant to which the Company sold and issued $65.0 million in aggregate principal amount of its 4.25% Fixed to Floating Rate
Subordinated Notes due 2030. The Notes are unsecured and have a ten-year term, maturing October 1, 2030, and will bear interest at a fixed
annual rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will reset quarterly to an
interest rate per annum equal to a benchmark rate (which is expected to be the Three-Month Term SOFR plus 412.6 basis points, payable
quarterly in arrears. As provided in the Notes, under specified conditions the interest rate on the Notes during
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the applicable floating rate period may be determined based on a rate other than Three-Month Term SOFR. The Company is entitled to redeem
the Notes, in whole or in part, on any interest payment date on or after October 1, 2025, and to redeem the Notes at any time in whole upon
certain other specified events.
The Company had $144.6 million of subordinated debt, net of deferred issuance costs $2.2 million and unamortized fair value mark
$700 thousand, at December 31, 2020, compared to $80.7 million, net of deferred issuance costs $1.1 million and unamortized fair value mark
$754 thousand, at December 31, 2019.
NOTE O - TREASURY STOCK
Shares held in treasury totaled 483,984 at December 31, 2020, 194,682 at December 31, 2019 and 26,494 at December 31, 2018.
On March 28, 2019, the Company announced that its Board of Directors authorized a share repurchase program to purchase up to an
aggregate of $20 million of the Company’s common stock (the “March 2019 program”). This share repurchase program had an expiration date
of December 31, 2019. Under the March 2019 program, the Company could repurchase shares of its common stock periodically in a manner
determined by the Company’s management. The actual means and timing of purchase, target number of shares and maximum price or range of
prices under the program was determined by management at its discretion and depended on a number of factors, including the market price of
the Company's common stock, general market and economic conditions, and applicable legal and regulatory requirements. The Company
repurchased 168,188 shares under the March 2019 program during 2019.
On May 7, 2020, the Company announced the renewal of its share repurchase program that previously expired on December 31, 2019.
Under the program, the Company could from time to time repurchase up to $15 million of shares of its common stock in any manner
determined appropriate by the Company's management. The actual timing and method of any purchases, the target number of shares and the
maximum price (or range of prices) under the program, was determined by management at its discretion and depended on a number of factors,
including the market price of the Company's common stock, general market and economic conditions, and applicable legal and regulatory
requirements. The renewed share repurchase program expired on December 31, 2020. The Company repurchased 289,302 shares in 2020
pursuant to the program.
On December 16, 2020, the Company announced that is its Board of Directors has authorized a share repurchase program (the
"Repurchase Program"), pursuant to which the Company may purchase up to an aggregate of $30 million in shares of the Company's issued and
outstanding common stock. Under the program, the Company may, but is not required to, from time to time repurchase up $30 million of shares
of its own common stock in any manner determined appropriate by the Company's management. The actual timing and method of any
purchases, the target number of shares and the maximum price (or range of prices) under the program, will be determined by management at is
discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic
conditions, and applicable legal and regulatory requirements. The Repurchase Program will have an expiration date of December 31, 2021.
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. Such loans amounted to approximately $22.7 million and $23.7 million at December 31, 2020 and 2019,
respectively. The activity in loans to current directors, executive officers, and their affiliates during the year ended December 31, 2020, is
summarized as follows:
($ in thousands)
Loans outstanding at beginning of year
New loans
Repayments
Loans outstanding at end of year
$
$
23,697
318
(1,330)
22,685
Deposits from principal officers, directors, and their affiliates at year-end 2020 and 2019 were $10.5 million and $6.2 million.
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NOTE Q - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, there are outstanding various commitments and contingent liabilities, such as guaranties,
commitments to extend credit, overdraft protection, etc., which are not reflected in the accompanying financial statements. Commitments to
extend credit and letters of credit include some exposure to credit loss in the event of nonperformance of the customer. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit
are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit policies and procedures
for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a
number expire without being drawn upon, they generally do not present any significant liquidity risk. No significant losses on commitments
were incurred during the two years ended December 31, 2020, nor are any significant losses as a result of these transactions anticipated.
The contractual amounts of financial instruments with off-balance-sheet risk at year-end were as follows:
2020
2019
($ in thousands)
Commitments to make loans
Unused lines of credit
Standby letters of credit
Fixed Rate Variable Rate Fixed Rate Variable Rate
5,676
208,728
8,475
$ 42,774
137,966
3,648
$ 97,738
157,006
4,182
16,203
195,221
11,486
$
$
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates
ranging from 0.5% to 18.0% and maturities ranging from 1 year to 30 years.
The Company currently has 81 full service banking and financial service offices, one motor bank facility and two loan production
offices across Mississippi, Alabama, Florida, Georgia and Louisiana. Management closely monitors its credit concentrations and attempts to
diversify the portfolio within its primary market area. As of December 31, 2020, 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.
In the normal course of business, the Company and its subsidiary are subject to pending and threatened legal actions. Although the
Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes
that based on the information currently available the outcome of such actions, individually or in the aggregate, will not have a material adverse
effect on the Company’s consolidated financial statements.
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.
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
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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: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants
would use in pricing an asset or liability.
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.
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. 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 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. For securities where
quoted prices or market prices of similar securities are not available, fair values are calculated using the discounted cash flow or other market
indicators (Level 3).
The following table presents the Company’s 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, 2020 and 2019 ($ in thousands):
December 31, 2020
($ in thousands)
Available-for-sale
U.S. Treasury
Obligations of U.S. government agencies and sponsored entities
Municipal securities
Mortgage-backed securities
Corporate obligations
Total available for sale
December 31, 2019
($ in thousands)
Available-for-sale
U.S. Treasury
Obligations of U.S. government agencies and sponsored entities
Municipal securities
Mortgage-backed securities
Corporate obligations
Total available for sale
Fair Value Measurements
Quoted Prices in
Active Markets
For
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
9,383 $
100,170
480,374
401,232
31,023
$ 1,022,182
$
9,383 $
—
—
—
—
$
9,383
— $
100,170
460,248
401,232
30,788
992,438
$
—
—
20,126
—
235
20,361
Fair Value Measurements
Quoted Prices in
Active Markets
For
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
4,894
—
—
—
—
$
4,894
— $
77,950
248,637
395,315
27,538
749,440
$
—
—
10,345
—
408
10,753
$
$
4,894
77,950
258,982
395,315
27,946
765,087
$
$
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The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (Level 3) information:
($ in thousands)
Balance, January 1
Unrealized loss included in comprehensive income
Balance, December 31
($ in thousands)
Balance, January 1
Purchases
Sales
Transfer to level 2
Unrealized gain included in comprehensive income
Balance, December 31
Bank-Issued
Trust
Preferred
Securities
2020
2019
408
(173)
235
$
$
874
(466)
408
Municipal Securities
2020
2019
10,345
19,397
(3,334)
(6,294)
12
20,126
$
$
7,574
5,600
(3,116)
—
287
10,345
$
$
$
$
The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a
recurring basis at December 31, 2020 and 2019. The following tables present quantitative information about recurring Level 3 fair value
measurements ($ in thousands):
Trust Preferred Securities
December 31, 2020
December 31, 2019
Municipal Securities
December 31, 2020
December 31, 2019
Fair Value
Valuation Technique
235 Discounted cash flow
408 Discounted cash flow
Fair Value
Valuation Technique
20,126 Discounted cash flow
10,345 Discounted cash flow
$
$
$
$
Significant Unobservable
Inputs
Discount rate
Discount rate
Significant Unobservable
Inputs
Discount rate
Discount rate
Range of Inputs
1.08% - 2.48%
2.73% - 4.15%
Range of Inputs
0.50% - 2.45%
1.50% - 4.40%
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a non-recurring basis
and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation
hierarchy.
Impaired Loans
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are
measured for impairment. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of
impairment is utilized. This method requires obtaining a current independent appraisal of the collateral. These appraisals may utilize a single
valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the
appraisal process by the independent appraisers to adjust for differences between the comparable sales and income date available for similar
loans and collateral underlying such loans. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value.
The Company adjust the appraisal 10 percent. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s
financial statements, or aging reports, adjusted or discounted based on management’s expertise and knowledge of the client and client’s
business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment.
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Other Real Estate Owned
Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded
through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals of the collateral less costs
to sell when acquired, establishing a new costs basis. These assets are subsequently accounted for at lower of cost or fair value less estimated
costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals
may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from
comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between
the comparable sales and income data available. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair
value. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as
changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an
adjustment to lower the collateral value estimates indicated in the appraisals. The Company adjust the appraisal 10 percent. Periodic
revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Due to the
subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset
could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded
through other income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on
the disposition of other real estate owned and foreclosed assets are netted and recorded in other income. Other real estate measured at fair value
on a non-recurring basis at December 31, 2020, amounted to $5.8 million. Other real estate owned is classified within Level 3 of the fair value
hierarchy.
The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the
level within the fair value hierarchy in which the fair value measurements were reported at December 31, 2020 and 2019:
($ in thousands)
December 31, 2020
Impaired loans
Other real estate owned
December 31, 2019
Impaired loans
Other real estate owned
Fair Value Measurements Using
Quoted Prices in
Active Markets
For
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
— $
—
— $
—
Significant
Unobservable
Inputs
(Level 3)
— $
—
— $
—
15,107
5,802
11,337
7,299
Fair Value
$
$
15,107
5,802
11,337
7,299
$
$
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is
practicable to estimate that value:
Cash and Cash Equivalents – For such short-term instruments, the carrying amount is a reasonable estimate of fair value.
Investment in securities available-for-sale and held-to-maturity – The fair value measurement for securities available-for-sale was
discussed earlier. The same measurement approach was used for securities held-to-maturity and other securities.
Loans – The fair value of loans was estimated by discounting the expected future cash flows using the current interest rates at which
similar loans would be made for the same remaining maturities, in accordance with the exit price notion as defined by FASB ASC 820,
Fair Value Measurement ("ASC 820"). Expected future cash flows were projected based on contractual cash flows, adjusted for
estimated prepayments and as a result of the adoption of ASU 2016-01, which also included credit risk and other market factors to
calculate the exit price fair value in accordance with ASC 820.
Bank-owned Life Insurance – The fair value of bank-owned life insurance approximates the carrying amount, because upon
liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.
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Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates fair value and is classified as level 2
for accrued interest receivable related to investments securities and Level 3 for accrued interest receivable related to loans.
Deposits – The fair values of demand deposits are, as required by ASC Topic 825, equal to the carrying value of such deposits.
Demand deposits include non-interest-bearing demand deposits, savings accounts, NOW accounts, and money market demand
accounts. The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of
these deposits. Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after
six months. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.
Short-Term Borrowings – The carrying value of any federal funds purchased and other short-term borrowings approximates their fair
values.
FHLB and Other Borrowings – The fair value of the fixed rate borrowings are estimated using discounted cash flows, based on
current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of any variable rate borrowing
approximates its fair value.
Subordinated Debentures – Fair values are determined based on the current market value of like instruments of a similar maturity and
structure.
Accrued Interest Payable – The carrying amount of accrued interest payable approximates fair value resulting in a Level 2
classification.
Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar
agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed.
Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.
December 31, 2020
($ in thousands)
Financial Instruments:
Assets:
Cash and cash equivalents
Securities available-for-sale
Loans, net
Accrued interest receivable
Liabilities:
Non-interest-bearing deposits
Interest-bearing deposits
Subordinated debentures
FHLB and other borrowings
Accrued interest payable
Carrying
Amount
Estimated
Fair Value
Fair Value Measurements
Quoted
Prices
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
562,554
1,022,182
3,087,858
26,344
571,079
3,644,201
144,592
114,647
2,134
$
$
562,554
1,022,182
3,089,318
26,344
571,079
3,647,845
145,289
114,647
2,134
562,554
9,383
$
—
—
— $
992,438
—
5,690
—
20,361
3,089,318
20,654
— $
—
—
—
—
571,079
3,647,845
$
—
114,647
2,134
—
—
145,289
—
—
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December 31, 2019
($ in thousands)
Financial Instruments:
Assets:
Cash and cash equivalents
Securities available-for-sale
Loans, net
Accrued interest receivable
Liabilities:
Non-interest-bearing deposits
Interest-bearing deposits
Subordinated debentures
FHLB and other borrowings
Accrued interest payable
Carrying
Amount
Estimated
Fair Value
Fair Value Measurements
Quoted
Prices
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
168,864
765,087
2,597,260
14,802
723,208
2,353,325
80,678
214,319
2,508
$
$
168,864
765,087
2,560,668
14,802
723,208
2,339,537
80,330
214,319
2,508
168,864
4,894
$
—
—
— $
749,440
—
4,246
—
10,753
2,560,668
10,556
— $
—
—
—
—
723,208
2,339,537
$
—
214,319
2,508
—
—
80,330
—
—
NOTE S - REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within non-interest income.
The guidance does not apply to revenue associated with financial instruments, including loans and investment securities that are accounted for
under other GAAP, which comprise a significant portion of our revenue stream. A description of the Company’s revenue streams accounted for
under ASC 606 is as follows:
Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance, and
overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and
ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request.
Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period
over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.
Service charges on deposits are withdrawn from the customer’s account balance.
Interchange Income: The Company earns interchange fees from debit and credit card holder transaction conducted through various payment
networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized
daily, concurrently with the transaction processing services provided by the cardholder.
Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the
buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company
assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction
prices is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of
control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain
(loss) on sale if a significant financing component is present.
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Table of Contents
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The
following table presents the Company’s sources of non-interest income for December 31, 2020 and 2019. Items outside the scope of ASC 606
are noted as such.
Revenue by Operating Segments
($ in thousands)
Non-interest income
Service charges on deposits
Overdraft fees
Other
Interchange income
Investment brokerage fees
Net gains (losses) on OREO
Net gains (losses) on sales of securities (a)
Gain on acquisition
Gain on premises and equipment
Other
Commercial/
Retail
Bank
Year Ended December 31, 2020
Mortgage
Banking
Division
Holding
Company
Total
$
$
3,218
3,993
9,433
932
(537)
281
7,835
443
4,940
— $
2
—
—
—
—
—
—
10,444
— $
—
—
—
—
—
—
—
892
3,218
3,995
9,433
932
(537)
281
7,835
443
16,276
Total non-interest income
$
30,538
$
10,446
$
892
$
41,876
Revenue by Operating Segments
($ in thousands)
Non-interest income
Service charges on deposits
Overdraft fees
Other
Interchange income
Investment brokerage fees
Net gains (losses) on OREO
Net gains (losses) on sales of securities (a)
Other
Commercial/
Retail
Bank
Year Ended December 31, 2019
Mortgage
Banking
Division
Holding
Company
$
$
4,277
3,558
8,024
83
(144)
122
3,977
$
1
2
—
—
—
—
— $
—
—
—
—
—
5,985
1,062
Total
4,278
3,560
8,024
83
(144)
122
11,024
Total non-interest income
$
19,897
$
5,988
$
1,062
$
26,947
(a) Not within scope of ASC 606
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Table of Contents
NOTE T - PARENT COMPANY FINANCIAL INFORMATION
The balance sheets, statements of income and cash flows for The First Bancshares, Inc. (parent company only) follows:
Condensed Balance Sheets
($ in thousands)
Assets:
Cash and cash equivalents
Investment in subsidiary bank
Investments in statutory trusts
Bank owned life insurance
Other
Liabilities and Stockholders’ Equity:
Subordinated debentures
Borrowed funds
Other
Stockholders’ equity
($ in thousands)
Income:
Interest and dividends
Dividend income
Other
Expenses:
Interest on borrowed funds
Legal and professional
Other
Condensed Statements of Income
Income before income taxes and equity in undistributed income of subsidiary
Income tax benefit
Income before equity in undistributed income of Subsidiary
Equity in undistributed income of subsidiary
$
$
$
$
$
December 31,
2020
2019
67,231
720,159
496
4,202
2,659
794,747
144,592
4,647
693
644,815
794,747
$
$
$
$
5,941
616,807
496
4,200
2,292
629,736
80,678
5,354
46
543,658
629,736
2020
Years Ended December 31,
2019
2018
$
20
18,526
892
19,438
5,593
1,014
4,361
10,968
8,470
2,545
11,015
41,490
$
26
50,390
1,062
51,478
4,918
3,401
2,418
10,737
40,741
2,291
43,032
713
11
13,889
1,865
15,765
3,454
3,833
1,755
9,042
6,723
1,496
8,219
13,006
Net income
$
52,505
$
43,745
$
21,225
110
Table of Contents
($ in thousands)
Cash flows from operating activities:
Condensed Statements of Cash Flows
2020
Years Ended December 31,
2019
2018
Net income
Adjustments to reconcile net income to net cash used in operating activities:
$
52,505
$
43,745
$
21,225
Equity in undistributed income of Subsidiary
Restricted stock expense
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Investment in subsidiary bank
Net outlays for acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Dividends paid on common stock
Repurchase of restricted stock for payment of taxes
Common stock repurchased
Net proceeds from issuance of 2,012,500 shares
Proceeds (repayment) of borrowed funds
Issuance of subordinated debt
Net cash provided by (used in) financing Activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
(41,490)
2,352
329
13,696
(713)
1,661
1,185
45,878
—
—
1,726
1,726
(32,363)
(32,363)
(8,589)
(494)
(8,067)
—
(707)
63,725
45,868
61,290
5,941
(5,190)
(63)
(5,229)
—
(173)
—
(10,655)
2,860
3,081
(13,006)
1,154
1,364
10,737
(27,000)
(47,041)
(74,041)
(2,557)
(23)
—
(237)
(16,000)
64,766
45,949
(17,355)
20,436
Cash and cash equivalents at end of year
$
67,231
$
5,941
$
3,081
NOTE U - OPERATING SEGMENTS
The Company is considered to have three principal business segments in 2020, 2019, and 2018, the Commercial/Retail Bank, the
Mortgage Banking Division, and the Holding Company.
Year Ended December 31, 2020
($ in thousands)
Interest income
Interest expense
Net interest income (loss)
Provision (credit) for loan losses
Net interest income (loss) after provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax (benefit) expense
Net income (loss)
$
$
Commercial/ Mortgage
Banking
Holding
Retail
Bank
178,462
20,801
157,661
25,076
132,585
30,538
95,370
67,753
11,749
56,004
Division Company
$
$
866
270
596
75
521
10,446
5,596
5,371
1,359
4,012
$
$
$
20
5,593
(5,573)
—
(5,573)
892
5,375
(10,056)
(2,545)
(7,511) $
Total
179,348
26,664
152,684
25,151
127,533
41,876
106,341
63,068
10,563
52,505
Total Assets
Net Loans
$ 5,044,647
3,099,675
$ 33,525
9,615
$ 74,588
$ 5,152,760
— 3,109,290
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Table of Contents
($ in thousands)
Interest income
Interest expense
Net interest income (loss)
Provision (credit) for loan losses
Net interest income (loss) after provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax (benefit) expense
Net income (loss)
Total Assets
Net Loans
($ in thousands)
Interest income
Interest expense
Net interest income (loss)
Provision (credit) for loan losses
Net interest income (loss) after provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax (benefit) expense
Net income (loss)
Total Assets
Net Loans
Year Ended December 31, 2019
Commercial/ Mortgage
Banking
Holding
Retail
Bank
147,500
21,388
126,112
3,781
122,331
19,897
78,440
63,914
14,595
49,319
$
$
Division Company
$
$
1,003
417
586
(43)
629
5,988
4,310
2,181
490
1,691
$
$
26
4,918
(4,892)
—
(4,892)
1,062
5,819
(9,649)
(2,384)
$ (7,265) $
Total
148,529
26,723
121,806
3,738
118,068
26,947
88,569
56,446
12,701
43,745
$ 3,902,703
2,584,385
$ 26,231
12,875
$ 12,929
$ 3,941,863
— 2,597,260
Year Ended December 31, 2018
Commercial/ Mortgage
Banking
Retail
Bank
Holding
Division Company
Total
$
$
98,758
11,113
87,645
2,259
85,386
14,648
66,875
33,159
7,034
26,125
$
$
1,209
524
685
(139)
824
4,048
3,848
1,024
254
770
$
$
11
3,454
(3,443)
—
(3,443)
1,865
5,588
(7,166)
(1,496)
$ (5,670) $
99,978
15,091
84,887
2,120
82,767
20,561
76,311
27,017
5,792
21,225
$ 2,969,560
2,038,395
$ 23,865
16,799
$ 10,592
$ 3,003,986
— 2,055,195
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NOTE V - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS AND PER SHARE AMOUNTS (UNAUDITED)
($ in thousands, except per share amounts)
2020
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total non-interest income
Total non-interest expense
Income tax expense
Net income available to common stockholders
Per common share:
Net income, basic
Net income, diluted
Cash dividends declared
2019
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total non-interest income
Total non-interest expense
Income tax expense
Net income available to common stockholders
Per common share:
Net income, basic
Net income, diluted
Cash dividends declared
2018
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total non-interest income
Total non-interest expense
Income tax expense
Net income available to common stockholders
Per common share:
Net income, basic
Net income, diluted
Cash dividends declared
NOTE W - COVID-19 UPDATE
March 31
June 30
Sept. 30
Dec. 31
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
41,598
7,533
34,065
7,102
26,963
6,474
23,439
1,687
8,311
0.44
0.44
0.10
33,273
6,142
27,131
1,123
26,008
5,554
21,893
2,034
7,635
0.48
0.63
0.07
18,758
2,379
16,379
277
16,102
3,459
14,596
1,008
3,957
0.34
0.34
0.05
$
$
$
$
$
$
$
$
$
$
$
$
45,799
6,619
39,180
7,606
31,574
15,680
28,070
2,241
16,943
0.79
0.79
0.10
37,571
6,799
30,772
791
29,981
6,716
20,891
3,823
11,983
0.69
0.70
0.08
25,037
3,468
21,569
857
20,712
5,632
19,680
1,419
5,245
0.40
0.40
0.05
$
$
$
$
$
$
$
$
$
$
$
$
46,338
6,365
39,973
6,921
33,052
8,794
26,936
2,993
11,917
0.56
0.55
0.10
37,241
6,782
30,459
974
29,485
7,103
20,825
3,491
12,272
0.71
0.74
0.08
25,628
3,959
21,669
412
21,257
5,074
19,786
1,383
5,162
0.39
0.39
0.05
45,613
6,147
39,466
3,522
35,944
10,928
27,896
3,642
15,334
0.72
0.72
0.12
40,444
7,000
33,444
850
32,594
7,574
24,960
3,353
11,855
0.64
0.72
0.08
30,555
5,285
25,270
574
24,696
6,396
22,249
1,982
6,861
0.48
0.48
0.05
The COVID-19 pandemic continues to have significant effects on global markets, supply chains, businesses and communities.
COVID-19 could potentially impact the Company’s future financial condition and results of operations including but not limited to additional
credit loss reserves, additional collateral and/or modifications to debt obligations, liquidity, limited dividend payouts or
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potential shortages of personnel. Management continues to take appropriate actions to mitigate the negative impact the virus has on the
Company, including restricting employee travel, directing employees to work remotely, cancelling in-person meetings and implementing our
business continuity plans and protocols to the extent necessary.
The pandemic is having an adverse impact on certain industries the Company serves, including hotels, restaurants, retail, and direct
energy. As of December 31, 2020, the Company’s aggregate outstanding exposure in these segments was $436.9 million, and total loan
modifications resulting from COVID-19 were approximately $82.0 million. While it is still not yet possible to know the full effect that the
pandemic will have on the economy, or to what extent this crisis will impact the Company, all available current industry statistics and internal
monitoring of loan repayment ability and payment forgiveness across the portfolio has been analyzed in an attempt to understand the correlation
with asset quality and degree of possible deterioration.
Despite recent improvements in certain economic indicators, significant constraints to commerce remain in place, and significant
uncertainty remains over the timing of an effective and widely available coronavirus vaccine, the timing and scope of additional government
stimulus packages, and the economic impact resulting from the outcome of the November 2020 elections. The duration and extent of the
downturn and speed of the related recovery on our business, customers, and the economy as a whole remains uncertain. It is unknown how long
the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is
reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of
these conditions, including the determination of the allowance for loan losses, fair value of financial instruments, impairment of goodwill and
other intangible assets and income taxes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2020. Disclosure controls and procedures are controls
and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. No changes
were made to the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934)
during the last fiscal quarter that materially affected or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
The First Bancshares, Inc.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting (as
defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the
supervision of the Chief Executive Officer and the Chief Financial Officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal
control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of
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Table of Contents
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The Company’s management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2020 based on the
framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework (2013). Based on that assessment, our management believes that, as of December 31, 2020, the Company’s internal control over
financial reporting was effective based on those criteria.
As permitted by SEC guidance, management has excluded the operations of SWG from the scope of management’s report on internal
control over financial reporting, each of which was acquired during the year ended December 31, 2020. For the year ended December 31, 2020,
SWG represented approximately 10.8% of total consolidated assets and 30.5% of total consolidated net income.
This Annual Report on Form 10-K contains an audit report of Crowe LLP, our independent registered public accounting firm,
regarding internal control over financial reporting for the fiscal year ended December 31, 2020 pursuant to the rules of the SEC. Their report
appears in the section captioned “Report of Independent Registered Public Accounting Firm” included in Part II. Item 8 – Financial Statements
and Supplementary Data of this report.
ITEM 9B. OTHER INFORMATION
Not applicable.
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Table of Contents
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
PART III
Information required by this item is set forth in our definitive proxy materials regarding our Annual Meeting of Shareholders to be
held May 20, 2021, which proxy materials will be filed with the SEC on or about April 7, 2021.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth in our definitive proxy materials regarding our Annual Meeting of Shareholders to be
held May 20, 2021, which proxy materials will be filed with the SEC on or about April 7, 2021.
ITEM 12.
STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
Information required by this item is set forth in our definitive proxy materials regarding our Annual Meeting of Shareholders to be
held May 20, 2021, which proxy materials will be filed with the SEC on or about April 7, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this item is set forth in our definitive proxy materials regarding our Annual Meeting of Shareholders to be
held May 20, 2021, which proxy materials will be filed with the SEC on or about April 7, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is set forth in our definitive proxy materials regarding our Annual Meeting of Shareholders to be
held May 20, 2021, which proxy materials will be filed with the SEC on or about April 7, 2021.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
PART IV
1. The following consolidated financial statements of The First Bancshares, Inc. and subsidiaries are incorporated as part of this Report
under Item 8 – Financial Statements and Supplementary Data.
Consolidated balance sheets – December 31, 2020 and 2019
Consolidated statements of income – Years ended December 31, 2020, 2019, and 2018
Consolidated statements of other comprehensive income – Years ended December 31, 2020, 2019, and 2018
Consolidated statements of changes in stockholders’ equity– Years ended December 31, 2020, 2019 and 2018
Consolidated statements of cash flows –Years ended December 31, 2020, 2019, and 2018
Notes to consolidated financial statements – December 31, 2020, 2019, and 2018
2. Consolidated Financial Statement Schedules:
All schedules have been omitted, as the required information is either inapplicable or included in the Notes to Consolidated Financial
Statements.
3. Exhibits required to be filed by Item 601 of Regulation S-K, by Item 15(b) are listed below.
(b) Exhibits:
All other financial statements and schedules are omitted as the required information is inapplicable or the required information is
presented in the consolidated financial statements or related notes.
(a) 3. Exhibits:
Exhibit No.
2.1
2.2
2.3
2.4
Description of Exhibit
Agreement and Plan of Merger, dated October 12, 2016, by and among The First Bancshares, Inc., The First, A
National Banking Association, and Gulf Coast Community Bank (incorporated herein by reference to Exhibit 1.2 to
the Company’s Current Report on Form 8-K filed on October 14, 2016).
Stock Purchase Agreement, dated October 12, 2016, by and between The First Bancshares, Inc. and A. Wilbert’s Sons
Lumber and Shingle Co. (incorporated herein by reference to Exhibit 1.1 to the Company’s Current Report on
Form 8-K filed on October 14, 2016).
Agreement and Plan of Merger by and between The First Bancshares, Inc. and Southwest Banc Shares, Inc., dated
October 24, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
filed on November 9, 2017).
Agreement and Plan of Merger by and between The First Bancshares, Inc. and Sunshine Financial, Inc.,
dated December 6, 2017 (incorporated herein by reference to Exhibit 2.4 to the Company’s Annual Report on
Form 10-K filed on March 16, 2018).
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2.5
2.6
2.7
2.8
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
Agreement and Plan of Merger by and between The First Bancshares, Inc. and FMB Banking Corporation, dated
July 23, 2018 (incorporated by reference to Exhibit 2.1 of the Company’s Registration Statement on Form S-4 filed
on September 13, 2018).
Agreement and Plan of Merger by and between The First Bancshares, Inc. and FPB Financial Corp., dated
November 6, 2018 (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q
filed on November 6, 2018).
Agreement and Plan of Merger by and between The First Bancshares, Inc. and First Florida Bancshares, Inc., dated
July 22, 2019 (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 8-K filed
on July 23, 2019).
Agreement and Plan of Merger by and between The First Bancshares, Inc. and Southwest Georgia Financial Corp.,
dated December 18, 2019 (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on
Form 8-K filed on December 18, 2019).
Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated herein by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 29, 2016).
Amendment to Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated herein by
reference to Exhibit 3.2 to the Company’s Current Report on Form 10-Q filed on August 9, 2018).
Amended and Restated Bylaws of The First Bancshares, Inc., effective as of March 17, 2016 (incorporated herein by
reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on March 18, 2016).
Amendment No. 1 to the Amended and Restated Bylaws of The First Bancshares, Inc. effective as of May 7, 2020
(incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q filed on May 11, 2020).
Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Registration
Statement No. 333-220491 on Form S-3 filed on September 15, 2017).
Form of Global Subordinated Note for The First Bancshares, Inc. 5.875% Fixed-to-Floating Rate Subordinated
Notes Due 2028 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on
May 1, 2018).
Form of Global Subordinated Note for The First Bancshares, Inc. 6.4% Fixed-to-Floating Rate Subordinated
Notes Due 2023 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on
May 1, 2018).
Indenture by and between The First Bancshares, Inc. and U.S. Bank National Association, dated September 25, 2020
(incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on September 25,
2020).
Form of Global Subordinated Note for The First Bancshares, Inc. 4.25% Fixed-to-Floating Rate Subordinated Notes
Due 2030 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on
September 25, 2020).
118
Table of Contents
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Note Purchase Agreement between the Company and the several purchasers of the Subordinated Notes, dated
April 30, 2018 (incorporated herein by reference to Exhibit 10.1 to The Company’s Current Report on Form 8-K filed
on May 1, 2018).
Subordinated Note Purchase Agreement between the Company and the several purchasers of the Subordinated Notes,
dated April 30, 2018 (incorporated herein by reference to Exhibit 10.2 to The Company’s Current Report on Form 8-
K filed on May 1, 2018).
Loan Agreement, dated as of December 5, 2016, by and between the Company, as Borrower, and First Tennessee
Bank National Association, as Lender (incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on December 9, 2016).
Employment Agreement dated May 31, 2011, between The First, A National Banking Association, and M. Ray
Cole, Jr. (incorporated herein by reference to Exhibit 10.5 of The First Bancshares’ Annual Report on Form 10-K
filed on March 29, 2012).+
Amendment to Employment Agreement dated January 16, 2020, between The First, A National Banking Association,
and M. Ray Cole, Jr. (incorporated herein by reference to Exhibit 10.3 to The First Bancshares Quarterly Report on
Form 10-Q filed on May 11, 2020).+
Employment Agreement, dated as of October 17, 2019, by and between The First, A National Banking Association
and Donna T. (Dee Dee) Lowery (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on October 21, 2019).+
Amendment to Employment Agreement dated January 16, 2020, between The First, A National Banking Association,
and Donna T. (Dee Dee) Lowery (incorporated herein by reference to Exhibit 10.3 to The First Bancshares Quarterly
Report on Form 10-Q filed on May 11, 2020).+
The First Bancshares, Inc. 2007 Stock Incentive Plan (incorporated herein by reference to Exhibit 4.3 to The First
Bancshares’ Registration Statement No. 333-171996 on Form S-8 filed on February 1, 2011).+
Amendment to 2007 Stock Incentive Plan effective May 28, 2015 (incorporated herein by reference to Exhibit 10.6 to
The First Bancshares Annual Report on Form 10-K filed on March 30, 2016).+
Supplemental Executive Retirement Agreement between The First, A National Banking Association and M. Ray
(Hoppy) Cole, Jr., as amended (incorporated herein by reference to Exhibit 10.9 to The First Bancshares Annual
Report on Form 10-K filed on March 16, 2017).+
Supplemental Executive Retirement Agreement effective January 1, 2020 between The First, A National Banking
Association and Milton R. Cole, Jr. (incorporated herein by reference to Exhibit 10.3 to The First Bancshares
Quarterly Report on Form 10-Q filed on May 11, 2020).+
Supplemental Executive Retirement Agreement between The First, A National Banking Association and Donna T.
Lowery, as amended (incorporated herein by reference to Exhibit 10.10 to The First Bancshares Annual Report on
Form 10-K filed on March 16, 2017).+
Supplemental Executive Retirement Agreement between The First, A National Banking Association and Donna T.
Lowery.+*
Form of Supplemental Executive Retirement Agreements for Executives of The First, A National Banking
Association (incorporated herein by reference to Exhibit 10.11 to The First Bancshares Annual Report on Form 10-K
filed on March 16, 2017).+
119
Table of Contents
10.15
10.16
10.17
10.18
21.1
23.1
31.1
31.2
32.1
Form of Stock Incentive Agreement for Restricted Stock Award pursuant to The First Bancshares, Inc. 2007 Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K
filed on March 16, 2018).+
Amendment to Stock Incentive Agreement for Outstanding Shares of Restricted Stock, dated as of October 15, 2019
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on October 21, 2019).
+
Subordinated Note Purchase Agreement between The First Bancshares, Inc. and the several purchasers of the
Subordinated Notes, dated September 25, 2020 (incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed on September 25, 2020).
Registration Rights Agreement between The First Bancshares, Inc. and the several purchasers of the Subordinated
Notes, dated September 25, 2020 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on
Form 8-K filed on September 25, 2020).
Subsidiaries of The First Bancshares, Inc.*
Consent of Crowe LLP.*
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.*
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.*
Section 1350 Certifications.**
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.
**Furnished herewith.
+ Denotes management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
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In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Date: March 12, 2021
Date: March 12, 2021
THE FIRST BANCSHARES, INC.
By:
By:
/s/ M. Ray (Hoppy) Cole, Jr.
M. Ray (Hoppy) Cole, Jr.
Chief Executive Officer and President (Principal Executive
Officer)
/s/ Dee Dee Lowery
Dee Dee Lowery
Executive VP and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints M.
Ray (Hoppy) Cole, Jr. and Donna T. (Dee Dee) Lowery, with full power to act without the other, his or her true and lawful attorney-in-fact and
agent, with full and several powers of substitution and resubsititution, for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully as to all
intents and purposes as each of the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES
CAPACITIES
/s/ E. Ricky Gibson
/s/ Rodney D. Bennett
/s/ David W. Bomboy
/s/ Charles R. Lightsey
/s/ Fred McMurry
/s/ Thomas E. Mitchell
/s/ Renee Moore
/s/ Ted E. Parker
/s/ J. Douglas Seidenburg
/s/ Andrew D. Stetelman
/s/ M. Ray (Hoppy) Cole, Jr.
Director and Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
Director
Director
CEO, President and Director
(Principal Executive Officer)
DATE
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
/s/ Donna T. (Dee Dee) Lowery
Executive VP & Chief Financial Officer
(Principal Financial and Accounting Officer)
March 12, 2021
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Supplemental Executive Retirement
Plan Donna T. Lowery
Exhibit 10.13
The First, A National Banking Association
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT
THIS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (“Agreement”) is made and entered
into this 1st day of January 2021 (“Effective Date”), between The First, A National Banking Association
(“Bank”), a federally-chartered commercial bank located in Hattiesburg, Mississippi, and Donna T. Lowery
(“Executive”).
Article I
Purpose
The purpose of this Agreement is to further the growth and development of the Bank by providing
Executive with supplemental retirement income, and thereby encourage Executive’s productive efforts on
behalf of the Bank and the Bank’s shareholders, and to align the interests of the Executive and those
shareholders. The Bank promises to make certain payments to the Participant, or the Participant’s
Beneficiary, at retirement, death, or upon some other qualifying event pursuant to the terms of this
Agreement.
Article 2
Benefit Tables
The following tables describe the benefits available to the Executive, or the Executive’s Beneficiary,
upon the occurrence of certain events. Capitalized terms have the meanings given them in Article 3. Each
benefit described is in lieu of any other benefit herein, except as expressly stated otherwise.
Table A: Retirement Benefits
Distribution Event
Amount of Benefit
Form of Benefit
Timing of Benefit Distribution
Separation from Service
following attainment of age 65
while in the employment of the
Bank
$175,231 per year
Equal Monthly
Installments
Payment begins: First day of the
first month following Separation
from Service
Duration: Lifetime Benefit
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Supplemental Executive Retirement
Plan Donna T. Lowery
Table B: Benefit Available Prior to Retirement
Distribution Event
Amount of Benefit
Form of Benefit
Timing of Benefit Distribution
Separation from Service prior to
age 65, excluding for Cause,
Change in Control and Death
Change in Control, followed by
an Involuntary Separation from
Service, prior to age 65
The Executive shall vest
0.7752% at the beginning of each
month, commencing with the
Effective Date and continuing
until Separation from Service
(not to exceed 100%), in the
Table A Retirement Benefit. See
Schedule A
$175,231 per year
Death prior to Separation from
Service
** $3,679,851
Equal Monthly
Installments
Payment begins: First day of the
first month following age 65
Duration: Lifetime Benefit
Equal Monthly
Installments
Payment begins: First day of the
first month following age 65
Duration: Lifetime Benefit
Lump Sum
Payment begins (to Beneficiary):
60 days following Executive’s
death
Death subsequent to Separation
from Service after the
attainment of age 65
100% of the Accrued Liability
Balance
Lump Sum
Payment begins (to Beneficiary):
60 days following Executive’s
death
** The Executive’s death benefit shall not exceed the amount described on Schedule B of this agreement.
Article 3
Definitions and Construction
It is intended that this Agreement comply and be construed in accordance with Section 409A of the
Internal Revenue Code (the “Code”). It is also intended that the Agreement be “unfunded” and maintained for
a select group of management or highly compensated employees of the Bank, for purposes of the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”) and not be construed to provide income to
the Executive or Beneficiary under Code prior to actual receipt of benefits.
Where the following words and phrases appear in the Agreement, they shall have the respective meanings set
forth below, unless their context clearly indicates to the contrary:
3.1
“Accrued Liability Balance” shall mean the amount accrued by the Bank to fund the future benefit
expense associated with this Agreement. The Bank shall account for this benefit using Generally
Accepted Accounting Principles, regulatory accounting guidance of the Bank’s primary federal
regulator, and other applicable accounting guidance,
2
Supplemental Executive Retirement
Plan Donna T. Lowery
including APB 12, FAS 106, and FAS 87. Accordingly, the Bank shall establish a liability retirement account
for the Executive into which appropriate accruals shall be made using a reasonable discount rate, and which
may be adjusted from time to time.
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
“Beneficiary” shall mean the person(s) designated by the Executive, including the estate of the
Executive, entitled to a benefit under this Agreement.
“Board” shall mean the Board of Directors of the Bank.
“Cause” shall have the meaning set forth in the Employment Agreement.
“Change in Control” shall mean a change in ownership or control of the Bank as defined in Treasury
Regulation §1.409A-3(i)(5) or any subsequently applicable published authority or guidance.
“Disability” shall mean the Executive, while actively employed by the Bank: (i) is unable to engage in
any substantial gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be expected to last for a continuous period
of not less than twelve (12) months; or (ii) is, by reason of any medically determinable physical or
mental impairment which can be expected to result in death or can be expected to last for a continuous
period of not less than twelve (12) months, receiving income replacement benefits for a period of not
less than three (3) months under an accident and health plan covering employees of the Bank. Medical
determination of Disability may be made by either the Social Security Administration or by the
provider of an accident or health plan covering employees of the Bank, provided that the definition of
Disability applied under such Disability insurance program complies with the requirements of the
preceding sentence. Upon the request of the Plan Administrator, the Executive must submit proof to
the Plan Administrator of Social Security Administration’s or the provider’s determination.
“Employment Agreement” shall mean the Employment Agreement between The First, A National
Banking Association and the Executive, dated as of October 17, 2019, as such agreement may be
amended from time to time.
“Good Reason” shall have the meaning set forth in the Employment Agreement.
“Involuntary Separation from Service” shall mean that the Bank terminates the Executive’s
employment at any time prior to age 65 and such termination is not considered a Termination for
Cause. A Separation from Service for Good Reason, as defined above, will also be treated as an
Involuntary Separation from Service.
“Separation from Service” shall mean that the Executive has retired or otherwise has a termination of
employment with the Bank. For purposes of this Agreement, whether a termination of employment or
service has occurred is determined based on whether the facts and circumstances indicate that the
Bank and Executive reasonably anticipated that no further services would be performed after a certain
date, or that the level of bona fide
3
Supplemental Executive Retirement
Plan Donna T. Lowery
services the Executive would perform after such date (whether as an Executive or as an independent
contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona
fide services performed (whether as an Executive or an independent contractor) over the immediately
preceding thirty-six (36) month period (or the full period of services to the Bank if the Executive has been
providing services to the Bank less than 36 months). Facts and circumstances to be considered in making this
determination include, but are not limited to, whether the Executive continues to be treated as an Executive
for other purposes (such as continuation of salary and participation in Executive benefit programs), whether
similarly situated service providers have been treated consistently, and whether the Executive is permitted,
and realistically available, to perform services for other service recipients in the same line of business. An
Executive will be presumed not to have separated from service where the level of bona fide services
performed continues at a level that is fifty percent (50%) or more of the average level of service performed by
the Executive during the immediately preceding thirty-six (36) month period. A Separation from Service will
not be deemed to have occurred while the Executive is on military leave, sick leave, or other bona fide leave
of absence, provided Executive has the right to reemployment under an applicable statute or by contract.
3.11
“Termination for Cause” shall mean a termination of the Executive’s employment for Cause.
Article 4
Beneficiary
4.1
4.2
4.3
Beneficiary. Executive shall have the right to name a Beneficiary of the death benefit, if any,
described in Article 1 herein. Executive shall have the right to name such Beneficiary at any time
prior to Executive’s death and submit it to the Plan Administrator (or Plan Administrator’s
representative) on the form provided. Once received and acknowledged by the Plan Administrator, the
form shall be effective. The Executive may change a Beneficiary designation at any time by
submitting a new form to the Plan Administrator. Any such change shall follow the same rules as for
the original Beneficiary designation and shall automatically supersede the existing Beneficiary form
on file with the Plan Administrator.
Failure to Designate a Beneficiary. If Executive dies without a valid Beneficiary designation on file
with the Plan Administrator, the Executive’s surviving spouse, if any, shall become the designated
Beneficiary. If Executive has no surviving spouse, death benefits shall be paid to the personal
representative of Executive’s estate.
Facility of Distribution. If the Plan Administrator determines in its discretion that a benefit is to be
paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition
of that person’s property, the Plan Administrator may direct distribution of such benefit to the
guardian, legal representative or person having the care or custody of such minor, incompetent person
or incapable person. The Plan Administrator
4
Supplemental Executive Retirement
Plan Donna T. Lowery
may require proof of incompetence, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the
Executive and the Beneficiary, as the case may be, and shall be a complete discharge of any liability
under the Agreement for such distribution amount.
Article 5
General Limitation
5.1
5.2
5.3
Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank
shall not distribute any benefit under this Agreement if Executive’s employment is terminated for
Cause.
Removal. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not
distribute any benefit under this Agreement if the Executive is subject to a final removal or
prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the
Federal Deposit Insurance Act.
Noncompetition. In consideration of any benefits received hereunder, the Executive shall not, during
the term of employment with the Bank and for a period of two (2) years after Separation from Service
with the Bank for any reason other than Cause, either directly or indirectly own, have a proprietary
interest in, be employed by, or serve as a consultant to or for any retail banking business (other than
the Bank and its subsidiaries) which is engaged in the same or similar field of endeavor as that of the
Bank (including any of the Bank’s present or future subsidiaries) and which is located within fifty
(50) miles of any location where the Bank (including any of the Bank’s present or future subsidiaries)
is engaged in business. In addition, the Executive shall not, during the term of employment with the
Bank and for a period of two (2) years after Separation from Service from the Bank, influence or
attempt to influence or solicit any other employee, consultant, client, or agent of the Bank to terminate
its employment or relationship with the Bank or to work for or on behalf of any competitor or
potential competitor of the Bank, including, without limitation, the Executive or any other entity
controlled or organized by an Executive or in which an Executive is an owner, officer, a director or
agent. Failure to abide by the covenants set forth in this Section 5.3 will result in loss of any benefits
described hereunder.
Article 6
Administration of Agreement
6.1
Plan Administrator. The Bank shall be the Plan Administrator, unless the Bank appoints a committee
to be the Plan Administrator. The Bank may appoint a Committee (“Committee”) of one or more
individuals in the employment of Bank for the purpose of discharging the administrative
responsibilities of the Bank under the Plan. The Bank may remove a Committee member for any
reason by giving such member ten (10) days’ written notice and may thereafter fill any vacancy thus
created. The Committee shall represent the
5
Supplemental Executive Retirement
Plan Donna T. Lowery
6.2
6.3
6.4
6.5
6.6
6.7
6.8
Bank in all matters concerning the administration of this Plan; provided however, the final authority
for all administrative and operational decisions relating to the Plan remains with the Bank.
Authority of Plan Administrator. The Plan Administrator shall have full power and authority to adopt
rules and regulations for the administration of the Plan, provided they are not inconsistent with the
provisions of this Plan, and Section 409A of the Code, to interpret, alter, amend or revoke any rules
and regulations so adopted, to enter into contracts on behalf of the Bank with respect to this
Agreement, to make discretionary decisions under this Plan, to demand satisfactory proof of the
occurrence of any event that is a condition precedent to the commencement of any payment or
discharge of any obligation under the Plan, and to perform any and all administrative duties under this
Plan.
Recusal. An individual serving as Plan Administrator may be eligible to participate in the Plan, but
such person shall not be entitled to participate in discretionary decisions under Article 7 relating to
such person’s own interests in the Plan.
Agents. In the administration of this Agreement, the Plan Administrator may employ agents and
delegate to them such administrative duties as it sees fit, (including acting through a duly appointed
representative), and may from time to time consult with counsel who may be counsel to the Bank.
Binding Effect of Decisions. The decision or action of the Plan Administrator with respect to any
question arising out of or in connection with the administration, interpretation and application of the
Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and
binding upon all persons having any interest in the Agreement.
Indemnity of Plan Administrator. The Bank shall indemnify and hold harmless any party contracted
for the purposes of assisting the Plan Administrator in performing its duties under this Agreement
against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to
act with respect to this Agreement, except in the case of willful misconduct by such contracted party.
Bank Information. To enable any party contracted for the purposes of assisting the Plan Administrator
in performing its duties under this Agreement to perform its functions, the Bank shall supply full and
timely information to such contracted party on all matters relating to the date and circumstances of
any event triggering a benefit hereunder.
Annual Statement. Any party contracted for the purposes of assisting the Plan Administrator in
performing its duties under this Agreement shall provide to the Bank, on the schedule set forth in any
administrative services contract, a statement setting forth the benefits to be distributed under this
Agreement.
6
Supplemental Executive Retirement
Plan Donna T. Lowery
Article 7
Claims and Review Procedures
7.1
Claims Procedure. An Executive or Beneficiary (“claimant”) who has not received benefits under the
Agreement that he or she believes should be distributed shall make a claim for such benefits as
follows:
7.1.1
Initiation – Written Claim. The claimant initiates a claim by submitting to the Plan
Administrator a written claim for the benefits.
7.1.2 Timing of Plan Administrator Response. The Plan Administrator shall respond to such
claimant within 90 days after receiving the claim. If the Plan Administrator determines that
special circumstances require additional time for processing the claim, the Plan Administrator
can extend the response period by an additional 90 days by notifying the claimant in writing,
prior to the end of the initial 90-day period, that an additional period is required. The notice of
extension must set forth the special circumstances and the date by which the Plan
Administrator expects to render its decision.
7.1.3 Notice of Decision. If the Plan Administrator denies part or all of the claim, the Plan
Administrator shall notify the claimant in writing of such denial. The Plan Administrator shall
write the notification in a manner calculated to be understood by the claimant. The
notification shall set forth:
a) The specific reasons for the denial;
b) A reference to the specific provisions of the Agreement on which the denial is based;
c) A description of any information or material necessary for the claimant to perfect the claim
and an explanation of why it is needed;
d) An explanation of the Agreement’s review procedures and the time limits applicable to
such procedures; and
e) A statement of the claimant’s rights to bring a civil action under ERISA Section 502(a)
following an adverse benefit determination on review.
7.2
Review Procedure. If the Plan Administrator denies part or all of the claim, the claimant shall have the
opportunity for a full and fair review by the Plan Administrator of the denial, as follows:
7.2.1
Initiation – Written Request. To initiate the review, the claimant, within 60 days after
receiving the Plan Administrator’s notice of denial, must file with the Plan Administrator a
written request for review.
7.2.2 Additional Submissions – Information Access. The claimant shall then have the opportunity to
submit written comments, documents, records and other information
7
Supplemental Executive Retirement
Plan Donna T. Lowery
relating to the claim. The Plan Administrator shall also provide the claimant, upon request and
free of charge, reasonable access to, and copies of, all documents, records and other
information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for
benefits.
7.2.3 Considerations on Review. In considering the review, the Plan Administrator shall take into
account all materials and information the claimant submits relating to the claim, without
regard to whether such information was submitted or considered in the initial benefit
determination.
7.2.4 Timing of Plan Administrator Response. The Plan Administrator shall respond in writing to
such claimant within 60 days after receiving the request for review. If the Plan Administrator
determines that special circumstances require additional time for processing the claim, the Plan
Administrator can extend the response period by an additional 60 days by notifying the
claimant in writing, prior to the end of the initial 60-day period, that an additional period is
required. The notice of extension must set forth the special circumstances and the date by
which the Plan Administrator expects to render its decision.
7.2.5 Notice of Decision. The Plan Administrator shall notify the claimant in writing of its decision
on review. The Plan Administrator shall write the notification in a manner calculated to be
understood by the claimant. The notification shall set forth:
a) The specific reasons for the denial;
b) A reference to the specific provisions of the Agreement on which the denial is based;
c) A statement that the claimant is entitled to receive, upon request and free of charge,
reasonable access to, and copies of, all documents, records and other information relevant
(as described in applicable ERISA regulations) to the claimant’s claim for benefits; and
d) A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).
Article 8
Amendments and Termination
8.1
This Agreement may be amended or terminated only by a written agreement signed by the Bank and
the Executive. Additionally, the Bank may also amend this Agreement to conform to written
directives to the Bank from its banking regulators.
8.2
Subsequent Changes to Time and Form of Payment. The Bank may permit a subsequent
8
Supplemental Executive Retirement
Plan Donna T. Lowery
change to the time and form of benefit distributions. Any such change shall be considered made only
when it becomes irrevocable under the terms of the Agreement. Any change will be considered
irrevocable not later than thirty (30) days following acceptance of the change by the Plan
Administrator, subject to the following rules:
1)
2)
the subsequent deferral election may not take effect until at least twelve (12) months after the date
on which the election is made;
the payment (except in the case of death, disability, or unforeseeable emergency) upon which the
subsequent deferral election is made is deferred for a period of not less than five (5) years from the
date such payment would otherwise have been paid; and
3)
in the case of a payment made at a specific time, the election must be made not less than twelve
(12) months before the date the payment is scheduled to be paid.
Article 9
Miscellaneous
9.1
9.2
9.3
9.4
9.5
9.6
Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries,
survivors, executors, administrators and transferees.
No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the
Executive the right to remain as an employee of the Bank, nor does it interfere with the Bank’s right
to discharge the Executive. It also does not require the Executive to remain an employee nor interfere
with the Executive’s right to terminate employment at any time.
Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged,
attached or encumbered in any manner.
Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits
provided under this Agreement. The Executive acknowledges that the Bank’s sole liability regarding
taxes is to forward any amounts withheld to the appropriate taxing authority(ies).
Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of
Mississippi, except to the extent preempted by the laws of the United States of America.
Unfunded Arrangement. The Executive is a general unsecured creditor of the Bank for the distribution
of benefits under this Agreement. The benefits represent the mere promise by the Bank to distribute
such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment, or
9
Supplemental Executive Retirement
Plan Donna T. Lowery
garnishment by creditors.
9.7
9.8
9.9
Reorganization. The Bank shall not merge or consolidate into or with another bank, or reorganize, or
sell substantially all of its assets to another bank, firm, or person unless such succeeding or continuing
bank, firm, or person agrees to assume and discharge the obligations of the Bank under this
Agreement. Upon the occurrence of such event, the term “Bank” as used in this Agreement shall be
deemed to refer to the successor or survivor bank.
Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the
Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this
Agreement other than those specifically set forth herein.
Interpretation. Wherever the fulfillment of the intent and purpose of this Agreement requires, and the
context will permit, the use of the masculine gender includes the feminine and use of the singular
includes the plural.
9.10 Alternative Action. In the event it shall become impossible for the Bank or the Plan Administrator to
perform any act required by this Agreement, the Bank or Plan Administrator may in its discretion
perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is
in the best interests of the Bank.
9.11 Headings. Article and section headings are for convenient reference only and shall not control or
affect the meaning or construction of any of its provisions.
9.12 Validity. In case any provision of this Agreement shall be illegal or invalid for any reason, said
illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be
construed and enforced as if such illegal and invalid provision has never been inserted herein.
9.13 Notice. Any notice or filing required or permitted to be given to the Bank or Plan Administrator under
this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified
mail, to the address below:
First, ANBA
6480 Highway 98 West
Hattiesburg, MS 39402
Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the
date shown on the postmark on the receipt for registration or certification.
Any notice or filing required or permitted to be given to the Executive under this Agreement shall be
sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.
9.14 Restriction on Timing of Distribution. Solely to the extent necessary to avoid penalties under Section
409A, distributions under this Agreement may not commence earlier than
10
Supplemental Executive Retirement
Plan Donna T. Lowery
six (6) months after a Separation from Service (as described under the “Separation from Service”
provision herein) if, pursuant to Internal Revenue Code Section 409A, the participant hereto is
considered a “specified employee” of a publicly-traded company. In the event a distribution is delayed
pursuant to this Section, the originally scheduled distribution shall be delayed for six (6) months, and
shall commence instead on the first day of the seventh month following Separation from Service. If
payments are scheduled to be made in installments, the first six (6) months of installment payments
shall be delayed, aggregated, and paid instead on the first day of the seventh month, after which all
installment payments shall be made on their regular schedule. If payment is scheduled to be made in a
lump sum, the lump sum payment shall be delayed for six (6) months and instead be made on the first
day of the seventh month.
9.15 Certain Accelerated Payments. The Bank may make any accelerated distribution permissible under
Treasury Regulation 1.409A-3(j)(4), provided that such distribution(s) meets the requirements of
Section 1.409A-3(j)(4).
IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Bank have signed this
Agreement as of the date indicated above.
EXECUTIVE:
BANK:
/s/ Donna T. Lowery
Donna T. Lowery
First, A National Banking Association
By: /s/ M. Ray (Hoppy) Cole, Jr.
Name: M. Ray (Hoppy) Cole, Jr.
Title: President and Chief Executive Officer
11
Supplemental Executive Retirement
Plan Donna T. Lowery
The Executive shall be entitled to the corresponding Attained Benefit at Separation from Service prior to age 65,
except when for Cause, Change of Control or Death. The Attained Benefit is payable monthly at age 65 for the
Executives lifetime.
Schedule A
12
Supplemental Executive Retirement
Plan Donna T. Lowery
Schedule B
The Executive’s death benefit payable from this Supplemental Executive Retirement Plan Agreement, as stated
under Table B, Death Prior to Separation from Service, shall not exceed the following:
-
100% of the Net Death Proceeds, as of the date of death, from all life insurance policies owned by the Bank
on the life Donna T. Lowery,
minus
- The non-taxable death benefit payment to the beneficiary of Donna T. Lowery from the Endorsement Split
Dollar Insurance Agreement dated September 15, 2005 and amended on November 10, 2010 (estimated to be
$200,000, but shall not exceed 100% of the Net Death Benefit from the policies endorsed by the Endorsement
Method Split Dollar Insurance Agreement).
minus
- The net after-tax death benefit expense incurred by the Bank from the Supplemental Executive Retirement
Plan dated May 19th, 2014 and subsequently amended on April 1, 2016. This net benefit expense is estimated
to be $989,454 assuming a 26% Bank marginal income tax rate (based on a gross death benefit payment equal
to $1,337,100).
Any remaining Net Death Proceeds shall be paid to the Executive, not to exceed the death benefit amount listed
in Table B, Death Prior to Separation from Service, or a gross benefit of $3,679,851.
The net after-tax death benefit expense incurred by the Bank from all death benefits payable shall not exceed the
Net Death Proceeds. In the event the total net after-tax death benefits payable by the Bank exceeds the Net Death
Proceeds, a reduction in the death benefit payable under Table B, Death Prior to Separation from Service, of this
Agreement shall be required. For illustration purposes:
Net Death Proceeds shall be equal to or greater than the sum of:
1)
2)
3)
Endorsement Split Dollar non-taxable death benefit
2014 SERP net after-tax death benefit
2021 SERP net after-tax death benefit
$200,000
$989,454
$2,723,090
Net Death Proceeds means the total death proceeds of the life insurance policies minus the greater of (i) the cash
surrender value or (ii) the aggregate premiums paid by the company.
13
EXHIBIT 21.1
SUBSIDIARIES OF
THE FIRST BANCSHARES, INC.
The First, A National Banking Association
(a nationally chartered banking association)
The First Bancshares Statutory Trust 2
(Delaware statutory trust)
The First Bancshares Statutory Trust 3
(Delaware statutory trust)
FMB’S Capital Trust 1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-220491 and No. 333-248425) and on Form
S-8 (No. 333-171996 and No. 333-248426) of The First Bancshares, Inc. of our report dated March 12, 2021 on the consolidated financial
statements and the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K for the year ended
December 31, 2020.
/s/ CROWE LLP
Exhibit 23.1
Atlanta, Georgia
March 12, 2021
EXHIBIT 31.1
I, M. Ray (Hoppy) Cole, Jr., certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of The First Bancshares, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f))for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 12, 2021
/s/ M. Ray (Hoppy) Cole, Jr.
M. Ray (Hoppy) Cole, Jr.
Chief Executive Officer
EXHIBIT 31.2
I, Donna T. (Dee Dee) Lowery, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of The First Bancshares, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f))for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 12, 2021
/s/ Donna T. (Dee Dee) Lowery
Donna T. (Dee Dee) Lowery
Chief Financial Officer
CERTIFICATIONS
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of The First Bancshares, Inc. (the “Company”) for the year ending December 31, 2020, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), M. Ray (Hoppy) Cole, Jr., as Chief Executive Officer of
the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of his knowledge:
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d))
and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: March 12, 2021
/s/ M. Ray (Hoppy) Cole, Jr.
M. Ray (Hoppy) Cole, Jr.
Chief Executive Officer
In connection with the Annual Report on Form 10-K of The First Bancshares, Inc. (the “Company”) for the year ending December 31, 2020, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), Dee Dee Lowery, as Chief Financial Officer of the
Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
her knowledge:
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d))
and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of
the issuer.
Date: March 12, 2021
/s/ Donna T. (Dee Dee) Lowery
Donna T. (Dee Dee) Lowery
Chief Financial Officer