EXHIBIT 13
THE FIRST BANCSHARES, INC.
2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSPurpose
The purpose of management’s discussion and analysis is to make the reader aware of the significant components, events, and changes in the consolidated financial condition and results of operations of the Company and its subsidiary during the year ended December 31, 2009 when compared to the years 2008 and 2007. The Company’s consolidated financial statements and related notes should also be considered.
Critical Accounting Policies
In the preparation of the Company’s consolidated financial statements, certain significant amounts are based upon judgment and estimates. The most critical of these is the accounting policy related to the allowance for loan losses. The allowance is based in large measure upon management’s evaluation of borrowers’ abilities to make loan payments, local and national economic conditions, and other subjective factors. If any of these factors were to deteriorate, management would update its estimates and judgments which may require additional loss provisions.
Companies are required to perform periodic reviews of individual securities in their investment portfolios to determine whether decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company’s intent and ability to hold the security. Pursuant to these requirements, Management assesses valuation declines to determine the extent to which such changes are attributable to fundamental factors specific to the issuer, such as financial condition, business prospects or other factors or market-related factors, such as interest rates. Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses.
Goodwill is assessed for impairment both annually and when events or circumstances occur that make it more likely than not that impairment has occurred. The impairment test compares the estimated fair value of a reporting unit with its net book value. The Company has assigned all goodwill to one reporting unit that represents the overall banking operations. The analysis of goodwill for impairment requires significant assumptions about the economic environment, expected net interest margins, growth rates and the rate at which cash flows are discounted. No impairment was indicated when the annual test was performed in 2009.
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Overview
The Company was incorporated on June 23, 1995, and serves as a bank holding company for The First, A National Banking Association (“The First”), located in Hattiesburg, Mississippi. The First began operations on August 5, 1996, from its main office in the Oak Grove community, which is on the western side of Hattiesburg. The First currently operates its main office and two branches in Hattiesburg, one in Laurel, one in Purvis, one in Picayune, one in Pascagoula, one in Bay St. Louis, one in Wiggins and one in Gulfport, Mississippi. The Company and its subsidiary bank 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 First is a wholly-owned subsidiary of the Company.
The Company’s primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investments, the Company seeks to employ as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations. To ensure sufficient liquidity, the Company also maintains a portion of its deposits in cash, government securities, deposits with other financial institutions, and overnight loans of excess reserves (known as “Federal Funds Sold”) to correspondent banks. The revenue which the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of the Company’s loans and deposits, as well as the profit margin (“interest spread”) and fee income which can be generated on these amounts.
The Company increased from approximately $474.8 million in total assets, and $378.1 million in deposits at December 31, 2008 to approximately $477.6 million in total assets, and $383.8 million in deposits at December 31, 2009. Loans decreased from $318.3 million at December 31, 2008 to approximately $314.0 at December 31, 2009. The Company increased from $36.6 million in shareholders’ equity at December 31, 2008 to approximately $43.6 million at December 31, 2009. The First reported net income of $2,210,000 and $2,528,000 for the years ended December 31, 2009, and 2008, respectively. For the years ended December 31, 2009 and 2008, the Company reported consolidated net income applicable to common stockholders of $1,461,000 and $1,849,000, respectively. The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and the Company’s Consolidated Financial Statements and the Notes thereto and the other financial data included elsewhere.
7
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
(Dollars In Thousands, Except Per Share Data)
December 31,
--------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
---------------- ---------------- ----------------- ----------------- ----------------
Earnings:
Net interest income $ 16,039 $ 17,577 $ 18,256 $ 14,383 $ 10,150
Provision for loan
Losses 1,206 2,205 1,321 800 921
Noninterest income 2,749 3,162 3,189 2,239 1,682
Noninterest expense 15,324 15,998 14,823 11,138 8,138
Net income 1,743 1,849 3,823 3,315 1,909
Net income applicable
to common
Stockholders 1,461 1,849 3,823 3,315 1,909
Per common share data:
Basic net income per
Share $ .49 $ .62 $ 1.28 $ 1.35 $ .81
Diluted net income per
Share .49 .61 1.25 1.27 .77
Per share data:
Basic net income
per share $ .58 $ .62 $ 1.28 $ 1.35 $ .81
Diluted net income
per share .58 .61 1.25 1.27 .77
Selected Year End
Balances:
Total assets $ 477,552 $ 474,824 $ 496,056 $ 417,769 $ 294,390
Securities 114,618 102,303 87,052 91,810 50,660
Loans, net of
Allowance 314,033 318,300 367,002 284,082 197,943
Deposits 383,754 378,079 386,168 351,722 241,949
Stockholders' equity 43,617 36,568 36,281 32,365 18,478
Results of Operations
The following is a summary of the results of operations by The First for the years ended December 31,
2009 and 2008.
2009 2008
---------------------------------------
(In thousands)
Interest income $ 26,270 $ 31,708
Interest expense 13,645
9,966
---------- ----------
Net interest income 16,304 18,063
Provision for loan losses 1,206 2,205
---------- ----------
Net interest income after
provision for loan losses 15,098 15,858
---------- ----------
Other income 2,747 3,160
Other expense 14,963 15,560
Income tax expense 672 930
---------- ----------
Net income $ 2,210 $ 2,528
========== ==========
The following reconciles the above table to the amounts reflected in the consolidated financial
statements of the Company at December 31, 2009 and 2008:
8
2009 2008
---------------------------------------
(In thousands)
Net interest income:
Net interest income of subsidiary bank $ 16,304 $ 18,063
Intercompany eliminations (265) (486)
---------- ----------
$ 16,039 $ 17,577
========== ==========
Net income:
Net income of subsidiary bank $ 2,210 $ 2,528
Net loss of the Company, excluding
intercompany accounts (749) (679)
---------- ----------
$ 1,461 $ 1,849
========== ==========
Consolidated Net Income
The Company reported consolidated net income applicable to common stockholders of $1,461,000 for the year ended December 31, 2009, compared to a consolidated net income of $1,849,000 for the year ended December 31, 2008. The decrease in income was attributable to a decrease in net interest income of $1,539,000 or 8.8%, and a decrease of $413,000 or 13.1% in other income and an increase in preferred stock dividends and accretion of $282,000 relating to the participation in the Capital Purchase Program (CPP).
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 $16,039,000 for the year ended December 31, 2009, as compared to $17,577,000 for the year ended December 31, 2008. This decrease was the direct result of declining interest rates during 2009 as compared to 2008. Average interest-bearing liabilities for the year 2009 were $384,744,000 compared to $403,017,000 for the year 2008. At December 31, 2009, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.19% compared to 3.30% at December 31, 2008. The net interest margin (which is net interest income divided by average earning assets) was 3.57% for the year 2009 compared to 3.78% for the year 2008. Rates paid on average interest-bearing liabilities decreased from 3.51% for the year 2008 to 2.66% for the year 2009. 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 71.3% of average earning assets for the year 2009 compared to 75.1% for the year 2008.
9
Average Balances, Income and Expenses, and Rates. The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
Average Balances, Income and Expenses, and Rates
Years Ended December 31,
-------------------------------------------------------------------------------------------------
2009 2008 2007
-------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expenses Rate Balance Expenses Rate Balance Expenses Rate
-------------------------------------------------------------------------------------------------
Assets (Dollars in thousands)
Earning Assets..............
Loans (1)(2).......... $320,495 $22,323 6.97% $349,572 $26,879 7.69% $338,368 $28,732 8.49%
Securities............ 109,422 3,861 3.53% 96,357 4,416 4.58% 90,638 4,403 4.86%
Federal funds.sold.... 17,331 28 .16% 16,885 331 1.96% 4,478 232 5.18%
Other................. 1,991 66 3.31% 2,783 98 3.52% 612 32 5.23%
-------- ------- ------ -------- ------- ------ --------- ------- ------
Total earning assets.. 449,239 26,278 5.85% 465,597 31,724 6.81% 434,096 33,399 7.69%
-------- ------- ------ -------- ------- ------ --------- ------- ------
Cash and due from banks. 9,172 9,940 9,570
Premises and equipment.. 14,675 15,538 11,300
Other assets............ 13,620 13,256 13,411
Allowance for loan losses (5,064) (4,566) (4,160)
-------- -------- --------
Total assets............ $481,642 $499,765 $464,217
======== ======== ========
Liabilities
Interest-bearing
liabilities........... $384,744 $10,239 2.66% $403,017 $14,146 3.51% $366,567 $15,143 4.13%
------- ------- -------
Demand deposits (1)..... 48,855 56,236 61,565
Other liabilities....... 6,366 3,964 2,691
Shareholders' equity.... 41,677 36,548 33,394
-------- -------- --------
Total liabilities
and shareholders' equity $481,642 $499,765 $464,217
======== ======== ========
Net interest spread...... 3.19% 3.30% 3.56%
Net yield on interest-earning
assets................. $16,039 3.57% $17,578 3.78% $18,256 4.21%
======= ======= =======
____________________
(1) All loans and deposits were made to borrowers in the United States. Includes nonaccrual loans of
$4,367, $3,340, and $2,429, respectively, during the periods presented. Loans include held for sale loans.
(2) Includes loan fees of $1,161, $1,176, and $1,136, respectively.
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.
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Analysis of Changes in Consolidated Net Interest Income
Year Ended December 31, Year Ended December 31,
----------------------------- ----------------------------
2009 versus 2008 2008 versus 2007
Increase (decrease) due to Increase (decrease) due to
----------------------------- ----------------------------
Volume Rate Net Volume Rate Net
--------- -------- ---------- -------- --------- ---------
(Dollars in thousands)
Earning Assets
Loans............................ $(2,236) $(2,320) $(4,556) $ 950 $ (2,803) $(1,853)
Securities....................... 598 (1,153) (555) 278 (265) 13
Federal funds sold .............. 9 (312) (303) 643 (544) 99
Other short-term investments .... (28) (4) (32) 114 (48) 66
--------- -------- ---------- -------- --------- ---------
Total interest income ........... (1,657) (3,789) (5,446) 1,985 (3,660) (1,675)
--------- -------- ---------- -------- --------- ---------
Interest-Bearing Liabilities
Interest-bearing transaction
accounts....................... 618 (792) (174) 535 (129) 406
Money market accounts............ (242) (108) (350) (29) (467) (496)
Savings deposits................. (18) (58) (76) (31) (284) (315)
Time deposits.................... (566) (2,058) (2,624) 467 (1,373) (906)
Borrowed funds................... (471) (212) (683) 570 (256) 314
--------- -------- ---------- -------- --------- ---------
Total interest expense........... (679) (3,228) (3,907) 1,512 (2,509) (997)
--------- -------- ---------- -------- --------- ---------
Net interest income.............. $ (978) $ (561) $ (1,539) $ 473 $(1,151) $ (678)
========= ======== ========== ======== ========= =========
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 at December 31, 2007, 2008, and 2009.
11
December 31, 2007
---------------------------------------------------------------------
After Three
Within Through Within Greater Than
Three Twelve One One Year or
Months Months Year Nonsensitive Total
---------------------------------------------------------------------
(Dollars in thousands)
Assets
Earning Assets:
Loans.............................. $ 140,579 $ 59,868 $ 200,447 $ 170,776 $ 371,223
Securities (2)..................... 8,011 6,721 14,732 72,320 87,052
Funds sold and other............... 223 228 451 - 451
---------- ---------- ---------- ---------- ----------
Total earning assets............. 148,813 66,817 215,630 243,096 458,726
---------- ---------- ---------- ---------- ----------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)................... $ - $ 73,398 $ 73,398 $ - $ 73,398
Money market accounts.............. 38,820 - 38,820 - 38,820
Savings deposits (1) .............. - 20,934 20,934 - 20,934
Time deposits...................... 58,049 123,616 181,665 16,002 197,667
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits. 96,869 217,948 314,817 16,002 330,819
Borrowed funds (3).................... 17,052 12,693 29,745 31,027 60,772
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 113,921 230,641 344,562 47,029 391,591
---------- ---------- ---------- ---------- ----------
Interest-sensitivity gap per period... $ 34,892 $(163,824) $(128,932) $ 196,067 $ 67,135
========== ========== ========== ========== ==========
Cumulative gap at December 31, 2007... $ 34,892 $(128,932) $(128,932) $ 67,135 $ 67,135
========== ========== ========== ========== ==========
Ratio of cumulative gap to total earning
assets at December 31, 2007 ....... 7.6% (28.1%) (28.1%) 14.6%
December 31, 2008
---------------------------------------------------------------------
After Three
Within Through Within Greater Than
Three Twelve One One Year of
Months Months Year Nonsensitive Total
---------------------------------------------------------------------
(Dollars in thousands)
Assets
Earning Assets:
Loans.............................. $ 81,230 $ 57,092 $ 138,322 $ 184,762 $ 323,084
Securities (2)..................... 14,487 14,112 28,599 73,704 102,303
Funds sold and other............... 13,359 2,762 16,121 - 16,121
---------- ---------- ---------- ---------- ----------
Total earning assets............. 109,076 73,966 183,042 258,466 441,508
---------- ---------- ---------- ---------- ----------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)................... $ - $ 86,795 $ 86,795 $ - $ 86,795
Money market accounts.............. 27,836 - 27,836 - 27,836
Savings deposits (1) .............. - 18,419 18,419 - 18,419
Time deposits...................... 15,361 114,555 129,916 57,518 187,434
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits. 43,197 219,769 262,966 57,518 320,484
Borrowed funds (3).................... 10,519 6,471 16,990 29,037 46,027
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 53,716 226,240 279,956 86,555 366,511
---------- ---------- ---------- ---------- ----------
Interest-sensitivity gap per period... $ 55,360 $(152,274) $ (96,914) $ 171,911 $ 74,997
========== ========== ========== ========== ==========
Cumulative gap at December 31, 2008... $ 55,360 $ (96,914) $ (96,914) $ 74,997 $ 74,997
========== ========== ========== ========== ==========
Ratio of cumulative gap to total earnings
assets at December 31, 2008 ....... 12.5% (21.9%) (21.9%) 16.9%
12
December 31, 2009
---------------------------------------------------------------------
After Three
Within Through Within Greater Than
Three Twelve One One Year of
Months Months Year Nonsensitive Total
---------------------------------------------------------------------
(Dollars in thousands)
Assets
Earning Assets:
Loans.............................. $ 63,217 $ 55,419 $ 118,636 $ 200,159 $ 318,795
Securities (2)..................... 12,099 15,059 27,158 87,460 114,618
Funds sold and other............... 7,575 296 7,871 - 7,871
---------- ---------- ---------- ---------- ----------
Total earning assets............. 82,891 70,774 153,665 287,619 441,284
---------- ---------- ---------- ---------- ----------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)................... $ - $ 122,363 $ 122,363 $ - $ 122,363
Money market accounts.............. 25,110 - 25,110 - 25,110
Savings deposits (1) .............. - 15,712 15,712 - 15,712
Time deposits...................... 59,192 95,291 154,483 17,559 172,042
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits. 84,302 233,366 317,668 17,559 335,227
Borrowed funds (3) ................... 26 10,404 10,430 21,607 32,037
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 84,328 243,770 328,098 39,166 367,264
---------- ---------- ---------- ---------- ----------
Interest-sensitivity gap per period... $ (1,437) $ (172,996) $(174,433) $ 248,453 $ 74,020
========== ========== ========== ========== ==========
Cumulative gap at December 31, 2009... $ (1,437) $ (174,433) $(174,433) $ 74,020 $ 74,020
========== ========== ========== ========== ==========
Ratio of cumulative gap to total earning
assets at December 31, 2009....... (.3%) (39.5%) (39.5%) 16.8%
______________
(1) NOW and savings accounts are subject to immediate withdrawal and repricing. These deposits do not tend
to immediately react to changes in interest rates and the Company believes these deposits are a stable and
predictable funding source. Therefore, these deposits are included in the repricing period that management
believes most closely matches the periods in which they are likely to reprice rather than the period in
which the funds can be withdrawn contractually.
(2) Securities include mortgage backed and other installment paying obligations based upon stated maturity
dates.
(3) Does not include subordinated debentures of $10,310,000.
The Company generally would benefit from increasing market rates of interest when it has an asset-sensitive gap and generally from decreasing market rates of interest when it is liability sensitive. The Company currently is liability sensitive within the one-year time frame. However, the Company’s gap analysis is not a precise indicator of its interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by management as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Accordingly, management believes a liability sensitive-position within one year would not be as indicative of the Company’s true interest sensitivity as it would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income is also affected by other significant factors, including changes in the volume and mix of earning assets and interest-bearing liabilities.
Provision and Allowance for Loan Losses
The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.
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The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the prior four years is utilized in determining the appropriate allowance. Historical loss factors are determined by graded and ungraded loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio. These factors require judgment upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committees, and data and guidance received or obtained from the Company’s regulatory authorities.
The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. Impaired loans are determined based upon a review by internal loan review and senior loan officers. Impaired loans are loans for which the bank does not expect to receive contractual interest and/or principal by the due date. A specific allowance is assigned to each loan determined to be impaired based upon the value of the loan’s underlying collateral. Appraisals are used by management to determine the value of the collateral.
The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.
Our allowance for loan losses model is focused on establishing a loss history within the bank and relying on specific impairment to determine credits that the bank feels the ultimate repayment source will be liquidation of the subject collateral. Our model takes into account many other factors as well such as local and national economic factors, portfolio trends, non performing asset, charge off, and delinquency trends as well as underwriting standards and the experience of branch management and lending staff. These trends are measured in the following ways:
Local Trends: (Updated quarterly usually the month following quarter end)
Local Unemployment Rate
Insurance issues (Windpool areas)
Bankruptcy Rates (increasing/declining)
Local Commercial R/E Vacancy rates
Established market/new market
Hurricane threat
14
National Trends: (Updated quarterly usually the month following quarter end)
Gross Domestic Product (GDP)
Home Sales
Consumer Price Index (CPI)
Interest Rate Environment (increasing/steady/declining)
Single Family construction starts
Inflation Rate
Retail Sales
Portfolio Trends: (Updated monthly as the ALLL is calculated)
Second Mortgages
Single Pay Loans
Non-Recourse Loans
Limited Guaranty Loans
Loan to Value Exceptions
Secured by Non-Owner Occupied property
Raw Land Loans
Unsecured Loans
Measurable Bank Trends: (Updated quarterly)
Delinquency Trends
Non-Accrual Trends
Net Charge Offs
Loan Volume Trends
Non-Performing Assets
Underwriting Standards/Lending Policies
Experience/Depth of Bank Lending
Management
Our model takes into account many local and national economic factors as well as portfolio trends. Local and national economic trends are measured quarterly, typically in the month following quarter end to facilitate the release of economic data from the reporting agencies. These factors are allocated a basis point value ranging from -25 to +25 basis points and directly affect the amount reserved for each branch. As of December 31, 2009, most economic indicators both local and national pointed to a weak economy thus most factors were assigned a positive basis point value. This increased the amount of the allowance that was indicated by historical loss factors. Portfolio trends are measured monthly on a per branch basis to determine the percentage of loans in each branch that the bank has determined as having more risk. Portfolio risk is defined as areas in the bank’s loan portfolio in which there is additional risk involved in the loan type or some other area in which the bank has identified as having more risk. Each area is tracked on bank-wide as well as on a branch-wide basis. Branches are analyzed based on the gross percentage of concentrations of the bank as a whole. Portfolio risk is determined by analyzing concentrations in the areas outlined by determining the percentage of each branch’s total portfolio that is made up of the particular loan type and then comparing that concentration to the bank as a whole. Branches with concentrations in these areas are graded on a scale from — 25 basis points to + 25 basis points. Second mortgages, single pay loans, loans secured by raw land, unsecured loans and loans secured by non owner occupied property are considered to be of higher risk than those of a secured and amortizing basis. LTV exceptions place the bank at risk in the event of repossession or foreclosure.
15
Measurable Bank Wide Trends are measured on a quarterly basis as well. This consists of data tracked on a bank wide basis in which we have identified areas of additional risk or the need for additional allocation to the allowance for loan loss. Data is updated quarterly, each area is assigned a basis point value from -25 basis points to + 25 basis points based on how each area measures to the previous time period. Net charge offs, loan volume trends and non performing assets have all trended upwards therefore increasing the need for increased funds reserved for loan losses. Underwriting standards/ lending standards as well as experience/ depth of bank lending management is evaluated on a per branch level.
Loans are deemed to be impaired when, in the bank’s opinion, the ultimate source of repayment will be the liquidation of collateral through foreclosure or repossession. Once identified updated collateral values are attained on these loans and impairment worksheets are prepared to determine if impairment exists. This method takes into account any expected expenses related to the disposal of the subject collateral. Specific allowances for these loans are done on a per loan basis as each loan is reviewed for impairment. Updated appraisals are ordered on real estate loans and updated valuations are ordered on non real estate loans to determine actual market value.
At December 31, 2009, the consolidated allowance for loan losses amounted to $4,762,000, or 1.49% of outstanding loans. At December 31, 2008, the allowance for loan losses amounted to $4,785,000, which was 1.48% of outstanding loans. The Company’s provision for loan losses was $1,206,000 for the year ended December 31, 2009, compared to $2,205,000 for the year ended December 31, 2008.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the bank’s opinion the ultimate source of repayment will be generated from the liquidation of collateral.
The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.
16
The following tables illustrate the Company's past due and nonaccrual loans at December 31, 2009 and
2008.
December 31, 2009
----------------------------------------------------------------------
(In thousands)
----------------------------------------------------------------------
Past Due 30 to Past Due 90 days or
89 Days more and still accruing Non-Accrual
-------------- ----------------------- -----------
Real Estate-construction $ 3,737 $ 205 $ 1,890
Real Estate-mortgage 2,104 74 1,416
Real Estate-non farm nonresidential 3,004 735 589
Commercial 897 419 452
Consumer 619 14 20
-------- ------- -------
Total $ 10,361 $ 1,447 $ 4,367
======== ======= =======
December 31, 2008
----------------------------------------------------------------------
(In thousands)
----------------------------------------------------------------------
Past Due 30 to Past Due 90 days or
89 Days more and still accruing Non-Accrual
-------------- ----------------------- -----------
Real Estate-construction $ 1,845 $ 884 $ 1,480
Real Estate-mortgage 1,794 632 646
Real Estate-nonfarm residential 994 - 1,140
Commercial 907 83 50
Consumer 496 133 24
-------- -------- -------
Total $ 6,036 $ 1,732 $ 3,340
======== ======== =======
Total nonaccrual loans at December 31, 2009 amounted to $4.4 million which was an increase of $1.1 million over the December 31, 2008 amount of $3.3 million. This increase was due to the continued weakening of the real estate market. Management believes these relationships were adequately reserved at December 31, 2009. Restructured loans not reported as past due or nonaccrual at December 31, 2009 amounted to $.5 million.
A potential problem loan is one in which management has serious doubts about the borrower’s future performance under the terms of the loan contract. These loans are current as to principal and interest and, accordingly, they are not included in nonperforming asset categories. The level of potential problem loans is one factor used in the determination of the adequacy of the allowance for loan losses. At December 31, 2009 and December 31, 2008, the subsidiary bank had potential problem loans of $27,700,000 and $17,703,000, respectively. This represents an increase of $9,997,000.
17
Consolidated Allowance For Loan Losses
Years Ended December 31,
-------------------------------------------------------------
2009 2008 2007 2006 2005
--------- ---------- ---------- ---------- ----------
Average loans outstanding........................ $ 320,495 $ 349,572 $ 338,368 $ 237,578 $ 189,187
========= ========== ========== ========== ==========
Loans outstanding at year end.................... $ 318,795 $ 323,084 $ 371,223 $ 287,875 $ 200,310
========= ========== ========== ========== ==========
Total nonaccrual loans........................... $ 4,367 $ 3,340 $ 2,429 $ 1,789 $ 283
========= ========== ========== ========== ==========
Beginning balance of allowance................... $ 4,785 $ 4,221 $ 3,793 $ 2,367 1,659
Loans charged-off................................ (1,396) (1,784) (950) (186) (303)
--------- ---------- ---------- ---------- ----------
Total loans charged-off.......................... (1,396) (1,784) (950) (186) (303)
--------- ---------- ---------- ---------- ----------
Total recoveries................................. 167 143 57 107 90
--------- ---------- ---------- ---------- ----------
Net loans charged-off............................ (1,229) (1,641) (893) (79) (213)
Acquisition...................................... - - - 705 -
Provision for loan losses........................ 1,206 2,205 1,321 800 921
--------- ---------- ---------- ---------- ----------
Balance at year end.............................. $ 4,762 $ 4,785 $ 4,221 $ 3,793 $ 2,367
========= ========== ========== ========== ==========
Net charge-offs to average loans................. .38% .47% .26% .03% .11%
Allowance as percent of total loans.............. 1.49% 1.48% 1.14% 1.32% 1.18%
Nonperforming loans as a percentage of total loans 1.37% 1.03% .65% .62% .14%
Allowance as a multiple of nonaccrual loans...... 1.1X 1.4X 1.7X 2.1X 8.4X
At December 31, 2009, the components of the allowance for loan losses consisted of the following:
Allowance
---------------
(In thousands)
Allocated:
Impaired loans $ 2,004
Graded loans 2,758
-------
$ 4,762
=======
Graded loans are those loans or pools of loans assigned a grade by internal loan review.
18
The following table represents the activity of the allowance for loan losses for the years 2008 and 2009.
Analysis of the Allowance for Loan Losses
Years Ended December 31,
2009 2008
-----------------------------
(Dollars in thousands)
Balance at beginning of year $ 4,785 $ 4,221
Charge-offs:
Real Estate-construction 296 974
Real Estate-farmland 2 -
Real Estate-mortgage 443 179
Real Estate-nonfarm residential - 11
Commercial 389 290
Consumer 266 330
--------- --------
Total 1,396 1,784
Recoveries:
Real Estate-construction 45 -
Real Estate-mortgage 4 1
Commercial 3 19
Consumer 115 123
--------- --------
Total 167 143
--------- --------
Net charge-off 1,229 1,641
--------- --------
Provision for loan losses 1,206 2,205
--------- --------
Balance at end of year $ 4,762 $ 4,785
========= ========
The following tables represent how the allowance for loan losses is allocated to a particular loan type as
well as the percentage of the category to total loans at December 31, 2009 and 2008.
Allocation of the Allowance for Loan Losses
December 31, 2009
---------------------------------
(Dollars in thousands)
% of loans
in each category
Amount to total loans
--------- ------------------
Commercial Non Real Estate $ 1,015 13.9%
Commercial Real Estate 2,564 62.2%
Consumer Real Estate 687 17.8%
Consumer 317 3.9%
Unallocated 179 2.2%
------- ------
Total $ 4,762 100%
======= ======
December 31, 2008
---------------------------------
(Dollars in thousands)
% of loans
in each category
Amount to total loans
--------- ------------------
Commercial Non Real Estate $ 746 11.8%
Commercial Real Estate 2,603 60.4%
Consumer Real Estate 965 20.8%
Consumer 452 7.0%
Unallocated 19 -
------- ------
Total $ 4,785 100%
======= ======
19
Noninterest Income and Expense
Noninterest Income. The Company’s primary source of noninterest income is service charges on deposit accounts. Other sources of noninterest income include bankcard fees, commissions on check sales, safe deposit box rent, wire transfer fees, official check fees and bank owned life insurance income.
Noninterest income experienced a decrease of $413,000 or 13.1% as compared to $3,161,000 for the year ended December 31, 2008, to $2,748,000 for the year ended December 31, 2009. The deposit activity fees were $1,897,000 for 2009 compared to $2,113,000 for 2008. Other service charges decreased by $17,000 or 2.1% from $779,000 for the year ended December 31, 2008, to $762,000 for the year ended December 31, 2009. Impairment losses on investment securities were $111,000 for 2009 as compared to none for 2008.
Noninterest expense decreased from $16.0 million for the year ended December 31, 2008 to $15.3 million for the year ended December 31, 2009. The Company experienced decreases in most expense categories. The largest increase was in deposit and other insurance, which increased by $545,000 in 2009 as compared to 2008. During the 4th quarter of 2008 the Company made efforts to cut non-interest expenses by reducing its workforce by thirteen positions, or 7.8%.
The following table sets forth the primary components of noninterest expense for the periods indicated:
Noninterest Expense
--------------------------------
Years ended December 31,
--------------------------------
2009 2008 2007
---- ---- ----
(In thousands)
Salaries and employee benefits.................................... $ 8,401 $ 9,455 $ 8,962
Occupancy......................................................... 1,071 1,146 983
Equipment......................................................... 900 1,055 1,008
Marketing and public relations.................................... 329 250 323
Data processing................................................... 30 20 89
Supplies and printing............................................. 278 352 402
Telephone......................................................... 249 260 162
Correspondent services............................................ 110 110 106
Deposit and other insurance....................................... 1,019 474 283
Professional and consulting fees.................................. 830 845 506
Postage........................................................... 173 196 181
ATM fees.......................................................... 217 206 204
Other............................................................. 1,716 1,629 1,614
-------- -------- --------
Total........................................................ $ 15,323 $ 15,998 $14,823
======== ======== ========
Income Tax Expense
Income tax expense consists of two components. The first is the current tax expense which represents the expected income tax to be paid to taxing authorities. The Company also recognizes deferred tax for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities.
20
Analysis of Financial Condition
Earning Assets
Loans. Loans typically provide higher yields than the other types of earning assets, and thus one of the Company’s goals is for loans to be the largest category of the Company’s earning assets. At December 31, 2009 and 2008, respectively, loans accounted for 71% and 75% of earning assets. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Loans averaged $320.5 million during 2009, as compared to $349.6 million during 2008, and $338.4 million during 2007.
The following table shows the composition of the loan portfolio by category:
Composition of Loan Portfolio
December 31,
----------------------------------------------------------------------
2009 2008 2007
----------------------- --------------------- ----------------------
Amount Percent Amount Percent Amount Percent
Of Total of Total of Total
---------- ----------- -------- ----------- -------- ------------
(Dollars in thousands)
Mortgage loans held for sale................... $ 3,692 1.2% $ 3,113 1.0% $ 5,664 1.5%
Commercial, financial and agricultural ........ 43,229 13.6% 37,861 11.7% 46,633 12.6%
Real Estate:
Mortgage-commercial......................... 87,492 27.4% 84,181 26.1% 84,854 22.9%
Mortgage-residential........................ 102,738 32.2% 100,603 31.1% 112,676 30.3%
Construction................................ 68,695 21.5% 81,178 25.1% 100,634 27.1%
Consumer and other............................. 12,949 4.1% 16,149 5.0% 20,762 5.6%
-------- ------ --------- ------ --------- ------
Total loans.................................... 318,795 100% 323,085 100% 371,223 100%
====== ====== ======
Allowance for loan losses...................... (4,762) (4,785) (4,221)
-------- --------- ---------
Net loans...................................... $314,033 $ 318,300 $ 367,002
======== ========= =========
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, 2009.
21
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
December 31, 2009
-------------------------------------------------------
One Year Through Over Five
Type or Less Five Years Years Total
- ----------------------------------------- ------------ ------------- ------------ ----------
(Dollars in thousands)
Commercial, financial and agricultural..... $ 23,032 $ 19,821 $ 376 $ 43,229
Real estate - construction................. 68,695 - - 68,695
--------- --------- ------ --------
$ 91,727 $ 19,821 $ 376 $111,924
Loans maturing after one year with:
Fixed interest rates................................................................. $ 19,167
Floating interest rates.............................................................. 1,030
--------
$ 20,197
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 $109.4 million in 2009, as compared to $96.4 million in 2008 and $90.6 million in 2007. This represents 24.4%, 20.7%, and 20.9% of the average earning assets for the years ended December 31, 2009, 2008, and 2007, respectively. At December 31, 2009, investment securities were $114.6 million and represented 26% of earning assets. The Company attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations with maturities up to five years.
The following table summarizes the book value of securities for the dates indicated.
Securities Portfolio
December 31,
---------------------------------------
2009 2008 2007
---- ---- ----
(In thousands)
Available-for-sale
U. S. Government agencies................. $ 59,519 $ 64,814 $ 58,080
States and municipal subdivisions......... 41,982 23,093 21,224
Corporate obligations..................... 9,772 10,813 3,859
Mutual finds ........................... 958 959 1,156
-------- -------- --------
Total available-for-sale................ 112,231 99,679 84,319
-------- -------- --------
Held-to-maturity
U.S. Government agencies.................. 3 12 13
-------- -------- --------
Total......................................... $112,234 $ 99,691 $ 84,332
======== ======== ========
22
The following table shows, at carrying value, the scheduled maturities and average yields of securities
held at December 31, 2009.
Investment Securities Maturity Distribution and Yields (1)
December 31, 2009
---------------------------------------------------------------------------------------
After One But After Five But
($ in thousands) Within One Year Within Five Years Within Ten Years After Ten Years
--------------------- ------------------ ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- -------- --------- ------ -------- -------- -------- --------
Held-to-maturity:
U.S. Government agencies (2).... $ - - $ - - $ - - $ - -
========== ========= ======== ========
Available-for-sale:
U.S. Government agencies (3).... 9,676 3.81% 19,576 4.09% 2,140 1.37% - -
States and municipal subdivisions 5,267 1.84% 21,380 2.81% 12,680 3.83% 2,655 4.56%
Corporate obligations and other 1,001 5.07% 3,977 .80% 1,043 2.71% 3,751 2.30%
---------- --------- -------- --------
Total investment securities
available-for-sale.............. $15,944 $44,933 $15,863 $ 6,406
========== ========= ======== ========
_________________
(1) Investments with a call feature are shown as of the contractual maturity date.
(2) Excludes mortgage-backed securities totaling $3 thousand with a yield of 3.22%.
(3) Excludes mortgage-backed securities totaling $28.1 million with a yield of 4.71% and
mutual funds of $1.0 million.
Short-Term Investments. Short-term investments, consisting of Federal Funds Sold, averaged $17.3 million in 2009, $16.9 million in 2008, and $4.5 million in 2007. At December 31, 2009, and December 31, 2008, short-term investments totaled $7,575,000 and $13,359,000, respectively. These funds are a primary source of the Company’s liquidity and are generally invested in an earning capacity on an overnight basis.
Deposits
Deposits. Average total deposits increased $19.1 million, or 5.0% in 2008. Average total deposits decreased $14.7 million, or 3.6% in 2009. At December 31, 2009, total deposits were $383.8 million, compared to $378.1 million a year earlier, an increase of 1.5%.
The following table sets forth the deposits of the Company by category for the period indicated.
Deposits
December 31,
----------------------------------------------------------------
($ in thousands) 2009 2008 2007
----------------------------------------------------------------
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
--------- --------- --------- ----------- -------- --------
Noninterest-bearing accounts...... $ 48,527 12.6% $ 57,594 15.2% $ 55,349 14.3%
NOW accounts...................... 122,363 31.9% 86,795 22.9% 73,398 19.0%
Money market accounts............. 25,110 6.5% 27,836 7.4% 38,820 10.2%
Savings accounts.................. 15,712 4.1% 18,419 4.9% 20,934 5.4%
Time deposits less than $100,000.. 82,116 21.4% 99,491 26.3% 93,213 24.1%
Time deposits of $100,000 or over. 89,926 23.5% 87,944 23.3% 104,454 27.0%
--------- ------- -------- ------- -------- ------
Total deposits................ $383,754 100% $378,079 100% $386,168 100%
========= ======= ======== ======= ======== ======
23
The Company’s loan-to-deposit ratio was 82% at December 31, 2009 and 84% at December 31, 2008. The loan-to-deposit ratio averaged 83% during 2009. 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 $293.8 million at December 31, 2009 and $290.1 million at December 31, 2008. Management anticipates that a stable base of deposits will be the Company’s primary source of funding to meet both its short-term and long-term liquidity needs in the future. The Company has purchased brokered deposits from time to time to help fund loan growth. Brokered deposits and jumbo certificates of deposit generally carry a higher interest rate than traditional core deposits. Further, brokered deposit customers typically do not have loan or other relationships with the Company. The Company has adopted a policy not to permit brokered deposits to represent more than 10% of all of the Company’s deposits.
The maturity distribution of the Company’s certificates of deposit of $100,000 or more at December 31, 2009, is shown in the following table. The Company did not have any other time deposits of $100,000 or more.
Maturities of Certificates of Deposit
of $100,000 or More
After Three
Within Three Through After Twelve
(In thousands) Months Twelve Months Months Total
---------------- --------------- ---------------- ----------------
December 31, 2009.................... $ 32,365 $ 50,558 $ 7,003 $ 89,926
Borrowed Funds
Borrowed funds consists of advances from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase agreements. At December 31, 2009, advances from the FHLB totaled $17.0 million compared to $31.0 million at December 31, 2008. The advances are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. There were no federal funds purchased at December 31, 2009 and December 31, 2008.
Reverse Repurchase Agreements consist of three $5,000,000 agreements. These agreements are secured by securities with a fair value of $17,444,000 at December 31, 2009 and $17,805,000 at December 31, 2008. The maturity dates are from August 22, 2012 through September 26, 2017, with rates between 3.81% and 4.51%.
Subordinated Debentures
In 2006, the Company issued subordinated debentures of $4,124,000 to The First Bancshares, Inc. Statutory Trust 2 (Trust 2). The Company is the sole owner of the equity of the Trust 2. The Trust 2 issued $4,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 2. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2011 and mature in 2036. The Company entered into this arrangement to provide funding for expected growth.
24
In 2007, the Company issued subordinated debentures of $6,186,000 to The First Bancshares, Inc. Statutory Trust 3 (Trust 3). The Company is the sole owner of the equity of the Trust 3. The Trust 3 issued $6,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 3. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2012 and mature in 2037. The Company entered into this arrangement to provide funding for expected growth.
Capital
Total shareholders’ equity as of December 31, 2009, was $43.6 million, an increase of $7.0 million or approximately 19.3%, compared with shareholders’ equity of $36.6 million as of December 31, 2008.
The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general reserve for loan losses, subject to certain limitations. An institution’s total risk-based capital for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The risk-based regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.
Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 4%. All but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. The Company and the subsidiary bank exceeded their minimum regulatory capital ratios as of December 31, 2009 and 2008.
Analysis of Capital
Adequately Well The Company Subsidiary Bank
Capital Ratios Capitalized Capitalized December 31, December 31,
- -------------- ----------- ----------- ----------------------- -----------------------
2009 2008 2009 2008
---- ---- ---- ----
Leverage....................... 4.0% 5.0% 10.8% 9.4% 10.7% 9.3%
Risk-based capital:
Tier 1...................... 4.0% 6.0% 15.3% 12.8% 15.1% 12.5%
Total....................... 8.0% 10.0% 16.5% 14.0% 16.3% 13.8%
25
Ratios
2009 2008 2007
---- ---- ----
Return on assets (net income applicable
to common stockholders divided by
average total assets) .30% .37% .82%
Return on equity (net income applicable
to common stockholders divided by
average equity) 3.5% 5.1% 11.4%
Dividend payout ratio (dividends per
share divided by net income per
common share) - 36.3% 41.0%
Equity to asset ratio (average equity
divided by average total assets) 8.7% 7.3% 7.2%
Liquidity Management
Liquidity management involves monitoring the Company’s sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company’s market area.
The Company’s Federal Funds Sold position, which is typically its primary source of liquidity, averaged $17.3 million during the year ended December 31, 2009 and totaled $7.6 million at December 31, 2009. Also, the Company has available advances from the Federal Home Loan Bank. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2009, advances available totaled approximately $113.2 million of which $27.0 million had been drawn, or used for letters of credit.
Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources.
EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000. This increase is in place until the end of 2013 and is not covered by deposit insurance premiums paid by the banking industry.
26
Following a systemic risk determination, the FDIC established a Temporary Liquidity Guarantee Program (“TLGP”) on October 14, 2008. The TLGP includes the Transaction Account Guarantee Program (“TAGP”), which provides unlimited deposit insurance coverage through June 30, 2010 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts. Institutions participating in the TAGP pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place. The Company is participating in the TAGP.
The Company elected to participate in the Treasury TLG Program that provides an FDIC guarantee for all senior unsecured debt, with stated maturities in excess of 30 days, issued between October 14, 2008 and June 30, 2009. The guarantees will expire no later than June 30, 2012. The Company did not issue any debt under this program.
Subprime Assets
The Bank does not engage in subprime lending activities targeted towards borrowers in high risk categories.
Accounting Matters
Information on new accounting matters is set forth in Footnote B to the Consolidated Financial Statements included at Item 8 in this report. This information is incorporated herein by reference.
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company’s performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
27
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
The First Bancshares, Inc.
Hattiesburg, Mississippi
We have audited the accompanying consolidated balance sheets of The First Bancshares, Inc., and subsidiary as of
December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of The First Bancshares, Inc., and subsidiary as of December 31, 2009 and 2008,
and the consolidated results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ T. E. LOTT & COMPANY
Columbus, Mississippi
March 29, 2010
28
THE FIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
ASSETS 2009 2008
-------------------- --------------------
Cash and due from banks $ 8,119,637 $ 8,887,322
Interest-bearing deposits with banks 296,236 2,762,203
Federal funds sold 7,575,000 13,359,000
------------- -------------
Total cash and cash equivalents 15,990,873 25,008,525
Held-to-maturity securities (fair value of $3,047 in
2009 and $12,302 in 2008) 2,983 12,440
Available-for-sale securities 112,231,024 99,678,613
Other securities 2,383,650 2,611,900
------------- -------------
Total securities 114,617,657 102,302,953
Loans held for sale 3,692,316 3,112,572
Loans, net of allowance for loan losses of $4,762,069
in 2009 and $4,784,919 in 2008 310,340,494 315,186,957
Interest receivable 2,318,207 2,604,585
Premises and equipment 14,279,291 15,279,185
Cash surrender value of life insurance 5,857,074 5,659,897
Goodwill 702,213 702,213
Other assets 9,754,144 4,967,341
------------- -------------
Total assets $ 477,552,269 $ 474,824,228
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 48,527,218 $ 57,594,234
Interest-bearing 335,226,686 320,484,383
------------- -------------
Total deposits 383,753,904 378,078,617
Interest payable 672,355 849,873
Borrowed funds 32,037,082 46,027,274
Subordinated debentures 10,310,000 10,310,000
Other liabilities 7,162,262 2,990,378
------------- -------------
Total liabilities 433,935,603 438,256,142
------------- -------------
Stockholders' Equity:
Preferred stock, no par value, $1,000 per share liquidation,
10,000,000 shares authorized; 5,000 shares issued and out-
standing in 2009 and no shares issued and outstanding in 2008 4,773,010 -
Common stock, par value $1 per share: 10,000,000 shares
authorized; 3,046,363 and 3,016,695 shares issued
in 2009 and 2008, respectively 3,046,363 3,016,695
Additional paid-in capital 23,418,504 22,941,924
Retained earnings 12,943,540 11,482,585
Accumulated other comprehensive loss (101,106) (409,473)
Treasury stock, at cost (463,645) (463,645)
------------- -------------
Total stockholders' equity 43,616,666 36,568,086
Total liabilities and stockholders' equity $ 477,552,269 $ 474,824,228
============= =============
The accompanying notes are an integral part of these statements.
29
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2009 AND 2008
INTEREST INCOME 2009 2008
----------------------------------------
Interest and fees on loans $ 22,322,737 $ 26,878,927
Interest and dividends on securities:
Taxable interest and dividends 2,878,125 3,575,212
Tax-exempt interest 983,326 840,450
Interest on federal funds sold 28,143 331,376
Interest on deposits in banks
65,993 97,719
------------- -------------
Total interest income 26,278,324 31,723,684
------------- -------------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 2,246,314 2,821,373
Interest on other deposits 6,230,761 8,877,148
Interest on borrowed funds 1,762,639 2,447,674
------------- -------------
Total interest expense 10,239,714 14,146,195
------------- -------------
Net interest income 16,038,610 17,577,489
Provision for loan losses 1,206,343 2,204,672
------------- -------------
Net interest income after provision for loan losses 14,832,267 15,372,817
------------- -------------
OTHER INCOME
Service charges on deposit accounts 1,897,174 2,112,822
Other service charges and fees 762,783 779,428
Bank owned life insurance income 197,177 197,959
Loss on other real estate (20,831) (82,127)
Other 23,557 153,635
Impairment loss on securities:
Total other-than-temporary impairment loss (689,579) -
Less: Portion of loss recognized in other comprehensive income 578,151 -
------------- -------------
Net impairment loss recognized in earnings (111,428) -
------------- -------------
Total other income 2,748,432 3,161,717
------------- -------------
OTHER EXPENSE
Salaries 7,098,129 8,156,502
Employee benefits 1,302,807 1,298,422
Occupancy 1,082,818 1,158,206
Furniture and equipment 1,104,138 1,172,961
Supplies and printing 278,376 352,050
Professional and consulting fees 830,387 845,457
Marketing and public relations 328,690 250,140
FDIC and OCC assessments 968,524 421,724
Other 2,329,322 2,342,049
------------- -------------
Total other expense 15,323,191 15,997,511
------------- -------------
30
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2009 AND 2008
Continued: 2009 2008
----------------------------------------
Income before income taxes 2,257,508 2,537,023
Income taxes 514,111 688,158
--------------- ------------
Net income 1,743,397 1,848,865
Preferred dividends 225,694 -
Preferred stock accretion 56,748 -
--------------- ------------
Net income applicable to common stockholders $ 1,460,955 $ 1,848,865
=============== ============
Net income per share:
Basic $ .58 $ .62
Diluted .58 .61
Net income applicable to common stockholders:
Basic $ .49 $ .62
Diluted .49 .61
The accompanying notes are an integral part of these statements.
31
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2009 AND 2008
Accum-
Compre- Additional Other ulated
hensive Common Preferred Paid-in Retained Compre- Treasury
Income Stock Stock Capital Earnings hensive Stock Total
Income
(Loss)
---------- ------------- ------------ -------------- -------------- ----------- ------------- ------------
Balance,
January 1, 2008 $ 3,015,045 $ - $22,929,333 $10,306,336 $493,590 $ (463,645) $ 36,280,659
Comprehensive
Income:
Net income 2008 $1,848,865 - - - 1,848,865 - - 1,848,865
Net change in
unrealized
gain (loss)
on available-
for-sale
securities,
net of tax (903,063) - - - - (903,063) - (903,063)
-----------
Comprehensive
Income $ 945,802
===========
Exercise of stock
options 1,650 - 10,725 - - - 12,375
Stock option expense - 1,866 - - - 1,866
Cash dividend
declared, $.225
per share - - - (672,616) - - (672,616)
---------- ---------- ---------- ---------- ------- ---------- -----------
Balance,
December 31, 2008 3,016,695 - 22,941,924 11,482,585 (409,473) (463,645) 36,568,086
---------- ---------- ---------- ---------- ------- ---------- -----------
32
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2009 AND 2008
Continued:
Accum-
ulated
Compre- Additional Other
hensive Common Preferred Paid-in Retained Compre- Treasury
Income Stock Stock Capital Earnings hensive Stock Total
Income
(Loss)
-------------- ------------- ------------ -------------- -------------- ----------- ---------- ----------
Comprehensive
Income:
Net income 2009 $ 1,743,397 - - - 1,743,397 - - 1,743,397
Non-credit related
impairment
loss on
investment
securities,
net of tax (381,580) - - - - (381,580) - (381,580)
Net change in
unrealized
gain
on available-
for-sale
securities,
net of tax 702,010 - - - - 702,010 - 702,010
Net change in
unrealized
loss on
loans held for
sale, net of tax (12,063) - - - - (12,063) - (12,063)
------------
Comprehensive
Income $ 2,051,764
============
Issuance of
preferred
stock and warrant - 4,716,262 283,738 - - - 5,000,000
Accretion of
preferred
stock discount - 56,748 - (56,748) - - -
Dividends on
preferred stock - - - (225,694) - - (225,694)
Exercise of stock
options 29,668 - 192,842 - - - 222,510
------------ ----------- ------------- ------------ ---------- ---------- ------------
Balance,
December 31, 2009 $ 3,046,363 $4,773,010 $ 23,418,504 $12,943,540 $(101,106) $(463,645) $43,616,666
============ =========== ============= ============ ========== ========== ============
The accompanying notes are an integral part of these statements.
33
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 AND 2008
2009 2008
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,743,397 $ 1,848,865
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 970,262 1,056,786
Stock option expense - 1,866
FHLB Stock dividends (11,300) (70,400)
Provision for loan losses 1,206,343 2,204,672
Impairment loss on investment securities 111,428 -
Deferred income taxes (265,607) (206,303)
Increase in cash value of life insurance (197,177) (197,959)
Securities, amortization and accretion, net 336,253 32,249
Loss on sale/writedown of other real estate 268,062 82,127
Changes in:
Loans held for sale (598,021) 2,551,241
Interest receivable 286,378 933,975
Other assets (2,342,018) 1,978,689
Interest payable (177,518) 72,144
Other liabilities 4,139,940 1,242,852
------------ ------------
Net cash provided by operating activities 5,470,422 11,530,804
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (64,793,467) (49,708,592)
Purchases of other securities (110,600) (374,350)
Proceeds from maturities and calls of available-for-sale securities 52,288,321 30,654,367
Proceeds from sales of securities available-for-sale - 2,760,000
Proceeds from redemption of other securities 350,150 552,800
Decrease in loans 818,581 42,244,369
Net (additions) disposals to premises and equipment 245,086 (497,260)
------------ ------------
Net cash provided by (used in) investing activities (11,201,929) 25,631,334
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits 5,675,287 (8,089,227)
Proceeds from borrowed funds 3,000,000 15,000,000
Repayment of borrowed funds (16,990,192) (29,745,246)
Exercise of stock options 222,510 12,375
Dividends paid on common stock - (672,616)
Dividends paid on preferred stock (193,750) -
Proceeds from issuance of preferred stock and warrant 5,000,000 -
------------ ------------
Net cash used in financing activities (3,286,145) (23,494,714)
------------ ------------
The accompanying notes are an integral part of these statements.
34
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 AND 2008
Continued: 2009 2008
-------------------------------------
Net increase (decrease) in cash and cash equivalents (9,017,652) 13,667,424
Cash and cash equivalents at beginning of year 25,008,525 11,341,101
------------ ------------
Cash and cash equivalents at end of year $ 15,990,873 $ 25,008,525
============ ============
Supplemental disclosures:
Cash paid during the year for:
Interest $ 10,417,232 $ 14,580,872
Income taxes 876,436 934,200
Non-cash activities:
Transfers of loans to other real estate 2,821,539 1,701,975
The accompanying notes are an integral part of these statements.
35
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF BUSINESS
The First Bancshares, Inc. (the Company) is a bank holding company whose business is primarily conducted by its
wholly-owned subsidiary, The First, A National Banking Association (the Bank). The Bank provides a full range of
banking services in its primary market area of South Mississippi. The Company is regulated by the Federal Reserve
Bank. Its subsidiary bank is subject to the regulation of the Office of the Comptroller of the Currency (OCC).
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and its subsidiary follow accounting principles generally accepted in the United States of America
including, where applicable, general practices within the banking industry.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated.
2. Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the valuation of deferred tax assets.
3. Cash and Due From Banks
Included in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the
form of cash and balances due from the Federal Reserve. The reserve balance varies depending upon the types and
amounts of deposits. At December 31, 2009, the required reserve balance on deposit with the Federal Reserve Bank was
approximately $25,000.
4. Securities
Investments in securities are accounted for as follows:
Available-for-Sale Securities
Securities classified as available-for-sale are those securities that are intended to be held for an indefinite period
of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be
based on various factors, including movements in interest rates, liquidity needs, security risk assessments, changes
in the mix of assets and liabilities and other similar factors. These securities are carried at their estimated fair
value, and the net unrealized gain or loss is reported in stockholders' equity, net of tax, 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.
36
Securities to be Held-to-Maturity
Securities classified as held-to-maturity are those securities for which there is a positive intent and ability to
hold to maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of
discounts, computed by the interest method.
Trading Account Securities
Trading account securities are those securities which are held for the purpose of selling them at a profit. There were
no trading account securities on hand at December 31, 2009 and 2008.
Other Securities
Other securities are carried at cost and are restricted in marketability. Other securities consist of
investments in the Federal Home Loan Bank (FHLB), Federal Reserve Bank and First National Bankers' Bankshares, Inc.
Management reviews for impairment based on the ultimate recoverability of the cost basis.
Other-than-Temporary Impairment
Management evaluates investment securities for other-than-temporary impairment on a quarterly basis. A decline in the
fair value of available-for-sale and held-to-maturity securities below cost that is deemed other-than-temporary is
charged to earnings for a decline in value deemed to be credit related and a new cost basis for the security is
established. The decline in value attributed to non-credit related factors is recognized in other comprehensive
income.
5. Loans held for sale
The Company originates fixed rate single family, residential first mortgage loans on a presold basis. The Company
issues a rate lock commitment to a customer and concurrently "locks in" with a secondary market investor under a best
efforts delivery mechanism. Such loans are sold without the servicing retained by the Company. The terms of the loan
are dictated by the secondary investors and are transferred within several weeks of the Company initially funding the
loan. The Company recognizes certain origination fees and service release fees upon the sale, which are included in
interest and fees on loans in the consolidated statements of income. Between the initial funding of the loans by the
Company and the subsequent purchase by the investor, the Company carries the loans held for sale at the lower of cost
or fair value in the aggregate as determined by the outstanding commitments from investors.
6. Loans
Loans are carried at the principal amount outstanding, net of the allowance for loan losses. Interest income on loans
is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and
certain direct origination costs are deferred and recognized as an adjustment of the related loan yield using the
interest method.
A loan is considered impaired, in accordance with the impairment accounting guidance 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 or 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.
37
Loans are generally placed on a nonaccrual status when principal or interest is past due ninety days or when
specifically determined to be impaired. When a loan is placed on nonaccrual status, interest accrued but not received
is generally reversed against interest income. If collectibility is in doubt, cash receipts on nonaccrual loans are
used to reduce principal rather than recorded in interest income. Past due status is determined based upon contractual
terms.
7. Allowance for Loan Losses
For financial reporting purposes, the provision for loan losses charged to operations is based upon management's
estimations of the amount necessary to maintain the allowance at an adequate level. Allowances for any impaired loans
are generally determined based on collateral values. Loans are charged against the allowance for loan losses when
management believes the collectibility of the principal is unlikely.
Management evaluates the adequacy of the allowance for loan losses on a regular basis. These evaluations are based
upon a periodic review of the collectibility considering historical experience, the nature and value of the loan
portfolio, underlying collateral values, internal and independent loan reviews, and prevailing economic conditions.
In addition, the OCC, as a part of the regulatory examination process, reviews the loan portfolio and the allowance
for loan losses and may require changes in the allowance based upon information available at the time of the
examination. The allowance consists of two components: allocated and unallocated. The components represent an
estimation done pursuant to either ASC Topic 450, Contingencies, or ASC Subtopic 310-10. The allocated component of
the allowance reflects expected losses resulting from an analysis developed through specific credit allocations for
individual loans, including any impaired loans, and historical loan loss history. The analysis is performed quarterly
and loss factors are updated regularly.
The unallocated portion of the allowance reflects management's estimate of probable inherent but undetected losses
within the portfolio due to uncertainties in economic conditions, changes in collateral values, unfavorable
information about a borrower's financial condition, and other risk factors that have not yet manifested themselves.
In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in
the loan loss analysis.
8. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The depreciation policy is to provide for
depreciation over the estimated useful lives of the assets using the straight-line method. Repairs and maintenance
expenditures are charged to operating expenses; major expenditures for renewals and betterments are capitalized and
depreciated over their estimated useful lives. Upon retirement, sale, or other disposition of property and equipment,
the cost and accumulated depreciation are eliminated from the accounts, and any gains or losses are included in
operations.
9. Other Real Estate
Other real estate consists of properties acquired through foreclosure and, as held for sale property, is recorded at
the lower of the outstanding loan balance or current appraisal less estimated costs to sell. Any write-down to fair
value required at the time of foreclosure is charged to the allowance for loan losses. Subsequent gains or losses on
other real estate are reported in other operating income or expenses. At December 31, 2009 and 2008, other real
estate totaled $2,902,997 and $1,629,409, respectively.
38
10. Goodwill and Intangible Assets
The following table summarizes the changes in goodwill and core deposit intangible asset for the year
ended December 31, 2009.
Core deposit
(Dollars in thousands) Goodwill intangible
------------------------------------------
Balance, January 1, 2009 $ 702 $ 537
Amortization - 69
-------- ------------
Balance, December 31, 2009 $ 702 $ 468
======== ============
Acquired goodwill and core deposit intangible are related to the acquisition of First National Bank of Wiggins on
October 1, 2006.
The following table presents the forecasted core deposit intangible asset amortization expense for 2010 through 2014.
(Dollars in thousands) Full year
expected
Year amortization
---- ------------
2010 $69
2011 69
2012 69
2013 69
2014 69
11. Other Assets and Cash Surrender Value
Financing costs related to the issuance of junior subordinated debentures are being amortized over the life of the
instruments and are included in other assets. The Company invests in bank owned life insurance (BOLI). BOLI involves
the purchasing of life insurance by the Company on a chosen group of employees. The Company is the owner of the
policies and, accordingly, the cash surrender value of the policies is reported as an asset, and increases in cash
surrender values are reported as income.
12. Stock Options
The Company accounted for stock based compensation in accordance with ASC Topic 718, Compensation - Stock
Compensation. No stock options were granted during the twelve months ended December 31, 2009.
13. Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of
taxes currently payable plus deferred taxes related primarily to differences between the bases of assets and
liabilities as measured by income tax laws and their bases as reported in the financial statements. The deferred tax
assets and liabilities represent the future tax consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
The Company and its subsidiary file consolidated income tax returns. The subsidiary provides for income taxes on a
separate return basis and remits to the Company amounts determined to be payable.
ASC Topic 740, Income Taxes, provides guidance on financial statement recognition and measurement of tax positions
taken, or expected to be taken, in tax returns. ASC Topic 740 requires an evaluation of tax positions to determine if
the tax positions will more likely than not be sustainable upon examination by the appropriate taxing authority. The
Company at December 31, 2009 and 2008, had no uncertain tax positions that qualify for either recognition or
disclosure in the financial statements.
39
14. Advertising Costs
Advertising costs are expensed in the period in which they are incurred. Advertising expense for the years ended
December 31, 2009 and 2008, was approximately $246,306 and $186,073, respectively.
15. Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks, interest-bearing
deposits with banks and federal funds sold. Generally, federal funds are sold for a one to seven day period.
16. Off-Balance Sheet Financial Instruments
In the ordinary course of business, the subsidiary bank enters into off-balance sheet financial instruments consisting
of commitments to extend credit, credit card lines and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are exercised.
17. Earnings Applicable to Common Stockholders
Per share amounts are presented in accordance with ASC Topic 260, Earnings Per Share. Under ASC Topic 260, two per
share amounts are considered and presented, if applicable. Basic per share data is calculated based on the
weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any
dilution from potential common stock, such as outstanding stock options.
The following table discloses the reconciliation of the numerators and denominators of the basic and diluted
computations applicable to common stockholders:
For the Year Ended For the Year Ended
December 31, 2009 December 31, 2008
------------------------------------------------- ------------------------------------------------
Net Net
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ---------
Basic per common share $1,460,955 3,011,430 $ .49 $1,848,865 2,989,666 $ .62
========= =========
Effect of dilutive shares:
Stock options - 46,393
----------- ----------
$1,460,955 3,011,430 $ .49 $1,848,865 3,036,059 $ .61
========== =========== ========= ========== ========== =========
The diluted per share amounts were computed by applying the treasury stock method.
40
18. Reclassifications
Certain reclassifications have been made to the 2008 financial statements to conform with the
classifications used in 2009. These reclassifications did not impact the Company's consolidated financial condition
or results of operations.
19. Accounting Pronouncements
In June, 2009, FASB issued the Accounting Standards Codification (ASC) Topic 105, Generally Accepted Accounting
Principles, which became effective on July 1, 2009. At that date, the ASC became FASB's officially recognized source
of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public
non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA),
Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the SEC under the
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered nonauthoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in
financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique
numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
In April, 2009, the FASB issued ASC Topic 820, Fair Value Measurements and Disclosures. This guidance affirms that the
objective of fair value when the market for an asset is not active is the price that would be received to sell the
asset in an orderly transaction; includes additional factors for determining whether there has been a significant
decrease in market activity for an asset when the market is inactive; eliminates the presumption that all transactions
are distressed unless proven otherwise requiring an entity to base its conclusion on the weight of evidence; and
requires an entity to disclose a change in valuation technique resulting from application of the guidance and to
quantify its effects, if practicable. The guidance is effective for interim and annual periods ending after June 15,
2009 with early adoption permitted for periods ending after March 15, 2009. The adoption of the guidance did not have
a material impact on the Company's financial condition or results of operation.
In April 2009, the FASB issued ASC Topic 320, Investments-Debt and Equity Securities,(specifically ASC Section
320-10-35) regarding recognition and presentation of other-than-temporary impairments that changes existing guidance
for determining whether an impairment is other-than-temporary to debt securities; replaces the existing requirement
that the entity's management assert it has both the intent and ability to hold an impaired security until recovery
with a requirement that management assert: (a) it does not have the intent to sell the security and (b) it is more
likely than not it will not have to sell the security before recovery of its cost basis; requires that an entity
recognize noncredit losses on held-to-maturity debt securities in other comprehensive income and amortize the amount
over the remaining life of the security in a prospective manner by offsetting the recorded value of the asset unless
the security is subsequently sold or there are credit losses; requires an entity to present the total
other-than-temporary impairment in the statement of earnings with an offset for the amount recognized in other
comprehensive income; and at adoption, requires an entity to record a cumulative-effect adjustment as of the beginning
of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary
impairment from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the
security and it is more likely than not that the entity will not be required to sell the security before
recovery. The authoritative guidance is effective for interim and annual periods ending after June 15, 2009 with
early adoption permitted for periods ending after March 15, 2009. The adoption of the guidance did not have a
material impact on the Company's financial condition or results of operations.
41
In April 2009, the FASB issued ASC Topic 825, Financial Instruments. Under this guidance, a publicly traded company
is required to include disclosures about the fair value of its financial instruments whenever it issues summarized
financial information for interim reporting periods. In addition, an entity is required to disclose in the body or in
the accompanying notes of its summarized financial information for interim reporting periods and in its financial
statements for annual reporting periods the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the balance sheet. The guidance was effective for
interim periods ending after June 15, 2009. The adoption of the guidance did not have a material impact on the
Company's financial condition or results of operations.
In February 2009, the FASB issued ASC Topic 805, Business Combinations, regarding accounting for assets acquired and
liability assumed in a business combination that arise from contingencies, that amends provisions related to the
initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from
contingencies in a business combination. The guidance is effective for all business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008. The impact on the Company's financial condition or results of operations is dependent on the extent of future
business combinations.
In April 2008, the FASB issued ASC Subtopic 350-20, Goodwill and ASC Subtopic 350-30, Intangible Other than Goodwill
for the determination of the useful life of intangible assets which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under
previous guidance for determining goodwill and other intangible assets. The intent of the guidance is to improve the
consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset. This guidance was effective for financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of the guidance did not have a material impact on the Company's
financial condition or results of operations.
ASC Topic 860, Transfers and Servicing, amends prior guidance to enhance reporting about transfers of financial
assets, including securitizations, and where companies have continuing exposure to the risks related to transferred
financial assets. The new authoritative accounting guidance eliminates the concept of a "qualifying special-purpose
entity" and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance
also requires additional disclosures about all continuing involvements with transferred financial assets including
information about gains and losses resulting from transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 will be effective January 1, 2010, and is not expected to have a significant impact on
the Company's consolidated financial statements.
NOTE C - SECURITIES
A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity
securities at December 31, 2009 and 2008, follows:
42
December 31, 2009
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
Available-for-sale securities:
Obligations of U.S. Government
Agencies $ 31,061,333 $ 387,491 $ 56,602 $ 31,392,222
Tax-exempt and taxable
obligations of states and
municipal subdivisions 41,088,714 965,403 72,217 41,981,900
Mortgage-backed securities 27,226,696 985,163 84,851 28,127,008
Corporate obligations 11,742,149 51,683 2,021,721 9,772,111
Other 1,247,049 - 289,266 957,783
------------ ----------- ---------- ------------
$112,365,941 $ 2,389,740 $2,524,657 $112,231,024
============ =========== ========== ============
Held-to-maturity securities:
Mortgage-backed securities $ 2,983 $ 64 $ - $ 3,047
============ =========== ========== ============
December 31, 2008
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
Available-for-sale securities:
Obligations of U.S. Government
agencies $ 28,010,915 $ 703,354 $ - $28,714,269
Tax-exempt and taxable
obligations of states and
municipal subdivisions 23,305,755 243,123 455,620 23,093,258
Mortgage-backed securities 35,869,951 524,946 295,877 36,099,020
Corporate obligations 11,903,923 59,839 1,150,369 10,813,393
Other 1,208,474 - 249,801 958,673
------------ ----------- ---------- -----------
$100,299,018 $ 1,531,262 $2,151,667 $99,678,613
============ =========== ========== ===========
Held-to-maturity securities:
Mortgage-backed securities $ 12,440 $ - $ 138 $ 12,302
============ =========== ========== ===========
The scheduled maturities of securities at December 31, 2009, were as follows:
Available-for-Sale Held-to-Maturity
------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------------------------------------
Due less than one year $ 15,731,960 $15,943,868 $ - $ -
Due after one year through five years 44,261,937 44,932,952 - -
Due after five years through ten years 15,504,492 15,863,078 - -
Due after ten years 9,640,856 7,364,118 - -
Mortgage-backed securities 27,226,696 28,127,008 2,983 3,047
------------ ------------ --------- --------
$112,365,941 $112,231,024 $ 2,983 $ 3,047
============ ============ ========= ========
43
Actual maturities can differ from contractual maturities because the obligations may be called or prepaid with or without
penalties.
No gains or losses resulting from the sale of available-for-sale securities were realized in 2009 or 2008. An
other-than-temporary impairment loss of $111,428 was recognized for the year ended 2009.
Securities with a carrying value of $84,231,952 and $53,743,733 at December 31, 2009 and 2008, respectively, were pledged
to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law.
The details concerning securities classified as available-for-sale with unrealized losses as of
December 31, 2009 and 2008, were as follows:
2009
----------------------------------------------------------------------------------------------
Losses <12 Months Losses 12 Months or > Total
----------------------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------------------------------------------------------------------------------------------
Obligations of U.S.
government agencies $ 7,113,888 $ 56,602 $ - $ - $ 7,113,888 $ 56,602
Tax-exempt and tax-
able obligations of
states and municipal
subdivisions 5,055,888 71,665 90,567 552 5,146,455 72,217
Mortgage-backed
securities 776,355 3,091 321,532 81,760 1,097,887 84,851
Corporate obligations 487,730 398,736 3,811,605 1,622,985 4,299,335 2,021,721
Other - - 957,783 289,266 957,783 289,266
----------- --------- ----------- ----------- ----------- ----------
$13,433,861 $ 530,094 $ 5,181,487 $ 1,994,563 $18,615,348 $2,524,657
=========== ========= =========== =========== =========== ==========
2008
------------------------------- -------------------------------- -------------------------------
Losses <12 Months Losses 12 Months or > Total
----------------------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------------------------------------------------------------------------------------------
Obligations of U.S.
government agencies $ - $ - $ - $ - $ - $ -
Tax-exempt and tax-
able obligations of
states and municipal
subdivisions 8,517,167 354,987 684,367 100,633 9,201,534 455,620
Mortgage-backed
securities 8,327,567 292,600 14,702 3,277 8,342,269 295,877
Corporate obligations 7,946,273 1,058,465 280,090 91,904 8,226,363 1,150,369
Other - - 958,673 249,801 958,673 249,801
----------- ---------- ---------- --------- ----------- ----------
$24,791,007 $1,706,052 $1,937,832 $ 445,615 $26,728,839 $2,151,667
=========== ========== ========== ========= =========== ==========
Approximately 23.5% of the number of securities in the investment portfolio at December 31, 2009, reflected an
unrealized loss. Management is of the opinion the Company has the ability to hold these securities until such time as
the value recovers or the securities mature. Management also believes the deterioration in value is attributable to
changes in market interest rates and lack of liquidity in the credit markets. We have determined that these securities
are not other-than-temporarily impaired based upon anticipated cash flows.
44
NOTE D - LOANS
Loans outstanding included the following types at December 31, 2009 and 2008:
2009 2008
----------------------------------
(In thousands)
Commercial, financial and agricultural $ 43,229 $ 37,861
Real estate - construction 68,695 81,178
Real estate - mortgage 190,229 184,784
Installment loans to individuals 12,812 15,942
Overdrafts 137 207
--------- ----------
315,102 319,972
Allowance for loan losses (4,762) (4,785)
--------- ----------
$ 310,340 $ 315,187
========= ==========
Transactions in the allowance for loan losses for the years ended December 31, 2009 and 2008, were as follows:
2009 2008
-----------------------------------
Balance at beginning of year $ 4,784,919 $ 4,221,240
Additions:
Provision for loan losses charged to operations 1,206,343 2,204,672
Recoveries 166,904 142,861
----------- -----------
6,158,166 6,568,773
Deductions:
Loans charged off 1,396,097 1,783,854
----------- -----------
Balance at end of year $4,762,069 $ 4,784,919
=========== ===========
Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as
impaired. At December 31, 2009, the Company had $0.8 million of commercial loans and $1.5 million of real estate -
mortgage loans that were modified in troubled debt restructurings and impaired. In addition to these amounts, the
Company had troubled debt restructurings that were performing in accordance with their modified terms of $.5 million
of real estate - mortgage loans at December 31, 2009.
The following table represents the Company's impaired loans at December 31, 2009 and 2008. This table excludes
performing troubled debt restructurings.
2009 2008
--------------------------------
(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance $ 12,295 $ 9,322
Impaired loans with a valuation allowance 8,314 7,470
----------- -----------
Total impaired loans $ 20,609 $ 16,792
=========== ===========
45
Continued:
2009 2008
--------------------------------
(In thousands)
Allowance for loan losses on impaired loans at year end $ 2,004 $ 1,369
Total nonaccrual loans 4,367 3,340
Past due 90 days or more and still accruing 1,447 1,732
Average investment in impaired loans 19,114 13,784
Interest paid on impaired loans 1,297 861
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and amortization as follows:
2009 2008
------------------------------------
Premises:
Land $ 4,970,959 $ 4,963,029
Buildings and improvements 9,848,581 10,316,062
Equipment 4,418,294 5,341,598
Construction in progress 141,923 10,947
------------ -----------
19,379,757 20,631,636
Less accumulated depreciation and amortization 5,100,466 5,352,451
------------ -----------
$14,279,291 $15,279,185
============ ===========
The amounts charged to operating expense for depreciation were $754,808 and $840,501 in 2009 and 2008, respectively.
NOTE F - DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or more as of December 31, 2009, and 2008 was
$89,926,071 and $87,943,691, respectively.
At December 31, 2009, the scheduled maturities of time deposits included in interest-bearing deposits were as follows
(in thousands):
Year Amount
---- ------
2010 $154,483
2011 10,030
2012 2,819
2013 1,286
2014 3,424
--------
$172,042
========
46
NOTE G - BORROWED FUNDS
Borrowed funds consisted of the following:
December 31,
------------------------------------
2009 2008
-----------------------------------
Reverse Repurchase Agreement $15,000,000 $15,000,000
FHLB advances 17,037,082 31,027,274
----------- -----------
$32,037,082 $46,027,274
=========== ===========
Advances from the FHLB have maturity dates ranging from June, 2010 through July, 2013. Interest is payable monthly at
rates ranging from 2.959% to 5.920%. Advances due to the FHLB are collateralized by a blanket lien on first mortgage
loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. At
December 31, 2009, FHLB advances available and unused totaled $86,214,775.
Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2009, were as follows:
Year Amount
---- ------
2010 $10,430,185
2011 3,075,064
2012 1,761,059
2013 1,770,774
-----------
$17,037,082
===========
Reverse Repurchase Agreements consisted of three $5,000,000 agreements. The agreements are secured by securities with
a fair value of $17,444,000 at December 31, 2009 and $17,805,000 at December 31, 2008. The maturity dates are from
August 22, 2012 through September 26, 2017, with rates between 3.81% and 4.51%.
NOTE H - REGULATORY MATTERS
The Company and its subsidiary bank are subject to regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative judgment by regulators about components, risk weightings,
and other related factors.
To ensure capital adequacy, quantitative measures have been established by regulators, and these require the Company
and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to adjusted total assets (leverage).
Management believes, as of December 31, 2009, that the Company and its subsidiary bank exceeded all capital adequacy
requirements.
47
At December 31, 2009 and 2008, the subsidiary bank was categorized by regulators as well-capitalized under the
regulatory framework for prompt corrective action. A financial institution is considered to be well-capitalized if it
has a total risk-based capital ratio of 10% or more, has a Tier I risk-based capital ratio of 6% or more, and has a
Tier I leverage capital ratio of 5% or more. There are no conditions or anticipated events that, in the opinion of
management, would change the categorization. The actual capital amounts and ratios at December 31, 2009 and 2008, are
presented in the following table. No amount was deducted from capital for interest-rate risk exposure.
Company Subsidiary
(Consolidated) The First
----------------------------------------------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
December 31, 2009
Total risk-based $56,545 16.5% $55,686 16.3%
Tier I risk-based 52,259 15.3% 51,410 15.1%
Tier I leverage 52,259 10.8% 51,410 10.7%
December 31, 2008
Total risk-based $49,637 14.0% $48,580 13.8%
Tier I risk-based 45,214 12.8% 44,171 12.5%
Tier I leverage 45,214 9.4% 44,171 9.3%
The minimum amounts of capital and ratios as established by banking regulators at December 31, 2009 and 2008, were as
follows:
Company Subsidiary
(Consolidated) The First
------------------------------------ ----------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
December 31, 2009
Total risk-based $27,397 8.0% $27,326 8.0%
Tier I risk-based 13,698 4.0% 13,663 4.0%
Tier I leverage 19,307 4.0% 19,252 4.0%
December 31, 2008
Total risk-based $28,278 8.0% $28,189 8.0%
Tier I risk-based 14,139 4.0% 14,095 4.0%
Tier I leverage 19,106 4.0% 19,052 4.0%
The Company's dividends, if any, are expected to be made from dividends received from its subsidiary bank. The OCC
limits dividends of a national bank in any calendar year to the net profits of that year combined with the retained
net profits for the two preceding years.
NOTE I - COMPREHENSIVE INCOME
The Company and its subsidiary bank report comprehensive income as required by ASC Topic 220, Comprehensive Income.
In accordance with this statement, unrealized gains and losses on securities available-for-sale are included in
accumulated other comprehensive income.
In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double counting
amounts that are displayed as part of net income for a period that also had been displayed as part of other
comprehensive income. The disclosure of the reclassification amounts is as follows:
48
Years Ended December 31,
-------------------------------------------
2009 2008
--------------------- ---------------------
Unrealized holdings gains (losses) on available-for-
sale securities and loans held for sale $ 355,795 $(1,368,275)
Reclassification adjustment for losses
realized in income 111,428 -
--------- ------------
Net unrealized gains (losses) 467,223 (1,368,275)
Tax effect 158,856 465,212
--------- ------------
Net unrealized gains (losses), net of tax $ 308,367 $ (903,063)
========= ============
NOTE J - INCOME TAXES
The components of income tax expense are as follows:
Years Ended December 31,
--------------------------------------
2009 2008
------------------- ------------------
Current:
Federal $ 731,452 $ 820,839
State 48,266 73,622
Deferred (benefit) (265,607) (206,303)
---------- ----------
$ 514,111 $ 688,158
The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates
to income before income taxes. A reconciliation of the differences is as follows:
Years Ended December 31,
-------------------------------------------------------------
2009 2008
-------------------------------------------------------------
Amount % Amount %
------ --- ------ ---
Income taxes at statutory rate $ 767,553 34% $ 862,588 34%
Tax-exempt income (399,973) (18)% (352,397) (14)%
Nondeductible expenses 140,342 6% 186,832 8%
State income tax, net of federal
tax effect 31,856 2% 48,591 2%
Tax credits (25,887) (1)% (63,797) (3)%
Other, net 220 - 6,341 -
---------- ------ ---------- -----
$ 514,111 23% $ 688,158 27%
========== ====== ========== =====
The components of deferred income taxes included in the consolidated financial statements were as follows:
December 31,
--------------------------------------
2009 2008
-------------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,384,855 $ 1,354,720
Unrealized loss on available-for-sale securities 45,870 210,938
Net operating loss carryover 885,272 963,009
Other 360,925 154,736
----------- -----------
2,676,922 2,683,403
----------- -----------
Deferred tax liabilities:
Securities (155,772) (158,298)
Premises and equipment (761,078) (839,723)
Core deposit intangible (174,480) (200,329)
----------- -----------
(1,091,330) (1,198,350)
----------- -----------
Net deferred tax asset, included in other assets $ 1,585,592 $ 1,485,053
=========== ===========
49
With the acquisition of Wiggins, the Company assumed a federal tax net operating loss carryover. This net operating
loss is available to the Company through the year 2026.
The Company adopted the provisions of the 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 a result of the implementation of ASC Topic
740, the Company did not identify any 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 2006.
NOTE K - EMPLOYEE BENEFITS
The Company and its subsidiary bank provide a deferred compensation arrangement (401(k) plan) whereby employees
contribute a percentage of their compensation. For employee contributions of three percent or less, the Company and
its subsidiary bank provide a matching contribution. Contributions totaled $131,660 in 2009 and $138,841 in 2008.
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, 2009, the ESOP held 6,620 shares of Company
common stock and had no debt obligation. All shares held by the plan were considered outstanding for net income per
share purposes. Total ESOP expense was $2,500 for 2009 and $10,500 for 2008.
NOTE L - STOCK PLANS
On May 27, 1999, the Company's stockholders approved the 1999 Stock Incentive Plan (1999 Plan). The 1999 Plan provides
for the granting of options to purchase up to 213,376 shares of the Company's common stock by the Company's and its
subsidiary's directors, key employees, and management. Under the 1999 Plan, the Company may grant either incentive
stock options or nonqualified stock options. Options granted to directors and employees vest in equal amounts over
three years. Stock options granted to management vest based on annual performance goals or after nine years and
eleven months, if still employed. At December 31, 2008, 213,356 options had been granted, and 95,530 had been
exercised or forfeited. All options expired and were void unless exercised on or before April 15, 2009. In 2009,
29,668 options were exercised and the remaining options expired. The options were exercisable at not less than the
market value of the Company's stock at the grant date.
In 2007, the Company adopted the 2007 Stock Incentive Plan. The 2007 Plan provides for the issuance of up to 315,000
shares of Company Common Stock, $1.00 par value per share. Shares issued under the 2007 Plan may consist in whole or
in part of authorized but unissued shares or treasury shares. As of December 31, 2009, no awards had been granted.
50
A summary of the status of the stock option plans as of December 31, 2009 and 2008, and changes during the years
ending on those dates is presented below:
December 31,
----------------------------------------------------------------------
2009 2008
----------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Options outstanding at beginning of year 117,826 $8 120,776 $8
Options exercised (29,668) 8 (1,650) 8
Options forfeited (88,158) 12 (1,300) 12
--------- ---------
Options outstanding at end of year - 0 117,826 8
========= =========
Options exercisable at end of year - 0 117,826 8
========= =========
NOTE M - SUBORDINATED DEBENTURES
On June 30, 2006, The Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to
The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole
asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company's
obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee
by the Company of the Trust's obligations under the preferred securities. The preferred securities are redeemable by
the Company in 2011, or earlier in the event the deduction of related interest for federal income taxes is prohibited,
treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The preferred securities
must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month
London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are
identical to those of the preferred securities. On July 27, 2007, The Company issued $6,186,000 of floating rate
junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns
all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust
Preferred Securities (TPSs) to investors. The Company's obligations under the debentures and related documents, taken
together, constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred
securities. The preferred securities are redeemable by the Company in 2012, or earlier in the event the deduction of
related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain
other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2037.
Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the
subordinated debentures are identical to those of the preferred securities. In accordance with the provisions of ASC
Topic 810, Consolidation, the trusts are not included in the consolidated financial statements.
NOTE N - TREASURY STOCK
Shares held in treasury totaled 26,494 at December 31, 2009, and 2008.
51
NOTE O - RELATED PARTY TRANSACTIONS
In the normal course of business, the Bank makes loans to its directors and executive officers and to companies in
which they have a significant ownership interest. In the opinion of management, these loans are made on substantially
the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions
with other parties, are consistent with sound banking practices, and are within applicable regulatory and lending
limitations. Such loans amounted to approximately $14,814,000 and $11,875,000 at December 31, 2009 and 2008,
respectively. The activity in loans to current directors, executive officers, and their affiliates during the year
ended December 31, 2009, is summarized as follows (in thousands):
Loans outstanding at beginning of year $ 11,875
New loans 4,285
Repayments (1,346)
--------
Loans outstanding at end of year $ 14,814
========
NOTE P - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, there are outstanding various commitments and contingent liabilities, such as
guaranties, commitments to extend credit, etc., which are not reflected in the accompanying financial statements. The
subsidiary bank had outstanding letters of credit of $1,012,000 and $937,000 at December 31, 2009 and 2008,
respectively, and had made loan commitments of approximately $39,967,000 and $36,117,000 at December 31, 2009
and 2008, respectively.
Commitments to extend credit and letters of credit include some exposure to credit loss in the event of nonperformance
of the customer. Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit policies and procedures for such
commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates
and because a number expire without being drawn upon, they generally do not present any significant liquidity risk.
No significant losses on commitments were incurred during the two years ended December 31, 2009, nor are any
significant losses as a result of these transactions anticipated.
The primary market area served by the Bank is Forrest, Lamar, Jones, Pearl River, Jackson, Hancock, Stone, and
Harrison Counties within South Mississippi. Management closely monitors its credit concentrations and attempts to
diversify the portfolio within its primary market area. As of December 31, 2009, 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.
The Company had five leases for facilities during 2008. The first lease expired May, 2008 and was not renewed.
Monthly lease payments were $2,458. The second lease expired in August, 2008 and was not renewed. Monthly lease
payments were $1,293. The third lease expired in May, 2008 and was not renewed. Monthly lease payments were
$6,045. Permanent owned space was used to replace these three expired leases. The fourth lease requires monthly
payments of $3,013 through June, 2012. One five-year renewal option is included in the lease term. The fifth lease
requires monthly payments of $4,600 and expired in May, 2009. Since May, 2009 the lease has been on a monthly basis
with a 60 day termination notice requirement. Rental expense for 2009 to related parties amounted to $0.
52
Rental expense for premises and equipment for the years ended December 31, 2009 and 2008, was approximately $136,000
and $193,000, respectively.
On October 8, 2007, The First Bancshares, Inc. (the "Company") and its subsidiary, The First, A National Banking
Association (the "Bank") were formally named as defendants and served with a First Amended Complaint in litigation
styled Nick D. Welch v. Oak Grove Land Company, Inc., Fred McMurry, David E. Johnson, J. Douglas Seidenburg, The
First, A National Banking Association, The First Bancshares, Inc., and John Does 1 through 10. The Plaintiff seeks
damages from all the defendants, including $2,957,385, annual dividends for the year 2006 in the amount of $.30 per
share, punitive damages and attorneys' fees and costs. The Company and the Bank both deny any liability to Welch, and
intend to defend vigorously against this lawsuit.
NOTE Q - FAIR VALUES OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Company adopted ASC Topic 820, Fair Value Measurements and Disclosures, that
establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance
has been applied prospectively as of the beginning of the period.
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 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets and
liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
Following is a description of the valuation methodologies used for instruments measured at fair value on a
recurring basis and recognized in the accompanying balance sheet.
53
Available-for-Sale Securities
The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted
market prices are available in an active market, securities are classified within Level 1. The Company has
no securities 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
U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and
political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where
Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
The following table presents the Company's assets that are measured at fair value on a recurring basis and the
level within the hierarchy in which the fair value measurements fall as of December 31, 2009 and December 31,
2008 (in thousands):
December 31, 2009
Fair Value Measurements Using
-----------------------------------------------------------------------------------
Quoted Prices in Significant
Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs Inputs
Fair Value (Level 1) (Level 2) (Level 3)
------------------------------------------------------------------------------------
Available-for-sale securities $ 112,231 $ - $ 108,998 $ 3,233
December 31, 2008
Fair Value Measurements Using
------------------------------------------------------------------------------------
Quoted Prices in Significant
Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs Inputs
Fair Value (Level 1) (Level 2) (Level 3)
------------------------------------------------------------------------------------
Available-for-sale securities $ 99,679 $ - $ 99,679 $ -
54
The following is a reconciliation of activity for assets measured at fair value based on significant
unobservable (non-market) information.
Bank-Issued
Trust
Preferred
(Dollars in thousands) Securities
-----------------
Balance, December 31, 2008 $ -
Transfers into Level 3 5,338
Transfers out of Level 3 -
Other-than-temporary impairment loss included in earnings (111)
Unrealized loss included in comprehensive income (1,994)
-------
Balance, December 31, 2009 $ 3,233
=======
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. Allowable methods for estimating fair value include using the
fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral
dependent, using the discounted cash flow method.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount
of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and
applying a discount factor to the value. If the impaired loan is determined not to be collateral
dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at
the present value of expected future cash flows discounted at the loan's effective interest rate. The effective
interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs,
premiums or discount existing at origination or acquisition of the loan. Impaired loans are classified
within Level 2 of the fair value hierarchy.
Other Real Estate Owned
Other real estate owned 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. 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 non-interest expense. 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 posted to other non-interest expense. Other real estate owned measured at fair value on a non-recurring
basis at December 31, 2009, amounted to $2.9 million. Other real estate owned is classified within Level 2 of the
fair value hierarchy.
55
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 fall at December
31, 2009 and December 31, 2008.
December 31, 2009
Fair Value Measurements Using
-------------------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Sinificant
for Observable Unobservable
Identical Assets Inputs Inputs
Fair Value (Level 1) (Level 2) (Level 3)
-------------------------------------------------------------------------
Impaired loans $ 20,609 $ - $ 20,609 $ -
-
Other real estate owned $ 2,903 $ - $ 2,903 $ -
December 31, 2008
Fair Value Measurements Using
-------------------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Sinificant
for Observable Unobservable
Identical Assets Inputs Inputs
Fair Value (Level 1) (Level 2) (Level 3)
-------------------------------------------------------------------------
Impaired loans $ 16,792 $ - $ 16,792 $ -
Other real estate owned $ 1,629 $ - $ 1,629 $ -
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.
Loans - The fair value of loans is estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
56
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 noninterest-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 - The subordinated debentures bear interest at a variable rate and the carrying value
approximates the fair value.
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.
As of As of
December 31, 2009 December 31, 2008
----------------- -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
Financial Instruments:
Assets:
Cash and cash equivalents $ 15,991 $ 15,991 $25,009 $25,009
Securities available-for-sale 112,231 112,231 99,679 99,679
Securities held-to-maturity 3 3 12 12
Other securities 2,384 2,384 2,612 2,612
Loans, net 314,033 326,271 318,300 332,389
Liabilities:
Noninterest-bearing
Deposits $ 48,527 $ 48,527 $57,594 $57,594
Interest-bearing deposits 335,227 337,238 320,484 325,777
Subordinated debentures 10,310 10,310 10,310 10,310
FHLB and other borrowings 32,037 32,037 46,027 46,027
57
NOTE R - SENIOR PREFERRED STOCK
On February 6, 2009, under the U.S. Department of Treasury's (Treasury) Capital Purchase Program (CPP) established
under the Troubled Asset Relief Program (TARP) that was created as part of the Emergency Economic Stabilization Act of
2008 (EESA), the Company issued to Treasury 5,000 non-voting shares of Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, no par value, having a liquidation amount of $1,000 per share, and a ten-year warrant to purchase
54,705 shares of common stock at an exercise price of $13.71 per share, for aggregate proceeds of $5 million. The
total capital raised through this issue qualifies as Tier 1 regulatory capital and can be used in calculating all
regulatory capital ratios.
Cumulative preferred stock dividends are payable quarterly at a 5% annual rate on the per share liquidation amount for
the first five years and 9% thereafter. All redemptions would be at the liquidation amount per share plus accrued and
unpaid dividends and are subject to prior regulatory approval.
The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock
without first having paid all accrued cumulative preferred dividends that are due. For three years from the issue
date, the Company also may not increase its common stock dividend rate above an annual rate of $.15 per share or
repurchase its common shares without Treasury's consent, unless Treasury has transferred all the preferred shares to
third parties or the preferred stock has been redeemed.
The American Recovery and Reinvestment Act (ARRA) became law on February 17, 2009. Among its many provisions, the
ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP
recipients, including the Company, that are in addition to those previously announced by the Treasury. These limits
are effective until the institution has repaid the Treasury.
NOTE S - SUBSEQUENT EVENTS
Management has evaluated the effect of subsequent events on these financial statements through the date
the financial statements were issued.
58
NOTE T - PARENT COMPANY FINANCIAL INFORMATION
The balance sheets, statements of income and cash flows for The First Bancshares, Inc. (parent company only) follow.
Condensed Balance Sheets
December 31,
--------------------------------------
2009 2008
--------------------------------------
Assets:
Cash and cash equivalents $ 285,232 $ 561,309
Investment in subsidiary bank 52,768,436 45,249,878
Investments in statutory trusts 310,000 310,000
Other securities 100,000 100,000
Premises and equipment 368,623 368,623
Other 207,448 290,705
----------- ------------
$54,039,739 $ 46,880,515
=========== ============
Liabilities and Stockholders' Equity:
Subordinated debentures 10,310,000 10,310,000
Other 113,073 2,429
Stockholders' equity 43,616,666 36,568,086
----------- ------------
$54,039,739 $46,880,515
=========== ============
Condensed Statements of Income
Years Ended December 31,
--------------------------------------
2009 2008
--------------------------------------
Income:
Interest and dividends $ 25,354 $ 38,196
Dividend income - 600,000
Other 1,500 1,500
---------- ----------
26,854 639,696
Expenses:
Interest on borrowed funds 291,110 523,894
Other 360,820 436,863
---------- ----------
651,930 960,757
Loss before income taxes and equity in undistributed income of
Subsidiary (625,076) (321,061)
Income tax benefit (158,282) (241,539)
---------- ----------
Loss before equity in undistributed income of subsidiary (466,794) (79,522)
Equity in undistributed income of subsidiary 2,210,191 1,928,387
---------- ----------
Net income $1,743,397 $1,848,865
========== ==========
59
Condensed Statements of Cash Flows
Years Ended December 31,
--------------------------------------
2009 2008
--------------------------------------
Cash flows from operating activities:
Net income $ 1,743,397 $ 1,848,865
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed income of subsidiary (2,210,191) (1,928,387)
Other, net 161,957 370,877
Stock option expense - 1,866
------------ ------------
Net cash provided by (used in) operating activities (304,837) 293,221
------------ ------------
Cash flows from investing activities:
Investment in subsidiary bank (5,000,000) -
------------ ------------
Net cash used in investing activities (5,000,000) -
------------ ------------
Cash flows from financing activities:
Dividends paid on common stock - (672,616)
Dividends paid on preferred stock (193,750) -
Exercise of stock options 222,510 12,375
Proceeds from issuance of preferred stock and warrant 5,000,000 -
------------ ------------
Net cash provided by (used in) financing activities 5,028,760 (660,241)
------------ ------------
Net decrease in cash and cash equivalents (276,077) (367,020)
Cash and cash equivalents at beginning of year 561,309 928,329
------------ ------------
Cash and cash equivalents at end of year $ 285,232 $ 561,309
============ ============
60
NOTE U - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS AND PER SHARE
AMOUNTS (UNAUDITED)
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In thousands, except per share amounts)
2009
Total interest income $ 6,666 $ 6,608 $ 6,501 $ 6,503
Total interest expense 2,812 2,634 2,493 2,301
-------- -------- -------- --------
Net interest income 3,854 3,974 4,008 4,202
Provision (credit) for loan losses 628 464 (36) 150
-------- -------- -------- --------
Net interest income after provision for
loan losses 3,226 3,510 4,044 4,052
Total non-interest income 684 604 734 727
Total non-interest expense 3,658 3,890 3,707 4,069
Income tax expense 61 43 301 109
-------- -------- -------- --------
Net income 191 181 770 601
-------- -------- -------- --------
Preferred dividends 38 63 63 62
Preferred stock accretion 14 14 14 14
-------- -------- -------- --------
Net income applicable to common stockholders $ 139 $ 104 $ 693 $ 525
======== ======== ======== ========
Per common share:
Net income, basic $ .05 $ .03 $ .23 $ .18
Net income, diluted .05 .03 .23 .18
Cash dividends declared - - - -
2008
Total interest income $ 8,682 $ 8,168 $ 7,672 $ 7,202
Total interest expense 3,990 3,816 3,183 3,157
-------- -------- -------- --------
Net interest income 4,692 4,352 4,489 4,045
Provision for loan losses 366 634 721 484
-------- -------- -------- --------
Net interest income after provision for
loan losses 4,326 3,718 3,768 3,561
Total non-interest income 762 915 795 690
Total non-interest expense 3,963 4,176 4,085 3,774
Income tax expense 335 118 143 92
-------- -------- -------- --------
Net income applicable to common stockholders $ 790 $ 339 $ 335 $ 385
======== ======== ======== ========
Per common share:
Net income, basic $ .26 $ .11 $ .11 $ .14
Net income, diluted .26 .11 .11 .13
Cash dividends declared .075 .075 .075 -
61
