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Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

OR

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

For the transition period from _______ to ________

Commission file number: 000-22507

THE FIRST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Mississippi

64-0862173

(State of Incorporation)

(IRS Employer Identification No)

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

39402

(Address of principal executive offices)

(Zip Code)

(601) 268-8998

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00

FBMS

The Nasdaq Stock Market

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

Yes  þ                No  

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

Yes  þ                No  

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

Large accelerated filer

Accelerated filer

þ

Non-accelerated filer

Smaller Reporting Company

Emerging growth company

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

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

Yes                   No  þ

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

Common stock, $1.00 par value, 21,668,351 shares issued and 21,018,744 outstanding as of May 3, 2021.

Table of Contents

The First Bancshares, Inc.

Form 10-Q

Quarter Ended March 31, 2021

Index

Part I. Financial Information

 

 

 

Item 1.

Financial Statements

3

Consolidated Balance Sheets—Unaudited at March 31, 2021

3

Consolidated Statements of Income—Unaudited

4

Consolidated Statements of Comprehensive Income—Unaudited

5

Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

6

Consolidated Statements of Cash Flows—Unaudited

7

Notes to Consolidated Financial Statements—Unaudited

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

52

Item 4.

Controls and Procedures

55

 

 

 

Part II. Other Information

 

 

 

Item 1.

Legal Proceedings

56

Item 1A. 

Risk Factors

56

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults Upon Senior Securities

56

Item 4.

Mine Safety Disclosures

56

Item 5.

Other Information

56

Item 6.

Exhibits

57

Signatures

58

2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands)

(Unaudited)

March 31,

December 31, 

    

2021

    

2020

ASSETS

Cash and due from banks

$

117,520

$

137,684

Interest-bearing deposits with banks

 

695,737

 

424,870

Total cash and cash equivalents

 

813,257

 

562,554

Debt securities available-for-sale, at fair value

 

1,135,189

 

1,022,182

Other securities

 

22,137

 

27,475

Total securities

 

1,157,326

 

1,049,657

Loans held for sale

 

15,119

 

21,432

Loans held for investment

 

3,055,093

 

3,123,678

Allowance for credit losses (1)

(32,663)

(35,820)

Net loans held for investment

3,022,430

3,087,858

Interest receivable

 

24,686

 

26,344

Premises and equipment

 

113,778

 

114,823

Operating lease right-of-use assets

 

5,560

 

5,969

Finance lease right-of-use assets

 

2,596

 

2,658

Cash surrender value of bank-owned life insurance

 

86,462

 

73,732

Goodwill

 

156,944

 

156,944

Other real estate owned

5,769

5,802

Other assets

38,871

44,987

Total assets

$

5,442,798

$

5,152,760

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

Liabilities:

Deposits:

 

 

Noninterest-bearing

 

$

632,485

$

571,079

Interest-bearing

 

3,987,812

 

3,644,201

Total deposits

 

4,620,297

 

4,215,280

Interest payable

 

1,602

 

2,134

Borrowed funds

 

4,466

 

114,647

Subordinated debentures

 

144,572

 

144,592

Operating lease liabilities

5,633

6,031

Finance lease liabilities

2,234

2,281

Allowance for credit losses on off-balance sheet credit exposures (1)

718

Other liabilities

 

19,327

 

22,980

Total liabilities

 

4,798,849

 

4,507,945

Shareholders' equity:

 

  

 

  

Common stock, par value $1 per share, 40,000,000 shares authorized; 21,668,351 shares issued at March 31, 2021, and 21,598,993 shares issued at December 31, 2020, respectively

 

21,668

 

21,599

Additional paid-in capital

 

456,849

 

456,919

Retained earnings

 

168,162

 

154,241

Accumulated other comprehensive income

 

16,201

 

25,816

Treasury stock, at cost, 649,607 shares at March 31, 2021 and 483,984 shares at December 31, 2020

 

(18,931)

 

(13,760)

Total shareholders' equity

 

643,949

 

644,815

Total liabilities and shareholders' equity

$

5,442,798

$

5,152,760

(1)– Beginning January 1, 2021, allowance for credit losses is based on current expected credit loss methodology. Prior to January 1, 2021, allowance for loan loss was based on incurred loss methodology.

See Notes to Consolidated Financial Statements

3

Table of Contents

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

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

(Unaudited)

Three Months Ended

March 31,

    

2021

    

2020

Interest and dividend income:

Interest and fees on loans

$

39,613

$

36,005

Interest and dividends on securities:

 

 

Taxable interest and dividends

 

3,591

 

4,034

Tax exempt interest

 

1,935

 

1,360

Interest on federal funds sold and interest bearing deposits in other banks

 

48

 

199

Total interest income

 

45,187

 

41,598

Interest expense:

 

  

 

  

Interest on deposits

 

3,849

 

5,414

Interest on borrowed funds

 

2,109

 

2,119

Total interest expense

 

5,958

 

7,533

Net interest income

 

39,229

 

34,065

Provision for credit losses

 

 

7,102

Net interest income after provision for credit losses

 

39,229

 

26,963

Non-interest income:

 

  

 

  

Service charges on deposit accounts

 

1,761

 

1,914

Gain on sale of securities

20

174

Loss on sale of premises and equipment

(4)

(8)

Other

 

7,695

 

4,394

Total non-interest income

 

9,472

 

6,474

Non-interest expense:

 

  

 

  

Salaries and employee benefits

 

16,054

 

13,228

Occupancy and equipment

 

3,879

 

2,918

Acquisition and integration charges

740

Other

 

7,331

 

6,553

Total non-interest expense

27,264

23,439

Income before income taxes

21,437

9,998

Income tax expense

4,793

1,687

Net income

$

16,644

$

8,311

Basic earnings per share

$

0.79

$

0.44

Diluted earnings per share

0.79

0.44

See Notes to Consolidated Financial Statements

4

Table of Contents

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

(Unaudited)

Three Months Ended

March 31,

    

2021

    

2020

    

Net income

$

16,644

$

8,311

Other Comprehensive Income:

 

 

Unrealized holding (losses) gains arising during the period on available-for-sale securities

 

(12,852)

 

8,629

Reclassification adjustment for gains included in net income

 

(20)

 

(174)

Unrealized holding (losses) gains arising during period on available-for-sale securities

 

(12,872)

 

8,455

Income tax benefit (expense)

 

3,257

 

(2,713)

Other comprehensive income (loss)

 

(9,615)

 

5,742

Comprehensive Income

$

7,029

$

14,053

See Notes to Consolidated Financial Statements

5

Table of Contents

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

($ in thousands except per share data, unaudited)

Accumulated

Common

Additional

Other

Stock

Paid-in

Retained

Comprehensive

Treasury Stock

    

Shares

Amount

    

Capital

    

Earnings

    

Income

    

Shares

    

Amount

    

Total

Balance, January 1, 2020

18,996,948

$

18,997

$

409,805

$

110,460

$

10,089

(194,682)

$

(5,693)

$

543,658

Net income

 

 

 

8,311

 

 

 

8,311

Other comprehensive income

 

 

 

 

5,742

 

 

5,742

Dividends on common stock, $0.10 per share

 

 

 

(1,885)

 

 

 

(1,885)

Issuance of restricted stock grants

60,680

 

61

 

(61)

 

 

 

 

Repurchase of restricted stock for payment of taxes

(10,991)

(11)

 

(367)

 

 

 

 

(378)

Compensation expense

 

478

 

 

 

 

478

Balance, March 31, 2020

19,046,637

$

19,047

$

409,855

$

116,886

$

15,831

(194,682)

$

(5,693)

$

555,926

  

 

 

 

 

 

 

Balance, January 1, 2021

21,598,993

$

21,599

$

456,919

$

154,241

$

25,816

(483,984)

$

(13,760)

$

644,815

Net income

 

 

 

16,644

 

 

 

16,644

Common stock repurchased

(165,623)

(5,171)

(5,171)

Other comprehensive loss

 

 

 

 

(9,615)

 

 

(9,615)

Dividends on common stock, $0.13 per share

 

 

 

(2,723)

 

 

 

(2,723)

Issuance of restricted stock grants

84,578

 

85

 

(85)

 

 

 

 

Restricted stock grants forfeited

(500)

 

(1)

 

1

 

 

 

 

Repurchase of restricted stock for payment of taxes

(14,720)

 

(15)

 

(426)

 

 

 

 

(441)

Compensation expense

 

 

440

 

 

 

 

440

Balance, March 31, 2021

21,668,351

$

21,668

$

456,849

$

168,162

$

16,201

(649,607)

$

(18,931)

$

643,949

See Notes to Consolidated Financial Statements

6

Table of Contents

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

(Unaudited)

Three months ended

March 31,

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net income

$

16,644

$

8,311

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation, amortization and accretion

 

3,318

 

1,308

Provision for credit losses

 

 

7,102

(Gain) loss on sale or writedown of ORE

(75)

293

Securities gain

(20)

(174)

Loss on disposal of premises and equipment

4

8

Restricted stock expense

 

440

 

478

Increase in cash value of life insurance

 

(482)

 

(328)

Federal Home Loan Bank stock dividends

(14)

(53)

Residential loans originated and held for sale

(79,365)

(55,076)

Proceeds from sale of residential loans held for sale

85,678

51,828

Changes in:

 

 

  

Interest receivable

 

1,658

 

(141)

Interest payable

 

(532)

 

377

Operating lease liability

(398)

(382)

Other, net

 

5,351

 

495

Net cash provided by operating activities

 

32,207

 

14,046

Cash flows from investing activities:

 

  

 

  

Maturities, calls and paydowns of available-for-sale securities

53,570

46,192

Purchases of available-for-sale securities

 

(180,948)

 

(36,277)

Redemptions of other securities

 

5,352

 

832

Net decrease (increase) in loans

 

65,731

 

(925)

Net changes in premises and equipment

 

(283)

 

(1,413)

Proceeds from sale of other real estate owned

 

831

 

532

Purchase of bank-owned life insurance

 

(12,248)

 

(5,800)

Net cash provided by (used in) investing activities

 

(67,995)

 

3,141

Cash flows from financing activities:

 

  

 

  

Increase in deposits

 

405,078

 

201,122

Net decrease in borrowed funds

 

(110,181)

 

(98,139)

Principal payments on finance lease liabilities

(47)

(45)

Dividends paid on common stock

 

(2,688)

 

(1,852)

Cash paid to repurchase common stock

(5,171)

Payment of subordinated debt issuance costs

 

(59)

 

Repurchase of restricted stock for payment of taxes

 

(441)

 

(378)

Net cash provided by financing activities

 

286,491

 

100,708

Net change in cash and cash equivalents

 

250,703

 

117,895

Beginning cash and cash equivalents

 

562,554

 

168,864

Ending cash and cash equivalents

$

813,257

$

286,759

 

  

 

  

Supplemental disclosures:

 

  

 

  

Cash payments for interest

$

5,512

$

5,567

Loans transferred to other real estate

 

723

 

504

Issuance of restricted stock grants

 

85

 

61

Dividends on restricted stock grants

35

33

Lease liabilities arising from obtaining right-of-use assets

 

 

2,419

See Notes to Consolidated Financial Statements

7

Table of Contents

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2021

NOTE 1 – BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2020.

NOTE 2 – SUMMARY OF ORGANIZATION

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

At March 31, 2021, the Company had approximately $5.443 billion in assets, $3.022 billion in net loans held for investment (“LHFI”), $4.620 billion in deposits, and $643.9 million in shareholders’ equity. For the three  months ended March 31, 2021, the Company reported net income of $16.6 million.

On February 25, 2021, the Company paid a cash dividend in the amount of $0.13 per share to shareholders of record as of the close of business on February 10, 2021. On April 21, 2021, the Company announced that its Board of Directors declared a cash dividend of $0.14 per share to be paid on its common stock on May 25, 2021 to shareholders of record as of the close of business on May 10, 2021.

NOTE 3 – ACCOUNTING STANDARDS

Effect of Recently Adopted Accounting Standards

Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (“ASC 326”) introduces guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Accounting Standards Codification (“ASC”) 326 eliminates the current incurred loss approach and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. This guidance also changes the accounting for purchased loans and debt securities with credit deterioration.

ASC 326 also applies to off-balance sheet credit (“OBSC”) exposures such as unfunded loan commitments, letters of credit and other financial guarantees that are not unconditionally cancellable by the Company. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on OBSC exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Expected credit losses related to OBSC exposures are presented as a liability.

The allowance for loan credit losses (“ACL”) represents the estimated losses for financial assets accounted for on an amortized cost basis. Expected losses are calculated using relevant information, from internal and external sources, about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.  Historical credit loss experience provides the basis for the estimation of expected credit losses.  Adjustments to historical loss

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information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environment conditions, such as changes in unemployment rates, property values, or other relevant factors.  Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Expected losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.  The contractual term excludes expected extensions, renewals, and modifications.  Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed and recoveries are credited to the allowance when received.  Expected recoveries amounts may not exceed the aggregate of amounts previously charged-off.

The ACL is measured on a collective basis when similar risk characteristics exist.  Generally, collectively assessed loans are grouped by call code (segments).  Segmenting loans by call code will group loans that contain similar types of collateral, purposes, and are usually structured with similar terms making each loan’s risk profile very similar to the rest in that segment.  Each of these segments then flows up into one of the four bands (bands), Commercial, Financial, and Agriculture, Commercial Real Estate, Consumer Real Estate, and Consumer Installment.  In accordance with the guidance in ASC 326, the Company redefined its LHFI portfolio segments and related loan classes based on the level at which risk is monitored within the ACL methodology. Construction loans for 1-4 family residential properties with a call code 1A1, and other construction, all land development and other land loans with a call code 1A2 were previously separated between the Commercial Real Estate or Consumer Real Estate bands based on loan type code.  Under our ASC 326 methodology 1A1 loans are all defined as part of the Consumer Real Estate band and 1A2 loans are all defined as part of the Commercial Real Estate Band.

The probability of default (“PD”) calculation analyzes the historical loan portfolio over the given lookback period to identify, by segment, loans that have defaulted.  A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period.  The model observes loans over a 12-month window, detecting any events previously defined.  This information is then used by the model to calculate annual iterative count-based PD rates for each segment.  This process is then repeated for all dates within the historical data range.  These averaged PD’s are used for reversion back to the historical mean. The historical data used to calculate this input was captured by the Company from 2009 through the most recent quarter end.

The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans.  The model’s calculation also includes a 24-month forecasted PD based on a regression model that calculated a comparison of the Company’s historical loan data to various national economic metrics during the same periods.  The results showed the Company’s past losses having a high rate of correlation to unemployment, both regionally and nationally.   Using this information, along with the most recently published Wall Street Journal survey of sixty economists’ forecasts predicting unemployment rates out over the next eight quarters, a corresponding future PD can be calculated for the forward-looking 24-month period.  This data can also be used to predict loan losses at different levels of stress, including a baseline, adverse and severely adverse economic condition.  After the forecast period, PD rates revert to the historical mean of the entire data set.

The loss given default (“LGD”) calculation is based on actual losses (charge-offs, net recoveries) at a loan level experienced over the entire lookback period aggregated to get a total for each segment of loans.  The aggregate loss amount is divided by the exposure at default to determine an LGD rate.  Defaults occurring during the lookback period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event.  If there is not a minimum of five past defaults in a loan segment, or less than 15.0% calculated LDG rate, a proxy index is used.  This index is proprietary to the Company’s ACL modeling vendor derived from loss data of other client institutions similar in organization structure to the Company.  The vendor also provides a “crisis” index derived from loss data between the post-recessionary years of 2008-2013 that the Company uses.  

The model then uses these inputs in a non-discounted version of discounted cash flow (“DCF”) methodology to calculate the quantitative portion of estimated losses.  The model creates loan level amortization schedules that detail out the expected monthly payments for a loan.  These expected cash flows are discounted back to present value using the loan’s coupon rate instead of the effective interest rate. On a quarterly basis, the Company uses modeling of internal credit portfolio data, such as changes in portfolio volume and composition, underwriting practices, and levels of past due loans, nonaccruals and classified assets along with other external information not used in the quantitative calculation to determine if any subjective qualitative adjustments are required so that all significant risks are incorporated to form a sufficient basis to estimate credit losses.

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. These purchased credit deteriorated (“PCD”) loans are recorded at the amount paid. It is the Company’s policy that a loan

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meets this definition if it is adversely risk rated as Non-Pass (Special Mention, Substandard, Doubtful or Loss) including non-accrual loans, as well as loans identified as TDR’s.  An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans.  The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis.  The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan.  Subsequent changes to the allowance for credit losses are recorded through provision expense.

Upon adoption of ASC 326, the Company elected to maintain segments of loans that were previously accounted for under ASC 310-30 Accounting for Purchased Loans with Deteriorated Credit Quality and will continue to account for these segments as a unit of account unless the loan is collateral dependent.  PCD loans that are collateral dependent will be assessed individually.  Loans are only removed from the existing segments if they are written off, paid off, or sold.  Upon adoption of ASC 326, the allowance for credit losses was determined for each segment and added to the band’s carrying amount to establish a new amortized cost basis.  The difference between the unpaid principal balance of the segment and the new amortized cost basis is the noncredit premium or discount, which will be amortized into interest income over the remaining life of the segment.  Changes to the allowance for credit losses after adoption are recorded through provision expense.

The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30.  In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption.  Upon adoption of ASC 326, the Company increased the ACL by $1.1 million and adjusted the amortized cost basis of the PCD assets. The remaining noncredit discount of approximately $685 thousand (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021.Loans that do not share risk characteristics are evaluated on an individual basis.  Loans evaluated individually are not included in the collective evaluation.  Loans classified as nonaccrual, troubled debt restructuring (“TDRs”), greater than 90 days past due and still accruing interest, and PCD loans that are collateral dependent will be reviewed quarterly for potential individual assessment.  Any loan classified as nonaccrual, TDR, or PCD that is not determined to need individual assessment will be evaluated collectively within its respective segment.

ASC 326 requires that a loan be evaluated for losses individually and reserved for separately, if the loan does not share similar risk characteristics to any other loan segments.  The Company’s process for determining which loans require specific evaluation follows the standard and is two-fold.  All non-performing loans, including nonaccrual loans, loans considered to be TDRs or PCDs, are evaluated to determine if they meet the definition of collateral dependent under the new standard.  These are loans where no more payments are expected from the borrower, and foreclosure or some other collection action is probable.  Secondly, all non-performing loans that are not considered to be collateral dependent, but are 90 days or greater past due and/or have a balance of $500 thousand or greater, will be individually reviewed to determine if the loan displays similar risk characteristic to substandard loans in the related segment.

TDRs are loans for which the contractual terms on the loan have been modified and both of the following conditions exist: (1) the borrower is experiencing financial difficulty and (2) the restructuring constitutes a concession. Concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company assesses all loan modifications to determine whether they constitute a TDR.

The allowance for OBSC exposures was determined using the same methodology that is applied to LHFI. Utilization rates are determined based on historical usage.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2021. As of December 31, 2020, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material.

Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not

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that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.  

Accrued interest receivable on available-for-sale debt securities totaled $5.3 million at December 31, 2020 and is excluded from the estimate of credit losses.

The Company made the following policy elections related to the adoption of the guidance in ASC 326:

Accrued interest will be written off against interest income when the related financial asset is charged off. Therefore, accrued interest will be excluded from the amortized cost basis for purposes of calculating the allowance for credit losses. Accrued interest receivable is presented with other assets in a separate line item in the consolidated balance sheet.
The fair value of collateral practical expedient has been elected on certain loans, in determining the allowance for credit losses, for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty.

The adoption of ASC 326 increased the allowance for credit losses on loans by approximately $397 thousand and OBSC exposures by approximately $718 thousand at January 1, 2021, as shown below.  The increase in the allowance for credit losses on loans includes the $1.1 million increase for PCD loans as discussed above, less a decrease in ACL for certain pooled loans:

($ in thousands)

    

    

    

    

January 1,

December 31,

2021

2020

As Reported

Pre-ASC 326

Transition

Under

Assets:

Adoption

Adjustment

ASC 326

Loans

 

  

 

  

 

  

Commercial, financial, and agriculture

$

6,214

$

(1,153)

$

5,061

Commercial real estate

 

24,319

 

(4,032)

 

20,287

Consumer real estate

 

4,736

 

5,629

 

10,365

Consumer installment

 

551

 

(47)

 

504

Allowance for credit losses on loans

$

35,820

$

397

$

36,217

Liabilities:

 

  

 

  

 

  

Allowance for credit losses on OBSC exposures

 

 

718

 

718

Total allowance for credit losses

$

35,820

$

1,115

$

36,935

The transition had no net impact to retained earnings because the allowance for OBSC exposures was offset by decrease in the allowance for certain pooled loans.

New Accounting Standards That Have Not Yet Been Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (ASC 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate

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expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

NOTE 4 – BUSINESS COMBINATIONS

Acquisitions

Southwest Financial Corporation

On April 3, 2020, the Company completed its acquisition of Southwest Financial Corporation (“SWG”), and immediately thereafter merged its wholly-owned subsidiary, Southwest Georgia Bank with and into The First.  The Company paid a total consideration of $47.9 million to the SWG shareholders as consideration in the merger, which included 2,546,967 shares of Company common stock and approximately $2 thousand in cash. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs.  The Company also expects to reduce costs through economies of scale.

In connection with the acquisition, the Company recorded a $7.8 million bargain purchase gain and $4.6 million core deposit intangible. The bargain purchase gain was generated as a result of the estimated fair value of net assets acquired exceeding the merger consideration, based on provisional fair values, which is reflected as an adjustment to retained earnings.  The bargain purchase gain is considered non-taxable for income taxes purposes. The core deposit intangible will be amortized to expense over 10 years.

The Company acquired the $394.6 million loan portfolio at an estimated fair value discount of $2.3 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the SWG acquisition were $210 thousand for the three months period ended March 31, 2020. These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

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The assets acquired and liabilities assumed and consideration paid in the acquisition of SWG were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition.  While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which ran through April 3, 2021 in respect of SWG, in the measurement period in which the adjustment amounts are determined.  The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed and the goodwill (bargain purchase gain) generated from the transaction ($ in thousands):

Purchase price:

    

Cash and stock

$

47,860

Total purchase price

 

47,860

 

Identifiable assets:

 

Cash and due from banks

$

29,247

Investments

 

89,737

Loans

 

392,292

Core deposit intangible

 

4,556

Personal and real property

 

18,558

Bank owned life insurance

6,963

Other assets

 

3,402

Total assets

 

544,755

 

Liabilities and equity:

 

Deposits

 

476,099

Borrowed funds

 

9,500

Other liabilities

 

3,461

Total liabilities

 

489,060

Net assets acquired

 

55,695

Bargain purchase gain

$

(7,835)

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet as of the date of acquisition are as follows ($ in thousands):

    

April 3, 2020

Outstanding principal balance

$

394,621

Carrying amount

 

392,292

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Supplemental Pro-Forma Financial Information

The following unaudited pro-forma financial data for the three months ended March 31, 2021 and 2020 presents supplemental information as if the SWG acquisition had occurred on January 1, 2020.  The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

Pro-Forma

Pro-Forma

Three months

Three months

ended

ended

March 31,

March 31,

2021

2020

($ in thousands)

(unaudited)

    

(unaudited)

Net interest income

$

39,229

$

39,622

Non-interest income

 

9,472

 

7,675

Total revenue

48,701

47,297

Income before income taxes

21,437

10,638

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

NOTE 5 – EARNINGS APPLICABLE TO COMMON SHAREHOLDERS

Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock outstanding, such as restricted stock grants. There were no anti-dilutive common stock equivalents excluded in the calculations.

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

For the Three Months Ended

March 31, 2021

Net Income

Shares

Per

    

(Numerator)

    

(Denominator)

    

Share Data

Basic earnings per share

$

16,644

 

21,009,088

$

0.79

 

 

 

  

Effect of dilutive shares:

 

 

 

  

Restricted stock grants

 

 

191,470

 

  

Diluted earnings per share

$

16,644

 

21,200,558

$

0.79

For the Three Months Ended

March 31, 2020

Net Income

Shares

Per

    

(Numerator)

    

(Denominator)

    

Share Data

Basic earnings per share

$

8,311

 

18,818,115

$

0.44

 

 

 

  

Effect of dilutive shares:

 

 

 

  

Restricted stock grants

 

 

124,014

 

  

Diluted earnings per share

$

8,311

18,942,129

$

0.44

The Company granted 84,578 shares of restricted stock in the first quarter of 2021 and 60,680 shares of restricted stock in the first quarter of 2020.

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NOTE 6 – COMPREHENSIVE INCOME

As presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive income. The Company’s sources of other comprehensive income are unrealized gains and losses on available-for-sale securities, which are also recognized as separate components of equity.

NOTE 7 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. At March 31, 2021, and December 31, 2020 these financial instruments consisted of the following:

March 31, 2021

December 31, 2020

($ in thousands)

    

Fixed Rate

    

Variable Rate

    

Fixed Rate

    

Variable Rate

Commitments to make loans

$

77,299

$

10,266

$

97,738

$

16,203

Unused lines of credit

160,049

216,956

157,006

195,221

Standby letters of credit

 

3,900

10,510

4,182

 

11,486

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

The Company adopted ASC 326, effective January 1, 2021, which requires the Company to estimate expected credit losses for OBSC exposures which are not unconditionally cancellable.  The Company maintains a separate ACL on OBSC exposures, including unfunded commitments and letters of credit, which is included on the accompanying consolidated balance sheet as of March 31, 2021.

Changes in the ACL on OBSC exposures were at March 31, 2021 were as follows ($ in thousands):

    

Three Months Ended

March 31, 2021

Balance at beginning of period

$

Adoption of ASU 326

 

718

Credit loss expense related to OBSC exposures

 

Balance at end of period

$

718

Adjustments to the ACL on OBSC exposures will be recorded to provision for credit losses.

No credit loss estimate is reported for OBSC exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation on the arrangement.

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

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the assets or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

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

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

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

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The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at March 31, 2021 and December 31, 2020:

Investment Securities: The fair value for investment securities are determined by quoted market prices, if available (Level 1).  For securities where, quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing.  Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, valuing debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  
Loans Held For Sale: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes.  If available-for-sale loans are held on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.
Individually Evaluated Loans: Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment.  If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans.  Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value.   The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment.
Other Real Estate Owned: Other real estate owned consists of properties obtained through foreclosure.  The adjustment at the time of foreclosure is recorded through the allowance for credit losses.  Fair value of other real estate owned is based on current independent appraisals of the collateral less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value.  In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals.  The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs.  Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other non-interest income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recorded in other non-interest income. Other real estate owned is classified within Level 3 of the fair value hierarchy.

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

Fair Value Measurements

    

    

    

    

Significant

    

Other

Significant

Observable

Unobservable

March 31, 2021

Carrying

Estimated

Quoted Prices

Inputs

Inputs

($ in thousands)

    

Amount

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Instruments:

Assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

813,257