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FIRST BANCSHARES INC /MS/ - 10-Q - NO. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 14, 2014

FINANCIAL CONDITION

The following discussion contains "forward-looking statements" relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. The words "expect," "estimate," "anticipate," and "believe," as well as similar expressions, are intended to identify forward-looking statements. The Company's actual results may differ materially from the results discussed in the forward-looking statements, and the Company's operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" section in the Company's most recently filed Form 10-K.

The First represents the primary asset of the Company. The First reported total assets of $1.0 billion at June 30, 2014, compared to $941.0 million at December 31, 2013. Loans increased $26.7 million, or 4.6%, during the first six months of 2014. Deposits at June 30, 2014, totaled $884.2 million compared to $780 million at December 31, 2013. For the six month period ended June 30, 2014, The First reported net income of $3.3 million compared to $2.8 million for the six months ended June 30, 2013.

NONPERFORMING ASSETS AND RISK ELEMENTS. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At June 30, 2014, The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas.

At June 30, 2014, The First had loans past due as follows:

($ In Thousands) Past due 30 through 89 days $ 4,322 Past due 90 days or more and still accruing 447



The accrual of interest is discontinued on loans which become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans totaled $6.1 million at June 30, 2014, an increase of $2.9 million from December 31, 2013. Any other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $4.9 million at June 30, 2014. A loan is classified as a restructured loan when the following two conditions are present: First, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower's financial difficulties. At June 30, 2014, the Bank had $5.5 million in loans that were modified as troubled debt restructurings, of which $2.0 million were performing as agreed with modified terms.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity is adequate with cash and cash equivalents of $55.4 million as of June 30,2014. In addition, loans and investment securities repricing or maturing within one year or less exceeded $204.4 million at June 30, 2014. Approximately $124.5 million in loan commitments could fund within the next six months and other commitments, primarily standby letters of credit, totaled $.6 million at June 30, 2014.

There are no known trends or any known commitments or uncertainties that will result in The First's liquidity increasing or decreasing in a significant way.

Total consolidated equity capital at June 30, 2014, was $89.8 million, or approximately 8.9% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies. The Company's capital ratios as of June 30, 2014, were as follows:

Tier 1 leverage 8.54 % Tier 1 risk-based 12.50 % Total risk-based 13.38 %



On June 30, 2006, The Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, The Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. The preferred securities are redeemable by the Company in 2013 or later, at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the authoritative guidance, the trusts are not included in the consolidated financial statements.

RESULTS OF OPERATIONS - QUARTERLY

The Company had a consolidated net income of $1,613,000 for the three months ended June 30, 2014, compared with consolidated net income of $812,000 for the same period last year.

Net interest income increased to $7.8 million from $6.8 million for the three months ended June 30, 2014, or an increase of 15.6% as compared to the same period in 2013. Average earning assets through June 30, 2014, increased $137.3 million, or 18.1% and average interest-bearing liabilities also increased $79.2 million or 12.4% when compared to June 30, 2013.

Noninterest income for the three months ended June 30, 2014, was $2,055,000 compared to $1,890,000 for the same period in 2013, reflecting an increase of $165,000 or 8.7%. The increase for the quarter ended June 30, 2014, is attributed primarily to a gain of $254,000 from the sale of other investments.

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The provision for loan losses was $277,000 for the three months ended June 30, 2014, compared with $349,000 for the same period in 2013. The allowance for loan losses of $6.0 million at June 30, 2014 (approximately .98% of total loans and 1.16% of loans excluding those booked at fair value due to the business combination) is considered by management to be adequate to cover losses inherent in the loan portfolio. The level of this allowance is dependent upon a number of factors, including the total amount of past due loans, general economic conditions, and management's assessment of potential losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions to the allowance may be necessary.

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. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.

Noninterest expense increased by $139,000 or 1.9% for the three months ended June 30, 2014, when compared with the same period in 2013. This increase is primarily related to increases in operating costs associated with the acquisition of First National Bank of Baldwin County, operating costs associated with expansion into Baton Rouge, LA, and acquisition costs associated with the acquisition of Bay Bank. One-time acquisition costs, mainly related to Bay Bank, expensed during the second quarter of 2014 amounted to $128,000 and one-time acquisition costs, related to Baldwin County, expensed during the second quarter of 2013 amounted to $447,000.

RESULTS OF OPERATIONS - YEAR TO DATE

The Company had a consolidated net income of $3,040,000 for the six months ended June 30, 2014, compared with consolidated net income of $2,037,000 for the same period last year.

Net interest income increased to $15.7 million from $12.7 million for the six months ended June 30, 2014, or an increase of 23.6% as compared to the same period in 2013. This increase was primarily a result of increased loan volume.

Noninterest income for the six months ended June 30, 2014, was $3,727,000 compared to $3,820,000 for the same period in 2013, reflecting a decrease of $93,000 or 2.4%. Included in noninterest income is service charges on deposit accounts, which for the six months ended June 30, 2014, totaled $2,037,000 compared to $1,854,000 for the same period in 2013. An increase in fee income associated with higher loan and deposit volumes attributed to this income. The overall decrease for the six months is attributed to a one-time BEA award of $415,000 awarded in 2013 versus a one-time gain on sale of an investment of $254,000.

The provision for loan losses was $635,000 for the six months ended June 30, 2014, compared with $660,000 for the same period in 2013. The allowance for loan losses of $6.0 million at June 30, 2014 (approximately .98% of total loans and 1.16% of loans excluding those booked at fair value due to the business combination) is considered by management to be adequate to cover losses inherent in the loan portfolio. The level of this allowance is dependent upon a number of factors, including the total amount of past due loans, general economic conditions, and management's assessment of potential losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions to the allowance may be necessary.

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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. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.

Noninterest expense increased by $1.4 million or 10.5% for the six months ended June 30, 2014, when compared with the same period in 2013. This increase is primarily related to an increase in operating costs associated with the acquisition of First National Bank of Baldwin County, as well as an increase in salaries and employee benefits associated with the expansion into Baton Rouge, LA, as well as costs associated with the acquisition of Bay Bank.


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Source: Edgar Glimpses


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