ITEM 1. BUSINESS. BUSINESS OF THE COMPANY
General
The First Bancshares, Inc. (the "Company") was incorporated on June 23, 1995 to serve as a holding company for The First National Bank of South Mississippi (the "Hattiesburg Bank"). The Hattiesburg Bank began operations on August 5, 1996 from its main office in the Oak Grove community, which is on the outskirts of Hattiesburg, Mississippi, and in November 1996 opened a branch office in Purvis, Mississippi. The Hattiesburg Bank opened an additional branch office on Lincoln Road in Hattiesburg in the fourth quarter of 1998. In June 1998, the Company entered into a bank development agreement with the organizers of a proposed de novo community bank to be established in Laurel, Mississippi and to be known as The First National Bank of the Pine Belt (the "Laurel Bank"). In connection with the opening of the Laurel Bank, the Company raised approximately $6.4 million in a public offering which commenced in September 1998 and closed on December 31, 1998. The Company used $5.0 million of the proceeds of the offering to capitalize the Laurel Bank. The Laurel Bank began operations on January 19, 1999.
The Company currently engages in a general commercial and retail banking business through the Hattiesburg Bank and the Laurel Bank, characterized by personalized service and local decision-making, emphasizing the banking needs of small- to medium-sized businesses, professional concerns, and individuals.
Location and Service Area
The Hattiesburg Bank. The Hattiesburg Bank serves the cities of Hattiesburg and Purvis and the surrounding areas of Lamar and Forrest Counties, Mississippi. The Hattiesburg Bank has a main office located west of the city of Hattiesburg, Mississippi, in Lamar County. The Hattiesburg Bank also has a branch office located in a modular building on Highway 589 in the city of Purvis, Mississippi, also in Lamar County, a third office located at the intersection of Lincoln Road and South 28th Avenue in Hattiesburg, and has entered into a lease purchase agreement with Union Planters Bank for a fourth location at 3318 Hardy Street in Hattiesburg, which opened March 1, 2000.
The main office primarily serves the area in and around the northern portion of Lamar County which is west of Hattiesburg. The Purvis office primarily serves the area in and around Purvis, Mississippi, which is in the east central part of Lamar County and is the county seat. Lamar County is located in the southeastern section of Mississippi. Hattiesburg, one of the largest cities in Mississippi, is located in Forrest and Lamar Counties. Hattiesburg can be reached via U.S. Highways 98 and 49 and Interstate 59. Major employers located in the Lamar and Forrest County areas include Forrest General Hospital, the University of Southern Mississippi, the Methodist Hospital, Camp Shelby, Sunbeam Oster, the Hattiesburg Public Schools, the Hattiesburg Clinic, the City of Hattiesburg, Marshall Durbin Poultry, and Murray Envelope. The principal components of the economy of the Lamar and Forrest County areas include service industries, wholesale and retail trade, manufacturing, and transportation and public utilities.
The Laurel Bank. The Laurel Bank serves the city of Laurel and the surrounding area of Jones County, Mississippi. The Laurel Bank's permanent main office will be located at 1945 Highway 15 North, Laurel, Mississippi. The Laurel Bank is currently operating from a temporary facility located adjacent to the site of its permanent facility. The Laurel Bank expects to draw 75% of its retail business within a five mile radius of this location, with the remaining business coming from other areas of Jones County, as well as portions of Jasper County, Wayne County, Smith County, and Covington County that are within a 15 mile radius of the Laurel Bank.
Marketing Focus
The Hattiesburg Bank's primary service area includes portions of Lamar and Forrest Counties, and the Laurel Bank's primary service area includes Jones County, Mississippi. According to the U.S. Census Bureau, Lamar County is one of the fastest growing counties in Mississippi with a population of 33,642 in 1995, reflecting a 10.6% increase from the 1990 population of 30,424. The per capita income in Lamar County was $14,450 in 1993, as compared to $14,858 for Mississippi as a whole. Similarly, the population of Forrest County grew 6.5%,from 68,134 to 72,553, between 1990 and 1995, and the population of Jones County grew 1.6%, from 62,031 to 63,001, during this period. In 1993, the per capita income was $14,824 in Forrest County and $15,146 in Jones County, as compared to $14,858 for Mississippi as a whole.
Total nonagricultural employment in Lamar and Jones Counties grew by 1.0% and .96% respectively from 1997 to 1999. Total nonagricultural employment in Forrest County fell by 1.0% between 1997 and 1999. During the same time, unemployment rose from 2.6% to 2.9% in Lamar County and fell from 3.4% to 3.2% in Forrest County, and from 3.6% to 3.1% in Jones County, all of which are lower than the 4.8% unemployment rate for the State of Mississippi.
Most of the banks in the Pine Belt region are local branches of large regional banks. Although size gives the larger banks certain advantages in competing for business from large corporations, including higher lending limits and the ability to offer services in other areas of Mississippi and elsewhere, the Company believes that there remains a demand for community banks in the Pine Belt region that the Company can successfully fulfill. As a result, the Company generally does not attempt to compete for the banking relationships of large corporations, but concentrates its efforts on small- to medium-sized businesses and on individuals. The Company strives to provide its customers with the breadth of products comparable to a regional bank, while maintaining the quick response and personal service of a locally headquartered bank. The Company's advertising emphasizes the Company's local ownership, community bank nature, and ability to provide more personalized service than its competition.
Banking Services
The Company strives to provide its customers with the breadth of products and services comparable to those offered by large regional banks, while maintaining the quick response and personal service of a locally owned and managed bank. In addition to offering a full range of deposit services and commercial and personal loans, the Hattiesburg Bank offers products such as mortgage loan originations. The following is a description of the products and services offered or planned to be offered by the Hattiesburg and Laurel Banks.
o Deposit Services. The Banks offer a full range of deposit services that are typically available in most banks and savings and loan associations, including checking accounts, NOW accounts, savings accounts, and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time certificates are tailored to each bank's principal market area at rates competitive to those offered by other banks in the area. In addition, the Banks offer certain retirement account services, such as Individual Retirement Accounts (IRAs). All deposit accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount allowed by law. The Banks solicit these accounts from individuals, businesses, associations and organizations, and governmental authorities.
o Loan Products. The Banks offer a full range of commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including loans secured by inventory and accounts receivable), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include equity lines of credit and secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. The Banks also make real estate construction and acquisition loans. The Banks' lending activities are subject to a variety of lending limits imposed by federal law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower's relationship to the bank), in general the Banks are subject to a loans-to-one-borrower limit of an amount equal to 15% of the Bank's unimpaired capital and surplus. The Banks may not make any loans to any director, officer, employee, or 10% shareholder unless the loan is approved by the Board of Directors of the Bank and is made on terms not more favorable to such a person than would be available to a person not affiliated with the Bank.
o Mortgage Loan Division. The Hattiesburg Bank established a mortgage loan division through which it will broaden the range of services that it offers to its customers. The mortgage loan division originates loans to purchase existing or construct new homes and to refinance existing mortgages. The Hattiesburg Bank anticipates generating additional fee income by selling most of these loans in the secondary market and cross-selling its other products and services to its mortgage customers.
o Other Services. Other bank services include on-line Internet banking services, voice response telephone inquiry service, commercial sweep accounts, cash management services, safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, and automatic drafts for various accounts. The Banks are associated with the Money Belt, Gulfnet, and Plus networks of automated teller machines that may be used by the Banks' customers throughout Mississippi and other regions. The Banks also offer VISA and MasterCard credit card services through a correspondent bank.
Competition
The Banks generally compete with other financial institutions through the selection of banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal manner in which services are offered. Mississippi law permits statewide branching by banks and savings institutions, and many financial institutions in the state have branch networks. Consequently, commercial banking in Mississippi is highly competitive. Many large banking organizations currently operate in the Company's market area, several of which are controlled by out-of-state ownership. In addition, competition between commercial banks and thrift institutions (savings institutions and credit unions) has been intensified significantly by the elimination of many previous distinctions between the various types of financial institutions and the expanded powers and increased activity of thrift institutions in areas of banking which previously had been the sole domain of commercial banks. Recent legislation, together with other regulatory changes by the primary regulators of the various financial institutions, has resulted in the almost total elimination of practical distinctions between a commercial bank and a thrift institution. Consequently, competition among financial institutions of all types is largely unlimited with respect to legal ability and authority to provide most financial services.
The Company faces increased competition from both federally-chartered and state-chartered financial and thrift institutions, as well as credit unions, consumer finance companies, insurance companies, and other institutions in the Company's market area. Some of these competitors are not subject to the same degree of regulation and restriction imposed upon the Company. Many of these competitors also have broader geographic markets and substantially greater resources and lending limits than the Company and offer certain services such as trust banking that the Company does not currently provide. In addition, many of these competitors have numerous branch offices located throughout the extended market areas of the Company that may provide these competitors with an advantage in geographic convenience that the Company does not have at present.
Currently there are eight other commercial banks, one savings institution, and three credit unions operating in the Hattiesburg Bank's primary service area, and seven other commercial banks and two credit unions operating in the Laurel Bank's primary service area.
Employees
As of March 1, 2000, the Hattiesburg Bank had 36 full-time employees and 5 part-time employees, and the Laurel Bank had 9 full-time employees and 4 part-time employees. The Company does not have any employees other than its officers.
SUPERVISION AND REGULATION The Company and its banks are subject to state and federal banking laws and regulations which impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not shareholders. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and following with Federal Deposit Insurance Corporation Improvement Act of 1991
(“FDICIA”), numerous additional regulatory requirements have been placed on the banking industry in the past several years, and additional changes have been proposed. The operations of the Company and the Banks may be affected by legislative changes and the policies of various regulatory authorities. The Company is unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future.
The Company
Because it owns the outstanding capital stock of the Hattiesburg and Laurel Banks, the Company is a bank holding company within the meaning of the federal Bank Holding Company Act of 1956 (the "BHCA").
The BHCA. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. The Company's and the Banks' activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank holding company, such as the Company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the Company has registered securities under Section 12 of the Exchange Act (which the Company has done) or no other person owns a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenge of the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in, nonbanking activities, unless the Federal Reserve Board, by order or regulation, has found those activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve Board has determined by regulation to be proper incidents to the business of a bank holding company include making or servicing loans and certain types of leases, engaging in certain insurance and discount brokerage activities, performing certain data processing services, acting in certain circumstances as a fiduciary or investment or financial adviser, owning savings associations, and making investments in certain corporations or projects designed primarily to promote community welfare.
The Federal Reserve Board has imposed certain capital requirements on the Company under the BHCA, including a minimum leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted assets. These requirements are described below under "Capital Regulations." Subject to its capital
requirements and certain other restrictions, the Company may borrow money to make a capital contribution to the Banks, and such loans may be repaid from dividends paid from the Banks to the Company (although the ability of the Banks to pay dividends is subject to regulatory restrictions as described below in “The Banks - Dividends”). The Company is also able to raise capital for contribution to the Banks by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances in which the Company might not otherwise do so. Under the BHCA, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition.
The Banks
The Hattiesburg and Laurel Banks operate as national banking associations incorporated under the laws of the United States and subject to examination by the Office of Comptroller of the Currency ("OCC"). Deposits in the Banks are insured by the FDIC up to a maximum amount (generally $100,000 per depositor, subject to aggregation rules). The OCC and the FDIC regulate or monitor virtually all areas of the Banks' operations, including security devices and procedures, adequacy of capitalization and loan loss reserves, loans, investments, borrowings, deposits, mergers, issuances of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. The OCC requires the Banks to maintain certain capital ratios and imposes limitations on the Banks' aggregate investment in real estate, bank premises, and furniture and fixtures. The Banks are required by the OCC to prepare quarterly reports on their financial condition and to conduct an annual audit of their financial affairs in compliance with minimum standards and procedures prescribed by the OCC.
Under FDICIA, all insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC and the appropriate agency (and state supervisor when applicable). FDICIA also directs the FDIC to develop with other appropriate agencies a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition, or any other report of any insured depository institution. FDICIA also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to: (i) internal controls, information systems, and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset quality.
National banks and their holding companies which have been chartered or registered or undergone a change in control within the past two years or which have been deemed by the OCC or the Federal Reserve Board, respectively, to be troubled institutions must give the OCC or the Federal Reserve Board, respectively, thirty days prior notice of the appointment of any senior executive officer or director. Within the thirty day period, the OCC or the Federal Reserve Board, as the case may be, may approve or disapprove any such appointment.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by federally insured banks and thrifts for deposit insurance. A separate Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF") are maintained for commercial banks and thrifts, respectively, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. Since 1993, insured depository institutions like the Banks have paid for deposit insurance under a risk-based premium system. Under this system, until mid-1995 depositor institutions paid to BIF or SAIF from $0.23 to $0.31 per $100 of insured deposits depending on its capital levels and risk profile, as determined by its primary federal regulator on a semiannual basis. Once the BIF reached its legally mandated reserve ratio in mid-1995, the FDIC lowered premiums for well-capitalized banks, eventually to $.00 per $100, with a minimum semiannual assessment of $1,000. However, in 1996 Congress enacted the Deposit Insurance Funds Act of 1996, which eliminated this minimum assessment. It also separated the Financial Corporation (FICO) assessment to service the interest on its bond obligations. The amount assessed on individual institutions, including the Banks, by FICO is in addition to the amount paid for deposit insurance according to the risk-related assessment rate schedule. Increases in deposit insurance premiums or changes in risk classification will increase the Banks' cost of funds, and there can be no assurance that such cost can be passed on to the Banks' customers.
Transactions With Affiliates and Insiders. The Banks are subject to Section 23A of the Federal Reserve Act, which places limits on the amount of loans to, and certain other transactions with, affiliates, as well as on the amount of advances to third parties collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the Bank's capital and surplus and, as to all affiliates combined, to 20% of the Bank's capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.
The Banks are also subject to Section 23B of the Federal Reserve Act, which prohibits an institution from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution, as those prevailing at the time for comparable transactions with nonaffiliated companies. The Banks are subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.
Dividends. A national bank may not pay dividends from its capital. All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts. In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless the bank has transferred to surplus no less than one-tenth of its net profits of the preceding two consecutive half-year periods (in the case of an annual dividend). The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less
any required transfers to surplus. In addition, under FDICIA, the banks may not pay a dividend if, after paying the dividend, the bank would be undercapitalized. See "Capital Regulations" below.
Branching. National banks are required by the National Bank Act to adhere to branch office banking laws applicable to state banks in the states in which they are located. Under current Mississippi law, the Banks may open branches throughout Mississippi with the prior approval of the OCC. In addition, with prior regulatory approval, the Banks are able to acquire existing banking operations in Mississippi. Furthermore, federal legislation has recently been passed which permits interstate branching. The new law permits out of state acquisitions by bank holding companies (subject to veto by new state law), interstate branching by banks if allowed by state law, interstate merging by banks, and de novo branching by national banks if allowed by state law. See "Recent Legislative Developments."
Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC, the OCC, or the Office of Thrift Supervision shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.
Other Regulations. Interest and certain other charges collected or contracted for by the Banks are subject to state usury laws and certain federal laws concerning interest rates. The Banks' loan operations are subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs community it serves; the Equal Credit Opportunity Act, prohibiting discrimination on the basis of creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; the Fair Debt Collection Act, concerning the manner in which consumer debts may be collected by collection agencies; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of the Banks also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Capital Regulations. The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, account for off-balance sheet exposure, and minimize disincentives for holding liquid assets. The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimums. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, but excludes
goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under the guidelines, banks' and bank holding companies' assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans, both of which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage ratio, which is Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. The minimum required leverage ratio for top-rated institutions is 3%, but most institutions are required to maintain an additional cushion of at least 100 to 200 basis points.
FDICIA established a capital-based regulatory scheme designed to promote early intervention for troubled banks and requires the FDIC to choose the least expensive resolution of bank failures. The capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." To qualify as a "well capitalized" institution, a bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total risk-based capital ratio of no less than 10%, and the Bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level. As of December 31, 1999, the Company, the Hattiesburg Bank, and the Laurel Bank were qualified as "well capitalized."
Under the FDICIA regulations, the applicable agency can treat an institution as if it were in the next lower category if the agency determines (after notice and an opportunity for hearing) that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories may be required to (i) submit a capital restoration plan; (ii) raise additional capital; (iii) restrict their growth, deposit interest rates, and other activities; (iv) improve their management; (v) eliminate management fees; or (vi) divest themselves of all or part of their operations. Bank holding companies controlling financial institutions can be called upon to boost the institutions' capital and to partially guarantee the institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways. If the Company continues to grow at a rapid pace, a premature "squeeze" on capital could occur making a capital infusion necessary. The requirements could impact the Company's ability to pay dividends. The Company's present capital levels are more than adequate; however, rapid growth, poor loan portfolio performance, or poor earnings performance could change the Company's capital position in a relatively short period of time.
Failure to meet these capital requirements would mean that a bank would be required to develop and file a plan with its primary federal banking regulator describing the means and a schedule for achieving the minimum capital requirements. In addition, such a bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless the Bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.
Enforcement Powers. FIRREA expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain "institution-affiliated parties" (primarily including management, employees, and agents of a financial institution, independent contractors such as attorneys and accountants, and others who participate in the conduct of the financial institution's affairs). These practices can include the failure of an institution to timely file required reports; the filing of false or misleading information; or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to twenty years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, FIRREA expanded the appropriate banking agencies' power to issue cease and desist orders that may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications, or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.
Effect of Governmental Monetary Policies. The earnings of the Banks are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments, and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
Recent Legislative Developments. On September 29, 1994, the federal government enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"). This Act became effective on September 29, 1995 and permits eligible bank holding companies in any state, with regulatory approval, to acquire banking organizations in any other state. Since June 1, 1997, the Interstate Banking Act has allowed banks with different home states to merge, unless a particular state opts out of the statute. In addition, beginning June 1, 1997, the Interstate Banking Act has permitted national and state banks to establish de novo branches in another state if there is a law in that state which applies equally to all banks and expressly permits all out-of-state banks to establish de novo branches.
On November 12, 1999, President Clinton signed into law the Gramm- Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act
also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. “Financial activities” is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers;
o Provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies;
o Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries;
o Provides an enhanced framework for protecting the privacy of consumer information;
o Adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the Community Reinvestment Act ("CRA"); and
o Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
In order for the Company to take advantage of the ability to affiliate with other financial services providers, the Company must become a "Financial Holding Company" as permitted under an amendment to the BHCA. To become a Financial Holding Company, the Company would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. In addition, the Federal Reserve must also determine that each insured depository institution subsidiary of the Company has at least a "satisfactory" CRA rating. The Company currently meets the requirements to make an election to become a Financial Holding Company.
The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be "well-capitalized" and "well-managed." The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank's total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank's assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because Mississippi permits commercial banks chartered by the state to engage in any activity permissible for national banks, the state bank competitors of the Hattiesburg Bank and the Laurel Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as the Hattiesburg Bank and the Laurel Bank. In order to form a financial subsidiary, a state bank must be well-capitalized, and the state bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks.
The Company's management has not determined at this time whether it will seek an election to become a Financial Holding Company or will seek to form a financial subsidiary. The Company is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the Company and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, the Company desires to utilize any of its expanded powers provided in the Financial Services Modernization Act.
The Company and the Banks do not believe that the Financial Services Modernization Act will have a material adverse effect on operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Banks face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Banks.
From time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. The Company cannot predict whether any of these proposals will be adopted or, if adopted, how these proposals would affect the Company.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
The Hattiesburg Bank. The Hattiesburg Bank has a main office located west of the city of Hattiesburg, Mississippi, in Lamar County. The main office is located in a 10,000 square foot facility which the Company constructed and opened in January 1997 on a two acre plot of land at the southwest corner of U.S. Highway 98 and Old Highway 11. The Hattiesburg Bank also has a branch office located in a modular
building on Highway 589 in the city of Purvis, Mississippi, also in Lamar County, a third office in a 3,300 square foot facility located at the intersection of Lincoln Road and South 28th Avenue in Hattiesburg, and a fourth office located at 3318 Hardy Street in Hattiesburg which is held by the Hattiesburg under lease with an option to purchase.
The Laurel Bank. The Laurel Bank's permanent main office will be located on an eight acre parcel at 1945 Highway 15 North, Laurel, Mississippi. However, currently the Laurel Bank is operating from a temporary facility located adjacent to the site of its permanent facility.
The Company believes that the Banks' facilities will adequately serve their needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor either bank is a party to, nor is any of their property the subject of, any material pending legal proceedings incidental to the business of the Company or the Bank.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
In response to this Item, the information contained on page 48 of the Company's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated herein by reference.
ITEM 6.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
In response to this Item, the information contained on pages 3 through 21 of the Company's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated herein by reference.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS.
In response to this Item, the information contained on pages 22 through 47 of the Company's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated herein by reference.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
In response to this Item, the information contained on or about pages 2 through 12 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2000, is incorporated herein by reference.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on pages 6 through 7 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2000, is incorporated herein by reference.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information contained on pages 7 through 9 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2000, is incorporated herein by reference.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on pages 10 through 11 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2000, is incorporated herein by reference.
ITEM 13.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are furnished (or incorporated by reference):
Exhibit Number Description -------------- -----------
3.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-94288 on Form S-1).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-94288 on Form S-1).
4.1 Provisions in the Company's Articles of Incorporation and Bylaws defining the rights of holders of the Company's Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement No. 33-94288 on Form S-1).
4.2 Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement No. 33-94288 on Form S-1).
10.5 Amended and restated employment agreement dated November 20, 1995, by and between David E. Johnson and the Company (incorporated by reference to Exhibit 10.7 of the Company's Form 10-KSB for the fiscal year ended December 31, 1995, File No. 33-94288).
10.6 Employment Agreement dated June 10, 1998 by and between the Company and The First National Bank of the Pine Belt and William M. Renovich, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 25, 1998).
10.7 Bank Development Agreement dated June 19, 1998 by and among the Company and the organizers of The First National Bank of the Pine Belt (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 25, 1998).
10.8 First Bancshares, Inc. 1997 Stock Option Plan as of March 18, 1997 (incorporated by reference to Exhibit 10.7 of the Company's Form 10-KSB for the fiscal year ended December 31, 1996, File No. 33-94288).
10.9 Promissory Note dated June 16, 1998 by and between the Company and The First National Bank of the Pine Belt (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement No. 333-61081 on Form SB-2).
10.10 Construction Agreement dated March 18, 1998 between The First National Bank of South Mississippi and Piercon, Inc. (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement No. 333-61081 on Form SB-2).
10.11 Option to Purchase Real Estate dated June 29, 1998 between the Pine Belt Organizers, LLC and Frances B. Wheelis (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement No. 333-61081 on Form SB-2).
10.12 Employment Agreement dated July 1, 1999 by and between the Company and Charles T. Ruffin (incorporated by reference to Exhibit 99 to the Company's Form 10-QSB filed November 15, 1999).
13 The Company's 1999 Annual Report
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Company's Form 10-KSB filed March 31, 1999)
27.1 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE FIRST BANCSHARES, INC.
Date: March 16, 2000 By: /s/ David E. Johnson ------------------------------------- David E. Johnson President and Chief Executive Officer (Principal Executive Officer)
Date: March 16, 2000 By: /s/ Charles T. Ruffin ------------------------------------- Charles T. Ruffin Chief Financial Officer (Principal Financial and Principal Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David E. Johnson, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES CAPACITIES DATE
/s/ David W. Bomboy Director March 16, 2000 -----------------------------------
/s/ A. L. Smith Director March 16, 2000 -----------------------------------
/s/ E. Ricky Gibson Director March 16, 2000 -----------------------------------
/s/ Ted E. Parker Director March 16, 2000 -----------------------------------
/s/ Fred A. McMurry Director March 16, 2000 -----------------------------------
/s/ Dennis L. Pierce Director March 16, 2000 -----------------------------------
/s/ David E. Johnson President, CEO, and Director March 16, 2000 ----------------------------------- (Principal Executive Officer)
/s/ Charles T. Ruffin Chief Financial Officer March 16, 2000 ----------------------------------- (Principal Accounting and Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit Number Description
3.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-94288 on Form S-1).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-94288 on Form S-1).
4.1 Provisions in the Company's Articles of Incorporation and Bylaws defining the rights of holders of the Company's Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement No. 33-94288 on Form S-1).
4.2 Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement No. 33-94288 on Form S-1).
10.5 Amended and restated employment agreement dated November 20, 1995, by and between David E. Johnson and the Company (incorporated by reference to Exhibit 10.7 of the Company's Form 10-KSB for the fiscal year ended December 31, 1995, File No. 33-94288).
10.6 Employment Agreement dated June 10, 1998 by and between the Company and The First National Bank of the Pine Belt and William M. Renovich, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 25, 1998).
10.7 Bank Development Agreement dated June 19, 1998 by and among the Company and the organizers of The First National Bank of the Pine Belt (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 25, 1998).
10.8 First Bancshares, Inc. 1997 Stock Option Plan as of March 18, 1997 (incorporated by reference to Exhibit 10.7 of the Company's Form 10-KSB for the fiscal year ended December 31, 1996, File No. 33-94288).
10.9 Promissory Note dated June 16, 1998 by and between the Company and The First National Bank of the Pine Belt (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement No. 333-61081 on Form SB-2).
10.10 Construction Agreement dated March 18, 1998 between The First National Bank of South Mississippi and Piercon, Inc. (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement No. 333-61081 on Form SB-2).
10.11 Option to Purchase Real Estate dated June 29, 1998 between the Pine Belt Organizers, LLC and Frances B. Wheelis (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement No. 333-61081 on Form SB-2).
10.12 Employment Agreement dated July 1, 1999 by and between the Company and Charles T. Ruffin (incorporated by reference to Exhibit 99 to the Company's Form 10-QSB filed November 15, 1999).
13 The Company's 1999 Annual Report
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Company's Form 10-KSB filed March 31, 1999)
27.1 Financial Data Schedule (For SEC use only)
EXHIBIT 13
THE FIRST BANCSHARES, INC. 1999 ANNUAL REPORT
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 5:00 p.m., Thursday, April 27, 2000, at the principal offices of The First National Bank of South Mississippi, 6480 U.S. Highway 98 West Hattiesburg, Mississippi 39402. All shareholders are invited.
STOCK TRANSFER AGENT INDEPENDENT AUDITOR
Registrar and Transfer Company T.E. Lott & Company 10 Commerce Drive A Professional Association Cranford, NJ 07016 Certified Public Accountants 1-800-368-5948 Columbus, Mississippi
FORM 10-K
Copies of the Form 10-KSB Annual Report to the Securities and Exchange Commission, including financial statements and financial statement schedules, are available without charge upon request to:
The First Bancshares, Inc. Attn: Charles T. Ruffin 6480 U.S. Highway 98 West (39402) Post Office Box 15549 Hattiesburg, Mississippi 39404-5549
The Form 10-KSB Annual Report to the Securities and Exchange Commission, including financial statements and financial statement schedules, serves as the alternative annual disclosure statement pursuant to 12 CFRss.350.5.
STOCK INFORMATION
The Company's articles of incorporation authorize it to issue up to 10,000,000 shares of Common Stock. As of March 13, 2000, the Company had 1,152,878 shares outstanding, held by shareholders of record.
The Common Stock of the Company is not traded on any exchange and there is no public trading market for its common stock. Trading of the Common Stock has been limited and sporadic. The Company issued 721,848 shares of its currently
issued and outstanding Common Stock in its initial public offering, which closed on August 27, 1996. The price per share in the initial public offering was $10.00. The Company issued an additional 428,843 shares of its common stock in its public offering in connection with the formation of the Laurel Bank, which closed on December 31, 1998. The price per share in this offering was $15.00.
The Company is not aware of all prices at which the Common Stock has been traded since the initial offering. Based on information available to the Company from a limited number of sellers and purchasers of Common Stock, the Company is aware of several transactions between August 27, 1996 and December 31, 1996, all of which were at $10.00 per share, and the Company believes transactions in the Common Stock ranged from $10.00 to $12.00 during 1997, from $12.00 to $17.50 during 1998, and from $15.00 to $17.50 during 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was incorporated on June 23, 1995 to serve as a holding company for The First National Bank of South Mississippi ("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 outskirts of Hattiesburg, and in November 1996 opened a branch office in Purvis, Mississippi. The First opened an additional branch office on Lincoln Road in Hattiesburg in the fourth quarter of 1998. In June 1998, the Company entered into a bank development agreement with the organizers of The First National Bank of the Pine Belt ("Pine Belt") a de novo community bank located in Laurel, Mississippi which involved the Company having a stock offering from which the funds would be used to inject into Pine Belt. The offering was completed on December 31, 1998, with 428,843 common shares subscribed at $15 per share. Upon receipt of regulatory approval, the Company issued the subscribed shares and contributed $5 million to Pine Belt in exchange for all of its common stock. Pine Belt began banking operations on January 19, 1999. Pine Belt has one office located in Laurel, Mississippi. The Company and its subsidiary banks 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 and Pine Belt are wholly-owned subsidiary banks 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 subsidiary banks' 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 grew from approximately $50 million in total assets, $32.1 million in loans, $35.7 million in deposits, and $6.4 million in shareholders' equity at December 31, 1998 to approximately $91.3 million in total assets, $60.9 million in loans, $73.5 million in deposits, and $12.5 million in shareholders' equity at December 31, 1999. Of this growth, approximately $30.2 million in total assets, $18.4 million in loans, and $25.2 million in deposits, were related to Pine Belt. The increase in stockholders' equity was primarily due to the stock offering finalized in January, 1999. The Company enjoyed its first quarterly profit in the third quarter of 1997 and reported a net profit for the year 1998. For the year ended 1999, the Company reported a net loss of $173,000. Included in this loss was a loss of $513,000 reported by Pine Belt for the period beginning January 19, 1999 (opening date) and ended December 31, 1999. The First reported net income of $330,000 for the year ended December 31, 1999. Comparisons of the Company's results for all of the periods presented should be made with an understanding of the Company's short history. The following discussion should be read in conjunction with the preceding "Selected Consolidated Financial Data" and the Company's Financial Statements and the Notes thereto and the other financial data included elsewhere.
The following table demonstrates the Company's growth during each calendar year from August 5, 1996 (when The First opened for business) through December 31, 1999.
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (Dollars In Thousands, Except Per Share Data)
December 31, --------------------------------------------------------------------------------- 1999(1) 1998 1997 1996 ------- ---- ---- ---- Earnings: Net interest income $ 2,929 $ 1,617 $ 881 $ 370 Provision for loan losses 408 170 156 37 Noninterest income 396 215 216 4 Noninterest expense 3,212 1,595 1,203 693 Net income (loss) (173) 67 (262) (356)
Per Share Data: Basic net income per share $ (.15) $.09 $(.36) $(.58) Diluted net income per share (.15) .09 (.36) (.58)
Selected Year End Balances: Total assets $ 91,356 $ 49,912 $ 27,527 $ 14,177 Securities 14,481 7,486 4,303 4,216 Loans 60,887 32,059 17,294 4,290 Deposits 73,514 35,667 21,058 7,506 Stockholders' equity 12,473 6,422 6,368 6,621
(1) Includes the first period of operations of Pine Belt.
Results of Operations
The Company reported a consolidated net loss of $173,000 or $.15 per share as compared to consolidated net income of $67,000 or $.09 per share for the year 1998. The following is a summary of the results of operations by the subsidiary banks for the years ended December 31, 1999 and 1998. No summary is provided for Pine Belt for the year 1998 since it began operations on January 19, 1999.
Results of operations by subsidiary bank:
(In thousands) Pine The First Belt ---------------------------------------- ----------------- 1999 1998 1999 ------------------- ---------------- -----------------
Interest income $ 4,129 $ 3,035 $ 1,318 Interest expense 2,017 1,517 597 ----- ----- --- Net interest income 2,112 1,518 721 Provision for loan losses 134 169 274 --- --- --- Net interest income after provision for loan losses 1,978 1,349 447 ----- ----- ---
Other income 358 215 69 Other expense 2,127 1,517 1,029 Income tax benefit 121 - - --- ----- -----
Net income (loss) $ 330 $ 47 $ (513) ================== ================ =================
The following reconciles the above table to the amounts reflected in the consolidated financial statement of the Company at December 31, 1999:
Net interest income: Combined net interest income of subsidiary banks $ 2,833 Intercompany eliminations 96 -----------------
$ 2,929 =================
Net income: Combined net loss of subsidiary banks $ (183) Net income of the Company, excluding intercompany accounts 10 ------------------
$ (173) =================
Consolidated Net Income
The Company reported a consolidated net loss of $173,000 for the year ended December 31, 1999, compared to a consolidated net income of $67,000 for the year ended December 31 1998. The results of operations for the year 1999 were significantly effected by Pine Belt which reported a net loss of $513,000 in its first year of operations. This loss was anticipated by management and included significant organization, pre-opening, and other expenses associated with its formation and
beginning of operations. The First reported net income of $330,000 which resulted from continued increases in earning assets, principally loans. Also, The First has an increase in other income as service charges on deposit accounts increased due to growth in deposits. The increases in income by The First were partially offset by an increase in noninterest expense of $610,000 which was the result of anticipated staff additions and other operating costs related to the growth of the bank.
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 $2,929,000 for the year ended December 31, 1999, as compared to $1,617,000 for the year ended December 31, 1998. This increase was the direct result of an increase in average earnings assets for the year 1999 to $63,846,000 compared to $33,039,000 for the year 1998. This increase in earning assets was funded by an increase in deposits. Deposits at December 31, 1999, totaled $73,514,000 compared to $35,667,000. Average interest-bearing liabilities for the year 1999 was $54,421,000 compared to $29,342,000 for the year 1998. At December 31, 1999, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.90% compared to 3.94% at December 31, 1998. The net interest margin (which is net interest income divided by average earning assets) was 4.59% for the year 1999, compared to 4.67% for the year 1998. Rates paid on average interest-bearing liabilities declined from 4.83% for the year 1998 to 4.60% for the year 1999. Average loans comprised 74.9% of average earning assets for the year 1999 compared to 75% for the year 1998. The interest spread and margin declined in 1999 when compared to 1998 due to promotional activities of Pine Belt to attract loans and deposits.
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, 1999 1998 1997 -------------------------------- -------------------------------- ------------------------------ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expenses Rate ------- ------- ---- ------- ------- ---- ------- -------- ---- (Dollars in thousands)
Assets Earning Assets Loans (1) (2) ........ $ 47,808 $4,531 9.48% $25,919 $2,558 9.87% $12,692 $1,142 9.00% Securities............ 11,801 683 5.79% 6,873 400 5.81% 4,720 290 6.14% Federal funds sold.... 3,531 179 5.07% 1,765 75 4.25% 1,653 81 5.51% Other 706 37 5.24% 42 2 4.76% - - - ------ ----- ------ ----- ------ ----- Total earning assets 63,846 5,430 8.50% 34,599 3,035 8.77% 19,065 1,523 7.99% ------ ----- ------ ----- ------ -----
Cash and due from banks................................. 3,076 866 753 Premises and equipment.................................. 3,527 2,625 1,956 Other assets............................................ 1,594 1,140 893 Allowance for loan losses............................... (398) (258) (136) -------- ------- ------- ............................................Total assets $ 71,496 $38,972 $22,531 ======== ======= =======
Liabilities Interest-bearing liabilities............................ $ 54,421 2,501 4.60% $29,342 1,418 4.83% $13,987 641 4.58% -------- ----- ----- --- Demand deposits (1)..................................... 5,898 3,006 2,030 Other liabilities....................................... 262 204 111 Shareholders' equity.................................... 10,915 6,420 6,403 ------ ----- ----- ..............Total liabilities and shareholders' equity $ 71,496 $38,972 $22,531 ======== ======= =======
Net interest spread..................................... 3.90% 3.94% 3.41% Net interest income/margin.............................. $2,929 4.59% $1,617 4.67% $882 4.63% ====== ====== ====
-------------------- (1) All loans and deposits were made to borrowers in the United States. The Company had no significant nonaccrual loans during the periods presented. (2) Includes loan fees of $443, $310, and $115 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.
Analysis of Changes in Consolidated Net Interest Income
Year Ended December 31, Year Ended December 31, ---------------------------------------- --------------------------------- 1999 versus 1998 1998 versus 1997 Increase (decrease) due to Increase (decrease) due to -------------------------- -------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (Dollars in thousands)
Earning Assets Loans................................................. $2,195 $(222) $1,973 $1,052 $ 365 $1,417 Securities............................................ 285 (2) 283 132 (22) 110 Federal funds sold and securities purchased under agreements to resell.......................... 87 17 104 (22) 6 (16) Other short-term investments.......................... 35 - 35 2 - 2 ----- ----- ------ ------ ---- ----- Total interest income.......................... 2,602 (207) 2,395 1,164 349 1,513 ----- ----- ------ ------ ---- -----
Interest-Bearing Liabilities Interest-bearing transaction accounts................. 153 (7) 146 39 (62) (23) Money market accounts................................. 169 (4) 165 38 20 58 Savings deposits...................................... 4 - 4 2 1 3 Time deposits......................................... 714 (61) 653 546 188 734 Borrowed funds........................................ 116 (1) 115 6 - 6 ----- ---- ------ ---- --- ---- ................................Total interest expense 1,156 (73) 1,083 631 147 778 ----- ---- ------ ---- --- ----
Net interest income................................... $ 1,446 $(134) $1,312 $533 $ 202 $735 ======= ===== ====== ==== ======= ====
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, 1997, 1998 and 1999.
December 31, 1997 ---------------------------------------------------------------------------------- After Three Within Through Within Greather Than Three Twelve One One Year or Months Months Year Nonsensitive Total ------ ------ ---- ------------ ----- (Dollars in thousands)
Assets Earnings Assets Loans.................................. $6,687 $3,636 $10,323 $7,164 $17,487 Securities (2)......................... 1,007 1,776 2,783 1,521 4,304 Funds sold............................. 1,870 - 1,870 - 1,870 ----- ----- ------ ----- ------ Total earning assets............... 9,564 5,412 14,976 8,685 23,661 ----- ----- ------ ----- ------
Liabilities Interest-bearing liabilities Interest-bearing deposits NOW accounts (1)....................... - 2,370 2,370 - 2,370 Money market accounts.................. 4,296 - 4,296 - 4,296 Savings deposits (1) .................. - 200 200 - 200 Time deposits.......................... 1,464 5,423 6,887 4,826 11,713 ----- ----- ----- ----- ------ Total interest-bearing deposits.... 5,760 7,993 13,753 4,826 18,579 ----- ----- ------ ----- ------ Interest-sensitivity gap per period........... $3,804 $(2,581) $1,223 $3,859 5,082 ====== ======== ====== ====== ===== Cumulative gap at December 31, 1997........... $3,804 $1,223 $1,223 $5,082 $5,082 ====== ====== ====== ====== ====== Ratio of cumulative gap to total earning assets at December 31, 1997.... 16.08% 5.17% 5.17% 21.47%
December 31, 1998 ------------------------------------------------------------------------------- fter Three Within Through Within Greater Than Three Twelve One One Year or Months Months Year Nonsensitive Total ------ ------ ---- ------------ ----- (Dollars in thousands)
Assets Earnings Assets Loans...................................... $2,829 $5,184 $8,013 $24,393 $32,406 Securities (2)............................... 3,930 505 4,435 3,051 7,486 Funds sold................................... 2,963 - 2,963 - 2,963 ----- ----- ----- ------ ----- Total earning assets.................... 9,722 5,689 15,411 27,444 42,855 ----- ----- ------ ------ ------
Liabilities Interest-bearing liabilities Interest-bearing deposits NOW accounts (1)............................. - 3,302 3,302 - 3,302 Money market accounts........................ 6,932 - 6,932 - 6,932 Savings deposits (1) ........................ - 417 417 - 417 Time deposits................................ 4,991 7,395 12,386 9,223 21,609 ----- ----- ------ ----- ------ Total interest-bearing deposits......... 11,923 11,114 23,037 9,223 32,260 Borrowed funds.................................... 1,200 - 1,200 - 1,200 ------ ------ ------- ----- ----- Total interest-bearing liabilities................ 13,123 11,114 24,237 9,223 33,460 ------ ------ -------- ----- ------ Interest-sensitivity gap per period............... $(3,401) $(5,425) $(8,826) $18,221 $9,395 ======= ======= ======= ======= ====== Cumulative gap at December 31, 1998............... $(3,401) $(8,826) $(8,826) $9,395 $9,395 ======= ======= ======= ====== ====== Ratio of cumulative gap to total earning assets at December 31, 1998.......... (7.94%) (20.59%) (20.59%) 21.92%
December 31, 1999 ----------------------------------------------------------------------------- After Three Within Through Within Greater Than Three Twelve One One Year or Months Months Year Nonsensitive Total ------ ------ ---- ------------ ----- (Dollars in thousands)
Assets Earnings Assets: Loans...................................... $16,050 $10,503 $26,553 $35,073 $61,626 Securities (2)............................... 2,402 1,014 3,416 11,065 14,481 Funds sold and other......................... 6,674 - 6,674 - 6,674 ----- ------ ----- ------ ----- Total earning assets...................... 25,126 11,517 36,643 46,138 82,781 ------ ------ ------ ------ ------
Liabilities Interest-bearing liabilities: Interest-bearing deposits: NOW accounts (1).......................... $ - $7,743 $7,743 $ - $7,743 Money market accounts..................... 14,370 - 14,370 - 14,370 Savings deposits (1) ..................... - 668 668 - 668 Time deposits............................. 10,918 20,777 31,695 10,952 42,647 ------ ------ ------ ------ ------ Total interest-bearing deposits 25,288 29,188 54,476 10,952 65,428 Borrowed funds................................ 1,000 404 1,404 3,586 4,990 ----- --- ----- ----- ----- Total interest-bearing liabilities............ 26,288 29,592 55,880 14,538 70,418 ------ ------ ------ ------ ------ Interest-sensitivity gap per period........... $ (1,162) $(18,075) $(19,237) $31,600 $12,363 ========= ======== ======== ======= ======= Cumulative gap at December 31, 1999........... $ (1,162) $(19,237) $(19,237) $12,363 $12,363 ========= ======== ======== ======= ======= Ratio of cumulative gap to total earning assets at December 31, 1999...... (1.40%) (23.24%) (23.24%) 14.93% ------------------ (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.
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 over the three month and greater-than-one-year time frames. 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 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, particularly given the Company's short operating history and rapid growth. 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.
Additions to the allowance for loan losses, which are expended as the provision for loan losses on the Company's consolidated statement of operations, are made periodically to maintain the allowance at an appropriate level based on management's analysis of the potential risk in the loan portfolio. Currently, the allowance for loan losses is evaluated on an overall portfolio basis. Management intends to begin allocating the allowance to loan categories once the loan portfolio becomes large and diversified enough to support such an allocation system. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.
At December 31, 1999 the consolidated allowance for loan losses amounted to $740,000, or 1.20% of outstanding loans. At December 31, 1998 and 1997, the allowance for loan losses amounted to $347,000 and $194,000, respectively which was 1.07% and 1.10% of outstanding loans at December 31, 1998 and 1997, respectively. The Company's provision for loan losses was $408,000 for the year ended December 31, 1999, compared to $169,000 and $156,000 for the years ended December 31, 1998 and 1997, respectively. However, 1999 included $274,000 for Pine Belt which reflected management's efforts to maintain an adequate allowance on an unseasoned loan portfolio. In each case, the provision was made based on management's assessment of general loan loss risk and asset quality.
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 nonaccrualstatus when the loan becomes 90 days or more past due.
At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. The Company had nonaccrual loans of $19,000 and no restructured or other nonperforming loans at December 31, 1999. At December 31, 1999 the Company had loans in the principal amount of $379,000 delinquent by more than 30 days, and loans of approximately $31,000 that were delinquent by more than 90 days. At December 31, 1998 the Company had loans in the principal amount of $218,000 delinquent by more than 30 days, and loans of approximately $1,000 that were delinquent by more than 90 days.
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 assets 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, 1999 and December 31, 1998, the subsidiary banks had potential problem loans of:
1999 1998 ---- ----
The First $ 27,345 $ 12,000 Pine Belt 290,268 -
Consolidated Allowance For Loan Losses
Years Ended December 31, ----------------------------------------------------------- 1999 1998 1997 1996 ---- ---- ---- ---- (Dollars in thousands)
Average loans outstanding..........................................$ 47,808 $ 24,359 $12,692 $1,432 ========== ========== ======= ====== Loans outstanding at period end....................................$ 61,626 $ 32,406 $17,487 $1,432 ========== ========== ======= ====== Total nonperforming loans.......................................... 19 - - - ========== ========== ======= ===== Beginning balance of allowance..................................... 347 194 37 -
Loans charged-off.................................................. (25) (16) - - ---------- ---------- -------- ------
Total loans charged-off............................................ (25) (16) - - ---------- ---------- -------- ------
Total recoveries................................................... 10 - - - ---------- ---------- -------- ------
Net loans charged-off.............................................. (15) (16) - - Provision for loan losses.......................................... 408 169 156 $37 ---------- ---------- ---- --- Balance at period end..............................................$ 740 $ 347 $194 $37 ========== ========== ==== ===
Net charge-offs to average loans................................... .03% .06% - - Allowance as percent of total loans................................ 1.20% 1.07% 1.10% 0.86% Nonperforming loans as a percentage of total loans................. .03% - - - Allowance as a multiple of nonperforming loans..................... 38.9% - - -
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, and official check fees.
Noninterest income increased by $181,000 or 84.2% from $215,000 for the year ended December 31, 1998, to $396,000 for the year ended December 31, 1999. Included in this increase was an increase in activity fees related to deposits and to the growth of deposits. These activity fees were $286,000 for 1999 compared to $165,000 for 1998. Other service charges and fees totaled $98,000 for the year ended December 31, 1999, compared to $39,000 for the year ended December 31, 1998. Approximately $35,000 of this increase was attributable to Pine Belt.
Noninterest expense increased from $1.6 million for the year ended December 31, 1998 to $3.2 million for the year ended December 31, 1999. The Company experienced increases in most expense categories, which reflects the continued growth of the Company and the addition of Pine Belt during the year. The largest increase was in salary and employee benefits, which increased by $727,000 in 1999 as compared to 1998. This increase included normal merit increases in salaries as well as the employment of additional employees throughout 1999. Occupancy expense increased from $96,000 in 1998 to $224,000 in 1999. This increase resulted from costs related to the opening of a new branch facility in the fourth quarter of 1998 and to facilities of Pine Belt.
Equipment expense increased from $152,000 in 1998 to $297,000 in 1999. This increase is primarily due to an increase in maintenance expense of banking equipment and to depreciation of newly acquired equipment including costs associated with Pine Belt. Other expenses, including data processing and supplies, increased primarily as a result of the growth of the Company in 1999 as compared to 1998 and the resulting increased lending and deposit activities. In light of the intense competition in the financial services market in recent years, management emphasizes expense management and will continue to evaluate and monitor growth in discretionary expense categories in an attempt to control future increases.
The following table sets forth the primary components of noninterest expense for the periods indicated:
Noninterest Expense
Years ended December 31, 1999 1998 1997 ---- ---- ---- (In thousands)
Salaries and employee benefits................................................ $1,653 $ 848 $ 632 Occupancy..................................................................... 224 96 77 Equipment..................................................................... 297 152 123 Marketing and public relations................................................ 81 39 43 Data processing............................................................... 53 44 33 Supplies and printing......................................................... 136 64 40 Telephone..................................................................... 71 27 20 Correspondent services........................................................ 43 23 13 Deposit and other insurance................................................... 79 41 34 Professional fees............................................................. 58 30 36 Postage....................................................................... 38 22 17 ATM fees...................................................................... 37 15 - Other......................................................................... 227 194 135 Organization and pre-opening expense.......................................... 215 - - ----- ----- -----
Total...................................................................... $3,212 $1,595 $1,203 ====== ====== ======
Income Tax Expense
The Company had a cumulative net operating loss carryforward at December 31, 1999 of approximately $229,000. The Company's ability to realize a deferred tax benefit as a result of net operating losses will depend upon whether the Company has sufficient taxable income of an appropriate character in the carryforward periods. The Company recognizes deferred tax assets for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities and operating loss carryforwards. The Company then establishes a valuation allowance to reduce the deferred tax asset to the level that it is "more likely than not" that the tax benefit will be realized. Prior to 1999, the Company fully offset the deferred tax assets resulting primarily from the provision for loan losses, the deferred pre-opening costs, and the operating loss carryforwards by a valuation allowance in the same amount. In 1999, management reevaluated the valuation allowance and because of profitablility trends and projections redetermined the likelihood of realization of the assets and adjusted the valuation allowance accordingly.
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, 1999, loans accounted for 74% of earning assets, as compared to 76% and 74% of earning assets at December 31, 1998 and 1997, respectively. 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 $47.8 million during 1999, as compared to $25.9 million in 1998, reflecting the substantial growth of the Company during the period.
The following table shows the composition of the loan portfolio by category:
Composition of Loan Portfolio
December 31, ----------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 -------------------------- -------------------------- ------------------- ---------------------- Amount Percent Amount Percent Amount Percent Amount Percent ------ Of Total ------ Of Total ------ Of Total ------ Of Total -------- -------- -------- -------- (Dollars in thousands)
Commercial, financial and agricultural.................. $22,322 36.2% $ 12,378 38.2% $ 5,187 29.7% $1,106 25.6% Real Estate: Mortgage-commercial........... 9,139 14.8% 5,816 17.9% 4,166 23.8% 1,508 34.9% Mortgage-residential.......... 16,442 26.8% 7,119 22.0% 3,698 21.1% 1,205 27.8% Construction.................. 4,821 7.8% 3,166 9.8% 2,031 11.6% 36 0.8% Consumer and other............ 8,903 14.4% 3,927 12.1% 2,405 13.8% 472 10.9% ----- ---- ----- ---- ----- ---- --- ----
Total loans................... 61,627 $ 32,406 $ 17,487 100.0% $4,327 100.0% ----- ----- 100.0% 100.0% ===== ===== Allowance for loan losses..... (740) (347) (193) (37) ---- ---- ---- ---
Net loans..................... $60,887 $ 32,059 $ 17,294 $4,290 ======= ========== ========== ======
In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company's market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Due to the short term the loan portfolio has existed, the current portfolio may not be indicative of the ongoing portfolio mix. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.
The repayment of loans in the loan portfolio as they mature is a source of liquidity for the Company. The following table sets forth the Company's loans maturing within specified intervals at December 31, 1999.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
December 31, 1999 ---------------------------------------------------------------------------------------- Over One Year One Year Through Over Five or Less Five Years Years Total ------- ---------- ----- ----- (Dollars in thousands)
Commercial, financial and agricultural.....$ 7,340 $ 8,816 $ 6,166 $ 22,322 Real estate - construction................. 3,118 1,703 - 4,821 ----- ----- ----- ----- $ 10,458 $ 10,519 $ 6,166 $ 27,143 =========== =========== =========== ============
Loans maturing after one year with:
Fixed interest rates......................................................................................... $ 6,819 Floating interest rates...................................................................................... 9,866 -----
$ 16,685 ============
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 $11.8 million in 1999, as compared to $6.8 million in 1998. This represents 18.5% and 19.9% of the average earning assets for the years ended December 31, 1999 and 1998, respectively. At December 31, 1999, investment securities were $14.5 million and represented 17.7% 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 continues to grow its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, 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, ------------------------------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands)
Available-for-sale U.S. Treasury................................................. $ - $ 504 $ 504
U.S. Government agencies...................................... 12,608 3,282 2,635
States and municipal subdivisions............................. 413 - -
Corporate obligations......................................... 800 3,343 -
Other......................................................... 555 235 658 -------------- ---------- -------------
Total available-for-sale...................................... 14,376 7,364 3,797 -------------- --------- -------------
Held-to-maturity U.S. Government agencies...................................... $ 105 $ 122 $ 507 -------------- --------- -------------
Total......................................................... $ 14,481 $ 7,486 $ 4,304 ============== ========= =============
The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 1999.
Investment Securities Maturity Distribution and Yields (1)
December 31, 1999 --------------------------------------------------------------------------------------------------------------------
After One But After Five But Within One Year Within Five Years After Ten Years Within Ten Years --------------- ----------------- --------------- ---------------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands)
Held-to-maturity: U.S. Government agencies (2).....$ - $ - $ - $ - $ - $ - $ - $ - Available-for-sale: U.S. Government agencies (3)......... - - 6,370 5.84% - - 790 6.47%
States and municipal subdivisions.... - - - - - - 413 6.26%
Corporate obligations................ - - - - - - - - Other (including equity securities).. - - 800 6.15% 555 6.00% - - ------- ------ -------- ------ -------- --------
Total investment securities $ - $ - $ 7,170 $ 555 $ 1,203 $ - ========= ====== ======== ====== ========= ======== available-for-sale................ Total investment securities.......... -------------------- (1) Investments with a call feature are shown as of the contractual maturity date. (2) Excludes mortgage-backed securities totaling $105,000 with a yield of 7.22%. (3) Excludes mortgage-backed securities totaling $5.4 million with a yield of 6.03%.
Short-Term Investments. Short-term investments, which consist of Federal Funds sold, averaged $3.5 million in 1999 as compared to $1.8 million in 1998. At December 31, 1999, and December 31, 1998, short-term investments totaled $6.4 million and $3.0 million, 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 interest-bearing deposits increased $24.6 million, or 88.5%, to $52.4 million in 1999, from $27.8 million in 1998. Average total deposits increased $27.5 million, or 89.3%, in 1999 from $30.8 million in 1998. At December 31, 1999, total deposits were $73.5 million, compared to $35.7 million a year earlier, an increase of 105.9%.
The following table sets forth the deposits of the Company by category for the periods indicated.
Deposits
December 31, ------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------------------------- Percent of Percent of Percent of Amount Deposits Amount Deposits Amount Deposits ------ -------- ------ -------- ------ -------- (Dollars in thousands)
Demand deposit accounts $ 8,146 11.1%$ 3,407 9.6%$ 2,479 11.8% NOW accounts 7,909 10.8 3,302 9.2 2,370 11.3 Money market accounts 14,142 19.2 6,932 19.4 4,296 20.4 Savings accounts 670 .9 417 1.2 200 0.9 Time deposits less than $100,000 26,205 35.6 13,237 37.1 7,267 34.5 Time deposits of $100,000 or over 16,442 22.4 8,372 23.5 4,446 21.1 ------ ---- ----- ---- ----- ---- Total deposits $ 73,514 100.0%$ 35,667 100.0%$ 21,058 100.0% ========== ======= ======== ======= ======= =====
The Company's loan-to-deposit ratio was 83.8% at December 31, 1999, 90.9% at December 31, 1998, and 83.0% at December 31, 1997. The loan-to-deposit ratio averaged 81.9 % during 1999. 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 $57.0 million at December 31, 1999 and $27.3 million at December 31, 1998. 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 and maintain a loan- to-deposit ratio of approximately 80.0%. 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 deposits of $100,000 or more at December 31, 1999, is shown in the following table. The Company did not have any other time deposits of $100,000 or more at either of these dates.
Maturities of Certificates of Deposit of $100,000 or More
After Three Within Three Through After Twelve Months Twelve Months Months Total ------ ------------- ------ ----- (Dollars in thousands)
December 31, 1999.................................. $ 5,213 $ 8,317 $ 2,912 $ 16,442
Borrowed funds. Borrowed funds consist primarily of advances from the Federal Home Loan Bank of Dallas and federal funds purchased. At December 31, 1999, advances from the Federal Home Loan Bank totaled $3.8 million compared to $1.2 million at December 31, 1998. The advances are collateralized by first mortgage loans, Federal Home Loan Bank capital stock, and amounts on deposit with the Federal Home Loan Bank. Federal funds purchased was $1.0 million at December 31, 1999.
Capital
Total shareholders' equity as of December 31, 1999 was $12.5 million, an increase of $6.1 million or approximately 94.2%, compared with shareholders' equity of $6.4 million as of December 31, 1998. The Company completed a stock offering on December 31, 1998, and common stock was issued in January, 1999, upon receipt of regulatory approval. Proceeds, net of offering expenses, totaled approximately $6.3 million.
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% (the Federal Reserve grants an exemption from these requirements for bank holding companies with less than $150 million in consolidated assets, and therefore the Company's capital is currently measured only at the Hattiesburg Bank level). 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 qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The 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 3%. All but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. The Company and the subsidiary banks exceeded their minimum regulatory capital ratios as of December 31, 1999 and 1998.
Analysis of Capital
Regulatory Minimums The Company The First Pine Belt ---------------------------- ----------------- ------------- ----------------- Adequately Well December 31 December 31 December 31 Capital Ratios Capitalized Capitalized 1999 1998 1999 1998 1999 1998 -------------- ----------- ----------- ---- ---- ---- ---- ---- ----
Leverage....................... 4.0% 5.0% 14.9% 12.7% 9.0% 10.0% 17.2% - Risk-based capital Tier 1............. 4.0% 6.0% 18.7% 15.8% 11.3% 12.5% 22.1% - Total.............. 8.0% 10.0% 19.8% 16.7% 12.3% 13.3% 23.3% -
Ratios
1999 1998 1997 --------------------------------------
Return on assets (net income (loss) divided by average total assets) (.2%) .2% (1.2%)
Return on equity (net income (loss) divided by average equity) (1.6%) 1.4% (4.1%)
Dividend payout ratio (dividends per share divided by net income per share) N/A N/A N/A
Equity to asset ratio (average equity divided by average total assets) 15.3% 13.0% 28.41%
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 sold 721,848 shares during its initial public offering in 1996, with net proceeds, after offering expenses, of $7.1 million. Approximately $5.3 million of the proceeds of the offering were used to capitalize The First. The remaining offering proceeds were used to provide working capital for the Company. With the successful completion of the initial public offering, the Company has maintained a high level of liquidity that has been adequate to meet planned capital expenditures, as well as providing the necessary cash requirements of the Company needed for operations. The Company sold 428,843 shares of its common stock for net proceeds, after offering expense of $6.3 million. Approximately $5 million was used to purchase the capital stock of Pine Belt. The Company's Federal Funds sold position, which is typically its primary source of liquidity, averaged $3.5 million during the year ended December 31, 1999 and was $6.4 million at December 31, 1999. 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, 1999, advances available totaled approximately $8.0 million of which $3.8 million had been drawn.
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.
Accounting Matters
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in its financial statements and that those instruments be measured at fair value. Implementation is required for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not determined the impact the adoption of this statement may have on its consolidated financial statements.
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.
Year 2000 Issues
During 1999, management completed the process of preparing for the year 2000 date change. The process involved identifying and remediating date recognition problems in computer systems, software and other operating equipment, working with third parties to address year 2000 issues, and developing contingency plans to address potential risks in the event of year 2000 failures. To date, the Company has successfully managed the transition.
Although considered unlikely, unanticipated problems in the Company's processes, including problems associated with non-compliant third parties and disruptions to the economy in general, could still occur despite efforts to date to remediate affected systems and develop contingency plans. Management will continue to monitor all business processes, including interaction with the Company's customers, vendors and other third parties, throughout the year 2000 to address any issues and ensure all processes continue to function properly.
Through 1999, the cost of the Year 2000 project was estimated to be approximately $30,000. Costs expected to be incurred in 2000 for ongoing monitoring and support activities are not expected to be significant.
THE FIRST BANCSHARES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
DECEMBER 31, 1999 AND 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and StockholdersThe First Bancshares, Inc.Hattiesburg, Mississippi
We have audited the accompanying consolidated balance sheets of The First Bancshares, Inc., and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, 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 generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 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 subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles.
/s/ T.E. Lott & Company ------------------------------ Columbus, Mississippi March 3, 2000
THE FIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998 ------ ---- ----
Cash and due from banks $ 3,184,324 $ 1,457,280 Interest-bearing deposits with banks 308,341 95,205 Federal funds sold 6,365,915 2,963,203 --------- --------- Total cash and cash equivalents 9,858,580 4,515,688 Securities (Note C) 14,480,733 7,486,251 Loans, net of reserve for loan losses of $739,601 in 1999 and $347,305 in 1998 (Note D) 60,886,615 32,058,567 Premises and equipment (Note E) 4,396,487 3,604,364 Interest receivable 661,655 324,805 Other assets 1,072,015 1,922,966 --------- ---------
$ 91,356,085 $ 49,912,641 =============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
Deposits: Noninterest-bearing $ 8,084,996 $ 3,406,983 Time, $100,000 or more 16,441,896 8,372,200 Other interest-bearing 48,986,775 23,887,576 ---------- ---------- Total deposits 73,513,667 35,666,759 Interest payable 280,317 166,112 Stock subscriptions deposits (Note A) - 6,432,645 Borrowed funds (Note F) 4,990,370 1,200,000 Other liabilities 98,283 24,893 ------ ------ Total liabilities 78,882,637 43,490,409 ---------- ----------
Commitments and contingent liabilities (Note M )
Stockholders' Equity (Note G): Common stock, par value $1 per share; 10,000,000 shares authorized; issued and outstanding 1,152,878 and 721,848 at December 31, 1999 and 1998, respectively 1,152,878 721,848 Preferred stock, par value $1 per share, 10,000,000 shares authorized; no shares issued and outstanding - - Additional paid-in capital 12,376,136 6,451,456 Accumulated deficit (923,770) (750,879) Accumulated other comprehensive income (loss) (131,796) (193) -------- ---- Total stockholders' equity 12,473,448 6,422,232 ---------- ---------
$ 91,356,085 $ 49,912,641 ============== ================
The accompanying notes are an integral part of these statements.
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 ---- ---- INTEREST INCOME Interest and fees on loans $ 4,531,134 $ 2,557,943 Interest and dividends on investment securities - taxable 682,951 400,044 Interest on federal funds sold 178,994 75,122 Interest on deposits in banks 37,243 2,070 ------ ----- 5,430,322 3,035,179 --------- ---------
INTEREST EXPENSE Interest on time deposits of $100,000 or more 484,402 217,225 Interest on other deposits 1,895,817 1,194,699 Interest on borrowed funds 121,118 6,440 ------- ----- 2,501,337 1,418,364 --------- ---------
Net interest income 2,928,985 1,616,815 Provision for loan losses 407,700 169,748 ------- ------- Net interest income after provision for loan losses 2,521,285 1,447,067 --------- ---------
OTHER INCOME Service charges on deposit accounts 286,335 165,455 Other service charges and fees 97,976 39,187 Securities gains - 597 Other 11,910 9,675 ------ ----- 396,221 214,914 ------- ------- OTHER EXPENSE Salaries 1,389,620 724,098 Employee benefits 264,331 123,468 Occupancy expense 223,597 95,590 Furniture and equipment expense 297,488 152,111 Supplies and printing 136,107 63,653 Organization and pre-opening costs 214,934 - Other 685,580 436,289 ------- ------- 3,211,657 1,595,209 --------- ---------
Income (loss) before income taxes (294,151) 66,772
Income taxes (benefit) (Note I) (121,260) - -------- ------
Net income (loss) $ (172,891) $ 66,772 ==================== ===================
Net income (loss) per common share: Basic $(.15) $.09 Diluted (.15) .09
The accompanying notes are an integral part of these statements.
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated Other Compre- Compre- hensive- hensive Common Paid-in Accumulated Income Income Stock Capital Deficit (Loss) Total ------ ----- ------- ------- ------ -----
Balance, January 1, 1998 $ 721,848 $ 6,451,456 $ (817,651) $ 12,051 $ 6,367,704
Comprehensive income: Net income for 1998 $ 66,772 - - 66,772 - 66,772 Net change in unrealized gain (loss) on available- for-sale securities, net of tax (12,244) - - - (12,244) (12,244) ------- ------- ---------- -------- ------- -------- Comprehensive income $ 54,528 ============
Balance, December 31, 1998 721,848 6,451,456 (750,879) (193) 6,422,232
Issuance of common stock (Note A) 428,843 5,904,997 - - 6,333,840
Exercise of stock options 2,187 19,683 - - 21,870
Comprehensive income: Net loss for 1999 $ (172,891) - - (172,891) - (172,891) Net change in unrealized gain (loss) on available- for-sale securities, net of tax (131,603) - - - (131,603) (131,603) -------- -------- -------- -------- -------- -------- Comprehensive loss $ (304,494) ===========--
Balance, December 31, 1999 $ 1,152,878 $ 12,376,136 $ (923,770) $ (131,796) $ 12,473,448 === ==== ============= =============== ================== ============ ================
The accompanying notes are an integral part of these statements.
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (172,891) $ 66,772 Adjustments to reconcile net income (loss) to net cash: Depreciation and amortization 317,728 189,181 Stock dividends (6,100) - Provision for loan losses 407,700 169,748 Deferred income tax (121,260) - Amortization and accretion (12,649) (103,499) Securities gains - (597) Changes in: Interest receivable (336,850) (136,440) Other assets 868,127 (1,159,793) Interest payable 114,205 71,463 Other liabilities 73,390 18,993 ------ ------
Net cash used in operating activities 1,131,400 (884,172) --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities (17,448,724) (15,670,883) Proceeds from maturities and calls of available-for-sale securities 10,317,702 12,195,011 Purchase of securities to be held-to-maturity - 385,060 Increase in loans (29,235,748) (14,934,454) Additions to premises and equipment (1,059,016) (1,656,155) ---------- ----------
Net cash used in investing activities (37,425,786) (19,681,421) ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits 37,846,908 14,608,374 Increase in borrowed funds 3,790,370 1,200,000 Stock subscriptions - 6,432,645 --------- ---------
Net cash provided by financing activities 41,637,278 22,241,019 ---------- ----------
Net increase in cash and cash equivalents 5,342,892 1,675,426
Cash and cash equivalents at beginning of year 4,515,688 2,840,262 --------- ---------
Cash and cash equivalents at end of year $ 9,858,580 $ 4,515,688 ===================== ====================
Cash paid during the year for: Interest $ 2,387,132 $ 1,346,901 Income taxes - -
The accompanying notes are an integral part of these statements.
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A - NATURE OF BUSINESS
The First Bancshares, Inc. (the Company) is a bank holding company whose business is conducted by its wholly-owned subsidiaries, The First National Bank of South Mississippi (The First) and The First National Bank of the Pine Belt (Pine Belt). The subsidiary banks provide a full range of banking services in their primary market areas of Lamar, Forrest, and Jones counties, Mississippi, and the surrounding counties. The Company commenced its banking operations in August, 1996. The Company, as a bank holding company, is regulated by the Federal Reserve Bank. Its subsidiary banks are subject to the regulation of the Office of the Comptroller of the Currency (OCC).
In June, 1998, the Company entered into a development agreement with the organizers of Pine Belt, a de novo community bank in Laurel, Mississippi, for the purpose of Pine Belt becoming a wholly-owned subsidiary of the Company. In connection with the formation of Pine Belt, the Company made a public offering for the sale of a minimum of 340,000 shares and a maximum of 533,333 shares of its common stock at a price of $15 per share. The offering was closed on December 31, 1998. The net proceeds from the sale of common stock was used as an initial capital injection into Pine Belt and for general corporate purposes. The Company received subscriptions to purchase 428,843 shares of its common stock for an aggregate purchase price of $6,432,645. Offering expenses totaled $99,165. Subscription proceeds remained in escrow as of December 31, 1998, pending issuance of shares and receipt of routine regulatory approvals. On January 19, 1999, the subsidiary banks received approval from its banking regulator to begin banking operations, and the Company used $5 million of the net proceeds to purchase all of the capital stock of Pine Belt.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary banks. All significant intercompany accounts and transactions have been eliminated.
2. Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
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 and other banks.
4. Securities
Investments in securities are classified into three categories and 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, when applicable, until realized.
Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold.
Premiums and discounts are recognized in interest income using the interest method.
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, 1999 and 1998.
5. Loans
Loans are carried at the principal amount outstanding, net of the reserve 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 organization costs are deferred and recognized as an adjustment of the related loan yield using the interest method.
The accrual of interest on real estate and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection.
6. Reserve 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 reserve at an adequate level, considering losses charged to the loan portfolio, current economic conditions, credit reviews of the loan portfolio, and other factors warranting consideration. Reserves for any impaired loans are generally determined based on collateral values. Loans are charged against the reserve for loan losses when management believes the collectibility of the principal is unlikely. The reserve is maintained at a level believed adequate by management to absorb potential loan losses.
7. 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.
8. Organization and Pre-opening Costs
Organization and pre-opening costs are expensed as incurred in accordance with AICPA Statement of Position 98- 5, "Reporting on the Costs of Start-up Activities."
9. Stock Options
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation," requires a fair value-based method of measuring employee stock options. Under this method, compensation cost is measured at the option grant date based on the value of the award and is recognized over the service period. In lieu of recording the value of such options, the Company has elected to continue to measure compensation cost using Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees," and to provide pro forma disclosures quantifying the difference between compensation cost included in reported net income and the related cost measured by such fair value-based method.
10. Income Taxes
A deferred tax asset or liability is recognized for the future income tax effects attributable to the differences in the tax bases of assets or liabilities and their reported amounts in the financial statements, as well as operating loss and tax credit carryforwards. The deferred tax asset or liability is measured using the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be realized. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
11. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold for a one-day period.
12. Off-Balance Sheet Financial Instruments
In the ordinary course of business, the subsidiary banks enter 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.
13. Per Share Amounts
Per share amounts are presented in accordance with FASB Statement No. 128, "Earnings Per Share." Under Statement No. 128, 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 outstanding, such as exercise of stock options.
The following table discloses the reconciliation of the numerators and denominators of the basic and diluted computations:
For the Year Ended For the Year Ended December 31, 1999 December 31, 1998 --------------------------------------------------------- ----------------------------------- Net Net Income Income (Loss) Shares Per Share (Loss) Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Data ----------- ------------- ------ ----------- ------------- ----
Basic per share $ (172,891) $ 1,131,622 (.15) $ 66,712 721,848 $ .09 =========== ===========
Effect of dilutive shares: Stock options - 22,968 - 20,066
Diluted per share $ (172,891) $ 1,154,590 (.15) $ 66,712 741,914 $ .09 ============= ============= ==========- ============= ============= ===========-
The diluted per share amounts were computed by applying the treasury stock method.
14. Accounting Pronouncements
In June, 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and for Hedging Activities." Statement No. 133 requires all derivatives to be recorded on the balance sheet at fair value. Statement No. 133 is effective for fiscal periods beginning after June 15, 2000, and is not expected to have a material effect on the Company's consolidated financial statements.
NOTE C - SECURITIES
Securities at December 31, 1999 and 1998, consisted of available-for-sale securities with a carrying amount of $14,375,706 and $7,363,737, respectively, and securities held-to-maturity with a carrying amount of $105,027 and $122,514, respectively. The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of these securities at December 31, 1999 and 1998, are as follows:
------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Available-for-sale securities: Obligations of U. S. Government agencies $ 7,232,490 $ - $ 72,566 $ 7,159,924 Obligations of states and municipal subdivisions 450,410 - 37,263 413,147 Mortgage-backed securities 5,492,934 - 45,653 5,447,281 Corporate obligations 800,000 - - 800,000 Equity securities 555,354 - - 555,354 ------- --------- ------- ----------
$ 14,531,188 $ - $ 155,482 $ 14,375,706 ==================== ================= ================== ====================
Held-to-maturity securities: Mortgage-backed securities $ 105,027 $ 2,514 $ - $ 107,541 ==================== =================== ================ ====================
--------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Available-for-sale securities: U. S. Treasury securities $ 499,973 $ 3,307 $ - $ 503,280 Mortgage-backed securities 3,285,761 7,540 11,040 3,282,261 Corporate obligations 3,343,442 - - 3,343,442 Equity securities 234,754 - - 234,754 ------- ------ ------ -------
$ 7,363,930 $ 10,847 $ 11,040 $ 7,363,737 ================ =================== ================== ============== Held-to-maturity securities: Mortgage-backed securities $ 122,514 $ 1,436 $ - $ 123,950 =============== =================== ================== ================
The scheduled maturities of securities at December 31, 1999, are as follows:
Available-for-Sale Held-to-Maturity ------------------ ---------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- -----
Due after one year through five years $ 7,235,451 $ 7,170,291 $ - $ - Due after five years through ten years 1,247,449 1,202,780 - - Mortgage-backed securities and equity securities 6,048,288 6,002,635 105,027 107,541 --------- --------- ------- -------
$ 14,531,188 $ 14,375,706 $ 105,027 $ 107,541 ===================== ===================== =============== ===========
Actual maturities can differ from contractual maturities because the obligations may be called or prepaid with or without penalties.
Equity securities consist of stock in the Federal Reserve Bank and Federal Home Loan Bank (FHLB), the transferability of which is restricted.
Gross gains of $ -0- and $614 and gross losses of $ -0- and $17 were realized on available-for-sale securities in 1999 and 1998, respectively.
Securities with a carrying value of $3,198,000 and $1,541,000 at December 31, 1999 and 1998, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.
NOTE D - LOANS
Loans outstanding include the following types at December 31, 1999 and 1998:
1999 1998 ---- ----
Commercial, financial, and agricultural $ 22,322 $ 12,378 Real estate - construction 4,821 3,166 Real estate - mortgage 25,581 12,935 Installment loans to individuals 8,673 3,718 Other 230 209 --- --- 61,627 32,406 Reserve for loan losses (740) (347) ---- ---- $ 60,887 $ 32,059 ============== =============
Transactions in the allowance for loan losses were as follows:
1999 1998 ---- ----
Balance at beginning of year $ 347,305 $ 193,566
Additions: Provision for loan losses charged to operations 407,700 169,748 Recoveries 9,514 - ----- ------- 764,519 363,314 Deductions: Loans charged off 24,918 16,009 ------ ------
Balance at end of year $ 739,601 $ 347,305 ============= ============
For the years ended December 31, 1999 and 1998, no significant loans were classified as impaired.
NOTE E - PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1999 and 1998, is as follows:
1999 1998 ---- ---- Premises: Land $ 1,402,185 $ 1,264,614 Buildings and improvements 2,250,614 1,921,153 Construction in progress 84,811 - Equipment 1,233,509 726,902 --------- ------- 4,971,119 3,912,669 Less accumulated depreciation (574,632) (308,305) -------- --------
$ 4,396,487 $ 3,604,364 ==================== ===================
The amounts charged to operating expense for depreciation were $266,894 and $144,016 in 1999 and 1998, respectively.
NOTE F - BORROWED FUNDS
Borrowed funds consisted of the following:
December 31, 1999 1998 ---- ----
Federal funds purchased $ 1,000,000 $ - 5.395% note payable to the FHLB, due April 23, 2001. 450,000 - 5.878% note payable to the FHLB, due February 1, 2002. 1,749,966 - 5.21% note payable to the FHLB, due January 1, 2014. 575,204 600,000 5.28% note payable to the FHLB, due January 1, 2014. 575,342 600,000 6.68% note payable to the FHLB, due December 1, 2014. 500,000 - Other 139,858 - ------- ---------
============== ===================
Federal funds purchased are generally purchased for a one to seven day period. Interest is at the prevailing rate at the date of purchase.
The notes payable to the FHLB are collateralized by first mortgage loans, FHLB capital stock, and amounts on deposit with the FHLB.
Other borrowed funds consist of loans sold in transactions in which the risk of loss or obligation for payment is retained. For regulatory and financial reporting purposes, these amounts are required to be reported as borrowed funds.
Annual principal repayment requirements on the borrowings from the FHLB at December 31, 1999, are as follows:
Year Amount ---- ------
2000 $ 1,403,671 2001 1,328,490 2002 632,563 2003 33,137 2004 34,930 Thereafter 417,721 -------
$ 3,850,512 ===================
NOTE G - REGULATORY MATTERS
The Company and its subsidiary banks 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 banks 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 banks 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, 1999, that the Company and its subsidiary banks exceed all capital adequacy requirements.
At December 31, 1999, the subsidiary banks were 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 total risk- based capital of 10% or more, has Tier I risk-based 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, 1999 and 1998, are presented in the following table. No amount was deducted from capital for interest-rate risk exposure.
($ In Thousands) Company Subsidiaries ----------------------------------------------------------- (Consolidated) The First Pine Belt -------------- --------- --------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- December 31, 1999 Total risk-based $ 13,318 19.8% $ 5,685 12.3% $ 4,741 23.3% Tier I risk-based 12,596 18.7% 5,217 11.3% 4,487 22.1% Tier I leverage 12,596 14.9% 5,217 9.0% 4,487 17.2%
December 31, 1998 Total risk-based $ 6,691 16.7% $ 5,229 13.3% - - Tier I risk-based 6,343 15.8% 4,882 12.5% - - Tier I leverage 6,343 12.7% 4,882 10.0% - -
The minimum amounts of capital and ratios as established by banking regulators at December 31, 1999 and 1998, are as follows:
($ In Thousands) Company Subsidiaries -------------------------------------------------------- (Consolidated) The First Pine Belt -------------- --------- --------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- December 31, 1999 Total risk-based $ 5,385 8.0% $ 3,702 8.0% $ 1,625 8.0% Tier I risk-based 2,693 4.0% 1,851 4.0% 812 4.0% Tier I leverage 3,376 4.0% 2,332 4.0% 1,044 4.0%
December 31, 1998 Total risk-based $ 3,203 8.0% $ 3,137 8.0% - - Tier I risk-based 1,602 4.0% 1,568 4.0% - - Tier I leverage 1,995 4.0% 1,958 4.0% - -
The Company's dividends, if any, will be made from dividends received from its subsidiary banks. 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. At December 31, 1999, the subsidiary banks had no retained net profits free of the restrictions.
NOTE H - COMPREHENSIVE INCOME
The Company and the its subsidiary banks report comprehensive income as required by FASB Statement No. 130, "Reporting Comprehensive Income." In accordance with this statement, unrealized gains and losses on securities available-for-sale are included in 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 are as follows:
Years Ended December 31, ------------------------ 1999 1998 ---- ---- Unrealized gains (losses) on securities available- for-sale, net of tax, arising during year $ (131,603) $ (11,849) Less reclassification adjustment for (gains) losses included in net income, net of tax - (395) ------- ------- Net change in unrealized gains (losses) on securities available-for-sale, net of tax $ (131,603) $ (12,244) ==================== =====================
NOTE I - INCOME TAXES
The components of income tax expense (benefit) are as follows:
December 31, ------------ 1999 1998 ---- ---- Current $ - $ - Deferred 37,667 19,685 Change in valuation allowance (158,928) (19,685) -------- ------- $ (121,261) $ - ============= ===============
The Company's income tax expense differs from the amounts computed by applying the Federal income tax statutory rates to income (loss) before income taxes. A reconciliation of the differences is as follows:
Years Ended December 31, ------------------------ 1999 1998 ---- ---- Amount % Amount % ------ ---- ------ ---- Income taxes at statutory rate $ (100,011) (34%) $ 22,702 34% Carryover of net operating loss 96,546 32% - - Rate difference 37,667 21% - - Other items 3,465 2% (3,017) (6%) Change in valuation allowance (158,928) (92%) (19,685) (28%) -------- ----- ------- ----
$ (121,261) (70%) $ - $ - ================== ===== ================ ========
The components of deferred income taxes are as follows: December 31, ------------ 1999 1998 ---- ---- Deferred tax assets: Reserve for loan losses $ 129,710 $ 90,690 Pre-opening expenses 73,715 79,720 Unrealized loss on available-for-sale securities 23,685 - Net operating loss carryover 73,103 99,240 Other 1,150 43,160 ----- ------ 301,363 312,810 Valuation allowance (148,499) (307,427) -------- -------- 152,864 5,383 Deferred tax liabilities: Securities (7,918) (5,383) ------ ------
$ 144,946 $ - ================== ==================
The valuation allowance was adjusted by $158,928 based upon management's reevaluation of the likelihood of realization.
The Company has a consolidated net operating loss for income tax purposes at December 31, 1999, of approximately $229,000. Net operating losses will expire in the following years:
Year Amount ---- ------
2011 $ 21,000 2015 208,000
NOTE J - EMPLOYEE BENEFITS
The subsidiary banks 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 subsidiary banks provide a matching contribution. Contributions by the subsidiary banks totaled $13,024 in 1999 and $10,788 in 1998.
The Company and its subsidiary banks have employment agreements with three of their executive officers. These agreements contain provisions concerning salaries, bonuses, incentive programs, and benefits related to a change in control.
NOTE K - STOCK PLANS
In 1997, the Company adopted the 1997 Stock Option Plan (1997 Plan) which provides for the granting of options to purchase up to 72,185 shares of Company common stock by directors and key employees of the Company and its subsidiaries. Options granted under the 1997 Plan were exercisable at December 31, 1999, and expire ten years after the grant date. The options are exercisable at not less than the market value of the Company's stock at the grant date. Accordingly, no compensation cost has been recognized.
On May 27, 1999, the Company's shareholders approved the 1999 Stock Incentive Plan (1999 Plan). The 1999 Plan provides for the granting of options to purchase up to 106,689 shares of the Company's common stock by the Company's and its subsidiaries' 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, 1999, 93,963 options had been granted, none of which had vested. All options expire and are void unless exercised on or before April 15, 2009. The options are exercisable at not less than the market value of the Company's stock at the grant date. Accordingly, no compensation expense has been recognized.
A summary of the status of the stock option plans as of December 31, 1999 and 1998, and changes during the years ending on those date is presented below:
December 31, ------------------------------------------------------------------------- 1999 1998 ---- ---- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------ ----- ------ ----- Options outstanding at beginning of year 72,185 $ 10 72,185 $ 10 Options granted 93,963 15 - - Options exercised (2,187) 10 - - Options forfeited - 10 - - ------- ------ ------ ------ Options outstanding at end of year 163,961 $ 13 72,185 $ 10 ======= ============ ====== ===========
Options exercisable at end of year 69,998 $ 10 47,029 $ 10 ====== ============ ====== ===========
Had compensation cost for the stock plans been determined based on the fair values of the options at the grant dates consistent with the method of FASB Statement No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
1999 1998 ---- ----
Net income (loss), pro forma $ (240,321) $ 28,297 Basic net income (loss) per share, pro forma (.21) .04 Diluted net income (loss) per share, pro forma (.21) .04
The assumptions used in estimating compensation cost on a pro forma basis were: dividend yield of 0%, expected life of ten years, volatility of near 0%, and a risk-free interest rate of 6.5%.
NOTE L - RELATED PARTY TRANSACTIONS
In the normal course of business, the subsidiary banks make loans to its directors and officers and to companies in which they have a significant ownership interest. 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 persons. Such loans amounted to approximately $4,126,000 and $2,696,000 at December 31, 1999 and 1998, respectively. In the opinion of management, such loans are consistent with sound banking policies and are within applicable regulatory and lending limitations.
NOTE M - 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 banks had outstanding letters of credit of $359,000 and $471,000 at December 31, 1999 and 1998, respectively, and had made loan commitments of approximately $8,129,000 and $4,819,000 at December 31, 1999 and 1998, respectively. The subsidiary banks' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of the instrument. The subsidiary banks use the same credit policies in making commitments and conditional obligations as it does for its lending activities. No significant losses are anticipated as a result of these transactions.
The primary market area served by the subsidiary banks are Forrest, Lamar, and Jones 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, 1999, management does not consider there to be any significant credit concentration within the loan portfolio. Although the banks' loan portfolio, as well as existing commitments, reflect 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 First has Sixteenth Section land leases and contracts for bank premises. The leases have 40 year terms with annual rentals of $20,240 subject to reappraisals every 10 years.
Pine Belt has entered into a contract for the construction of its main office building in Laurel, Mississippi. The contract is for approximately $1.6 million and contains various performance and conditions clauses.
The Company has entered into an agreement with another financial institution to purchase a branch facility in Hattiesburg, Mississippi, for approximately $700,000. The First will conduct branch operations in the facility. The seller has the right to possession of the property until January 10, 2000, at which time the Company will lease the property for six months with monthly lease payments of $6,000. Title to the property is to transfer on or before July 10, 2000.
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures about financial instruments at December 31, 1999 and 1998, are presented as required by FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments." The following information does not purport to represent the aggregate consolidated fair value of the Company at December 31, 1999 and 1998.
The carrying amounts presented are the amounts at which the financial instruments are reported in the consolidated financial statements.
Cash and Cash Equivalents
The carrying amount for cash and due from banks, interest-bearing deposits, and federal funds sold approximate the fair values of such assets at December 31, 1999 and 1998.
Securities
The estimated fair value of securities is based on quoted market prices, if available. The estimated fair value is based on quoted market prices of comparable instruments, if quoted market prices are not available.
Carrying Estimated Date Amount Fair Value ---- ------ ----------
December 31, 1999 $ 14,480,733 $ 14,483,247 ================ ==================
December 31, 1998 $ 7,486,251 $ 7,487,687 ================ ==================
Loans
It is the opinion of management that in the current interest environment of stable rates, the net carrying value of loans of $60,886,615 at December 31, 1999, and $32,058,567 at December 31, 1998, approximates fair value.
Deposits
Fair values of demand deposits and savings accounts are defined by FASB Statement No. 107 as the amounts payable. The fair value of variable rate deposits approximates their carrying value. Because of the stable interest environment, management is of the opinion that the carrying value of fixed rate time deposits also approximates their fair value. Thus, the carrying value of deposits of $73,513,667 at December 31, 1999, and $35,666,759 at December 31, 1998, do not differ significantly from the fair value. No value has been considered from expected retention of deposits for a future time period. This value, often referred to as a core deposit intangible, is neither included in any fair value amounts nor recorded as an asset in the consolidated balance sheets.
Borrowed Funds
Borrowed funds consist of obligations with terms comparable to those currently available. Thus, the carrying value of these obligations approximates market 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.
NOTE O - SEGMENTS
The Company's principal activity is commercial banking, which includes providing deposit products and commercial, mortgage and consumer loans. These services are provided through the Company's subsidiary banks, which are located in adjacent, but separate, geographic areas. Results of operations and other selected financial information by bank are presented below:
(In thousands) Results of Operations The First Pine Belt --------------------- --------- --------- For the Year Ended December 31, 1999: Interest income $ 4,129 $ 1,309 Interest expense 2,017 597 ----- --- Net interest income 2,112 712 Provision for loan losses 134 274 --- --- Net interest income after provision for loan losses 1,978 438 Other income 358 78
Other expense 2,127 1,029 ----- ----- Net income (loss) before income taxes 209 (513) Income tax benefit 121 - ----- -----
Net income (loss) $ 330 $ (513) ============= ==============
Selected Financial Data
December 31, 1999: Loans, net of reserve for loan losses $ 42,534 $ 18,353 Deposits 50,438 25,228 Total assets 60,699 30,213
The following reconciles the above table to amounts reflected on the consolidated financial statements as of and for the year ended December 31, 1999:
Net income: Net loss of subsidiary banks $ (183) Net income of Company, excluding intercompany accounts 10 -----------
$ 173 =========== Total assets: Total assets of subsidiary banks $ 90,912 Total assets of Company, excluding investment in subsidiaries 2,892 Intercompany eliminations (2,448) -----------
$ 91,356 ===========
NOTE P - PARENT COMPANY FINANCIAL INFORMATION
The balance sheets, statements of operations, and cash flows for The First Bancshares, Inc. (parent only) follow:
Condensed Balance Sheets
December 31, ------------ 1999 1998 ---- ---- Assets: Interest-bearing deposit with subsidiary banks $ 2,151,911 $ 7,055,283 Investment in subsidiary banks 9,581,003 4,895,907 Premises 740,534 811,248 Other - 96,226 --------- ------
$ 12,473,448 $ 12,858,664 ===================== ==================== Liabilities: Stock subscriptions deposits $ - $ 6,432,645 Other - 3,787 Stockholders' equity 12,473,448 6,422,232 ---------- ---------
$ 12,473,448 $ 12,858,664 ===================== ====================
Condensed Statements of Operations
Years Ended December 31, ------------ 1999 1998 ---- ---- Income: Interest $ 96,475 $ 97,944
Expenses: Other 86,066 77,813 ------ ------ Income before income taxes and equity in undistributed income (loss) of subsidiary 10,409 20,131 Income taxes - - -------- ------ Income before equity in undistributed income (loss) of subsidiary 10,409 20,131 Equity in undistributed income (loss) of subsidiary (183,300) 46,641 -------- ------
Net income (loss) $ (172,891) $ 66,772 ================== ===============
Condensed Statements of Cash Flows
Years Ended December 31, ------------ 1999 1998 ---- ---- Cash flows from operating activities: Net income (loss) $ (172,891) $ 66,772 Adjustments to reconcile net income (loss) to net cash and cash equivalents: Equity in undistributed (income) loss of subsidiaries 183,300 (46,641) Other, net 15,505 (67,003) ------ -------
Net cash provided by (used in) operating activities 25,914 (46,872) ------ -------
Cash flows from investing activities: Investment in subsidiary bank (5,000,000) - Acquisition of fixed assets (142,960) (811,248) Sale of premises to subsidiary 213,674 - ------- -------- Net cash used in investing activities (4,929,286) (811,248) ---------- --------
Cash flows from financing activities: Stock subscriptions - 6,432,645 ---------- --------- Net cash provided by financing activities - 6,432,645 ---------- ---------
Net increase (decrease) in cash and cash equivalents (4,903,372) 5,574,525
Cash and cash equivalents at beginning of period 7,055,283 1,480,758 --------- ---------
Cash and cash equivalents at end of period $ 2,151,911 $ 7,055,283 =================== ==================