Company Quick10K Filing
Quick10K
First Bancshares
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$30.99 17 $535
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-29 Regulation FD, Exhibits
8-K 2019-07-22 Earnings, Regulation FD, Exhibits
8-K 2019-07-22 Enter Agreement, Other Events, Exhibits
8-K 2019-05-16
8-K 2019-05-06 Other Events, Exhibits
8-K 2019-04-22 Earnings, Regulation FD, Exhibits
8-K 2019-01-28 Earnings, Regulation FD, Exhibits
8-K 2018-11-06 Enter Agreement, Exhibits
8-K 2018-10-31 M&A, Other Events, Exhibits
8-K 2018-10-23 Earnings, Regulation FD, Exhibits
8-K 2018-07-23 Earnings, Regulation FD, Exhibits
8-K 2018-07-23 Enter Agreement, Exhibits
8-K 2018-05-24
8-K 2018-04-30 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-04-24 Earnings, Regulation FD, Exhibits
8-K 2018-04-01 M&A, Other Events, Exhibits
8-K 2018-03-01 M&A, Other Events, Exhibits
8-K 2018-02-15 Accountant, Exhibits
8-K 2018-01-26 Earnings, Regulation FD, Exhibits
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RGLS Regulus Therapeutics 13
ASTI Ascent Solar Technologies 0
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AERO Aerogrow 0
FBMS 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Note 1 -- Basis of Presentation
Note 2 -- Summary of Organization
Note 3 -- Recent Accounting Pronouncements
Note 4 - Business Combinations
Note 5 -- Earnings Applicable To Common Stockholders
Note 6 - Comprehensive Income
Note 7 - Financial Instruments with Off-Balance-Sheet Risk
Note 8 - Fair Value Disclosures and Reporting, The Fair Value Option and Fair Value Measurements
Note 9 - Securities
Note 10 - Loans
Note 11 - Revenue From Contracts with Customers
Note 12 - Leases
Note 13 - Subsequent Events/Other
Note 14 - Reclassification
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tv526074_ex31-1.htm
EX-31.2 tv526074_ex31-2.htm
EX-32.1 tv526074_ex32-1.htm
EX-32.2 tv526074_ex32-2.htm

First Bancshares Earnings 2019-06-30

FBMS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv526074_10q.htm FORM 10-Q

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2019

 

OR

 

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

 

For the transition period from _______ to ________

 

Commission file number: 000-22507

 

THE FIRST BANCshARES, INC.

(Exact name of Registrant as specified in its charter)

 

Mississippi 64-0862173
(State of Incorporation) (IRS Employer Identification No)

 

6480 U.S. Highway 98 West, Suite A, Hattiesburg, Mississippi 39402

(Address of principal executive offices)                                           (Zip Code)

 

(601) 268-8998

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $1.00 FBMS The Nasdaq Stock Market

 

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

 

Yes þ   No ¨

 

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

 

Yes þ   No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer þ
Non-accelerated filer ¨ Smaller Reporting Company ¨
Emerging growth company ¨

 

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

 

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

 

Yes ¨   No þ

 

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

 

Common stock, $1.00 par value, 17,308,308 shares issued and 17,138,248 outstanding as of August 2, 2019.

 

 

 

 

 

The First Bancshares, Inc.

Form 10-Q

Quarter Ended June 30, 2019

Index

 

Part I. Financial Information  
     
Item 1. Financial Statements 3
  Consolidated Balance Sheets—Unaudited at June 30, 2019 3
  Consolidated Statements of Income—Unaudited 4
  Consolidated Statements of Comprehensive Income—Unaudited 5
  Consolidated Statements of Changes in Stockholders’ Equity—Unaudited 6
  Consolidated Statements of Cash Flows—Unaudited 8
  Notes to Consolidated Financial Statements—Unaudited 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures about Market Risk 49
Item 4. Controls and Procedures 51
     
Part II. Other Information  
     
Item 1. Legal Proceedings 54
Item 1A. Risk Factors 54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
Item 3. Defaults Upon Senior Securities 54
Item 4. Mine Safety Disclosures 54
Item 5. Other Information 54
Item 6. Exhibits 55
Signatures 56

 

2

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands)

 

   (Unaudited)   (Audited) 
   June 30,   December 31, 
   2019   2018 
ASSETS          
Cash and due from banks  $77,032   $71,356 
Interest-bearing deposits with banks   88,952    87,751 
Federal funds sold   -    - 
           
Total cash and cash equivalents   165,984    159,107 
           
Securities held-to-maturity, at amortized cost   6,396    6,000 
Securities available-for-sale, at fair value   598,607    492,224 
Other securities   17,819    16,704 
           
Total securities   622,822    514,928 
           
Loans held for sale   8,597    4,838 
Loans   2,351,998    2,060,422 
Allowance for loan losses   (12,091)   (10,065)
           
Loans, net   2,348,504    2,055,195 
           
Interest receivable   12,828    10,778 
Premises and equipment   97,115    74,783 
Cash surrender value of bank-owned life insurance   58,971    50,796 
Goodwill   119,202    89,750 
Other real estate owned   11,205    10,869 
Other assets   35,953    37,780 
           
TOTAL ASSETS  $3,472,584   $3,003,986 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Deposits:          
Noninterest-bearing  $645,838   $570,148 
Interest-bearing   2,185,362    1,887,311 
           
TOTAL DEPOSITS   2,831,200    2,457,459 
           
Interest payable   1,785    1,519 
Borrowed funds   71,250    85,500 
Subordinated debentures   80,600    80,521 
Other liabilities   21,468    15,733 
           
TOTAL LIABILITIES   3,006,303    2,640,732 
           
           
STOCKHOLDERS’ EQUITY:          
Common stock, par value $1 per share, 40,000,000 shares authorized; 17,299,975 shares issued at June 30, 2019, and 14,857,092 shares issued at December 31, 2018, respectively   17,300    14,857 
Additional paid-in capital   355,217    278,659 
Retained earnings   89,231    71,998 
Accumulated other comprehensive gain (loss)   9,439    (1,796)
Treasury stock, at cost, 170,060 shares at June 30, 2019 and 26,494 Shares at December 31, 2018   (4,906)   (464)
           
TOTAL STOCKHOLDERS’ EQUITY   466,281    363,254 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $3,472,584   $3,003,986 

 

See Notes to Consolidated Financial Statements

 

3

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

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

 

   (Unaudited)   (Unaudited) 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
INTEREST INCOME:                    
Interest and fees on loans  $32,464   $21,714   $61,269   $37,699 
Interest and dividends on securities:                    
Taxable interest and dividends   4,241    2,423    7,832    4,409 
Tax exempt interest   790    758    1,548    1,433 
Interest on federal funds sold and interest bearing deposits in other banks   76    142    196    254 
                     
TOTAL INTEREST INCOME   37,571    25,037    70,845    43,795 
                     
INTEREST EXPENSE:                    
Interest on deposits   5,322    2,547    9,686    4,387 
Interest on borrowed funds   1,477    921    3,255    1,459 
                     
TOTAL INTEREST EXPENSE   6,799    3,468    12,941    5,846 
                     
NET INTEREST INCOME   30,772    21,569    57,904    37,949 
                     
                     
PROVISION FOR LOAN LOSSES   791    857    1,913    1,134 
                
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   29,981    20,712    55,991    36,815 
                     
                     
NON-INTEREST INCOME:                    
Service charges on deposit accounts   1,918    1,341    3,750    2,368 
Other service charges and fees   4,798    4,291    8,520    6,723 
TOTAL NON-INTEREST INCOME   6,716    5,632    12,270    9,091 
                     
NON-INTEREST EXPENSES:                    
Salaries and employee benefits   11,615    9,502    22,312    17,291 
Occupancy and equipment   2,532    2,034    4,974    3,680 
Acquisition and integration charges   91    3,838    3,270    5,596 
Other   6,653    4,306    12,230    7,710 
                     
TOTAL NON-INTEREST EXPENSES   20,891    19,680    42,786    34,277 
                     
INCOME BEFORE INCOME TAXES   15,806    6,664    25,475    11,629 
                     
INCOME TAXES   3,823    1,419    5,857    2,427 
                     
NET INCOME  $11,983   $5,245   $19,618   $9,202 
                     
BASIC EARNINGS PER SHARE  $0.70   $0.40   $1.20   $0.75 
DILUTED EARNINGS PER SHARE   0.69    0.40    1.19    0.74 

 

See Notes to Consolidated Financial Statements

 

4

 

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

  

   (Unaudited)   (Unaudited) 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Net income per consolidated statements of income  $11,983   $5,245   $19,618   $9,202 
                     
Other Comprehensive Income:                    
                     
Unrealized holding gains/(losses) arising during period on available-for-sale securities   7,117    (926)   15,140    (5,410)
                     
Reclassification adjustment for (gains)/ losses included in net income   (36)   -    (74)   - 
                     
Unrealized holding gains/(losses) arising during period on available-for-sale securities   7,081    (926)   15,066    (5,410)
                     
Income tax (expense) benefit   (1,768)   234    (3,831)   1,367 
                     
Other comprehensive income (loss)   5,313    (692)   11,235    (4,043)
                     
   Comprehensive Income  $17,296   $4,553   $30,853   $5,159 

 

See Notes to Consolidated Financial Statements

 

5

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in thousands except per share data, unaudited)

 

   Common Stock   Additional
Paid-in
   Retained   Accumulated
Other
Comprehensive
   Treasury Stock     
   Shares   Amount   Capital   Earnings   Income (Loss)   Shares   Amount   Total 
Balance, March 31, 2018   12,365,986   $12,366   $193,302   $57,124   $(3,789)   (26,494)  $(464)  $258,539 
Net income   -    -    -    5,245    -         -    5,245 
Other comprehensive income   -    -    -    -    (692)   -    -    (692)
Dividends on common stock, $0.05 per share   -    -    -    (651)   -    -    -    (651)
Issuance of 726,461 common shares for Sunshine acquisition   726,461    726    22,702    -    -    -    -    23,428 
Compensation expense   -    -    306    -    -    -    -    306 
ASU 2016-01 Implementation   -    -    -    (349)   -    -    -    (349)
Balance, June 30, 2018   13,092,447   $13,092   $216,310   $61,369   $(4,481)   (26,494)  $(464)  $285,826 
                                         
Balance, March 31, 2019   17,299,225   $17,299   $354,792   $78,594   $4,126    (26,494)  $(464)  $454,347 
Net income   -    -    -    11,983    -         -    11,983 
Common stock repurchased   -    -    -    -    -    (143,566)   (4,442)   (4,442)
Other comprehensive income   -    -    -    -    5,313    -    -    5,313 
Dividends on common stock, $0.08 per share   -    -    -    (1,346)   -    -    -    (1,346)
Issuance of restricted stock grants   750    1    (1)   -    -    -    -    - 
Compensation expense   -    -    426    -    -    -    -    426 
Balance, June 30, 2019   17,299,975   $17,300   $355,217   $89,231   $9,439    (170,060)  $(4,906)  $466,281 

 

6

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - CONTINUED

($ in thousands except per share amount, unaudited)

 

   Common Stock   Additional
Paid-in
   Retained   Accumulated
Other
Comprehensive
   Treasury Stock     
   Shares   Amount   Capital   Earnings   Income (Loss)   Shares   Amount   Total 
Balance, January 1, 2018   11,192,401   $11,192   $158,456   $53,722   $(438)   (26,494)  $(464)  $222,468 
Net income   -    -    -    9,202    -    -    -    9,202 
Other comprehensive income   -    -    -    -    (4,043)   -    -    (4,043)
Dividends on common stock, $0.10 per share        -    -    (1,206)   -    -    -    (1,206)
Issuance of 1,134,010 common shares for Southwest acquisition   1,134,010    1,134    34,871    -    -    -    -    36,005 
Issuance of 726,461 common shares for Sunshine acquisition   726,461    726    22,702                        23,428 
Issuance restricted stock grants   51,851    52    (52)   -    -    -    -    - 
Restricted stock grant forfeited   (12,276)   (12)   12    -    -    -    -    - 
Expenses associated with common stock issuance        -    (237)   -    -    -    -    (237)
Compensation expense        -    558    -    -    -    -    558 
ASU 2016-01 Implementation        -    -    (349)   -    -    -    (349)
Balance, June 30, 2018   13,092,447   $13,092   $216,310   $61,369   $(4,481)   (26,494)  $(464)  $285,826 
                                         
Balance, January 1, 2019   14,857,092   $14,857   $278,659   $71,998   $(1,796)   (26,494)  $(464)  $363,254 
Net income        -    -    19,618    -    -    -    19,618 
Common stock repurchased        -    -    -    -    (143,566)   (4,442)   (4,442)
Other comprehensive income        -    -    -    11,235    -    -    11,235 
Dividends on common stock, $0.15 per share        -    -    (2,385)   -    -    -    (2,385)
Issuance of 2,377,501 common shares for FPB acquisition   2,377,501    2,378    75,842    -    -    -    -    78,220 
Issuance restricted stock grants   66,882    67    (67)   -    -    -    -    - 
Restricted stock grant forfeited   (1,500)   (2)   2    -    -    -    -    - 
Compensation expense   -    -    781    -    -    -    -    781 
Balance, June 30, 2019   17,299,975   $17,300   $355,217   $89,231   $9,439    (170,060)  $(4,906)  $466,281 

 

See Notes to Consolidated Financial Statements

 

7

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

 

   (Unaudited) 
   Six Months Ended 
   June 30, 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
NET INCOME  $19,618   $9,202 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   1,297    2,121 
Provision for loan losses   1,913    1,134 
Loss on sale/writedown of ORE   382    52 
Securities (gain)/losses   (74)   - 
Loss on sale of premises and equipment   8    - 
Restricted stock expense   781    558 
Increase in cash value of life insurance   (863)   (411)
Federal Home Loan Bank stock dividends   (101)   (64)
Payments on operating leases   (350)   - 
Changes in:          
Interest receivable   (691)   (17)
Loans held for sale, net   (3,772)   (1,121)
Interest payable   191    696 
Other, net   (1,183)   (269)
NET CASH PROVIDED BY OPERATING ACTIVITIES   17,156    11,881 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Maturities, calls and paydowns of available-for-sale and held-to-maturity securities   44,075    30,021 
Proceeds from sales of securities available-for-sale   23,003    18,573 
Purchases of available-for-sale securities   (67,147)   (57,039)
Redemptions of other securities   292    2,436 
Net increase in loans   (45,357)   (48,042)
Net increase in premises and equipment   (4,427)   (2,424)
Proceeds from sale of other real estate owned   1,107    985 
Proceeds from the sale of land   422    - 
Proceeds from the sale of other assets   65    - 
Cash received in excess of cash paid for acquisitions   14,743    29,901 
NET CASH USED IN INVESTING ACTIVITIES   (33,224)   (25,589)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Increase in deposits   61,254    117,435 
Net decrease in borrowed funds   (31,500)   (138,664)
Dividends paid on common stock   (2,367)   (1,188)
Expenses associated with capital raise   -    (237)
Cash paid to repurchase common stock   (4,442)   - 
Issuance of subordinated debt, net   -    64,866 
NET CASH PROVIDED BY FINANCING ACTIVITIES   22,945    42,212 
           
NET INCREASE IN CASH   6,877    28,504 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   159,107    91,921 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $165,984   $120,425 
           
SUPPLEMENTAL DISCLOSURES:          
           
Cash payments for interest   5,008    4,964 
Loans transferred to other real estate   1,310    985 
Issuance of restricted stock grants   67    52 
Stock issued in connection with Southwest acquisition   -    36,005 
Stock issued in connection with Sunshine acquisition   -    23,428 
Stock issued in connection with FPB acquisition   78,220    - 
Dividends on restricted stock grants   18    18 
Right-of-use assets obtained in exchange for operating lease liabilities   4,354    - 

 

See Notes to Consolidated Financial Statements

 

8

 

 

 

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2019

 

NOTE 1 -- BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2018.

 

NOTE 2 -- SUMMARY OF ORGANIZATION

 

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

 

At June 30, 2019, the Company had approximately $3.473 billion in assets, $2.349 billion in net loans, $2.831 billion in deposits, and $466.3 million in stockholders' equity. For the six months ended June 30, 2019, the Company reported net income of $19.6 million. After tax merger related costs of $2.5 million were expensed during the six months ended June 30, 2019.

 

On May 24, 2019, the Company paid a cash dividend in the amount of $0.08 per share to shareholders of record as of the close of business on Friday, May 10, 2019.

 

On February 26, 2019, the Company paid a cash dividend in the amount of $0.07 per share to shareholders of record as of the close of business on Monday, February 11, 2019.

 

NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2019, the FASB issued ASU No. 2019-01, Leases: Codification Improvements. ASU 2019-01 provides clarification to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. This ASU (1) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to continue to be its cost and not fair value as measured under the fair value definition, (2) allows for the payments received from sales-type and direct financing leases to continue to be presented as results from investing activities in the statement of cash flows, and (3) clarifies that entities do not have to disclose the effect of the lease standard on adoption year interim amounts. ASU 2019-01 will be effective on January 1, 2020 and will not have a material impact on the Company’s Consolidated Financial Statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-11 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect for early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. The revised disclosure requirements will not have a material impact on the Company’s Consolidated Financial Statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 has been issued as part of a simplification initiative which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees and expands the scope through the amendments to address and improve aspects of the accounting for non-employee share-based payment transactions. The amendments were effective for interim and annual reporting periods beginning after December 15, 2018. ASU 2018-07 did not have a material impact on the Company’s Consolidated Financial Statements.

 

9

 

 

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The guidance is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing ASU 2018-15 and the impact the new standard will have on its Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is currently assessing the impact of ASU 2017-04 on its Consolidated Financial Statements.

 

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires a new impairment model known as the current expected credit loss (“CECL”) which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary-impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. The Company is currently working with a third party to assess the impact of the adoption of ASU 2016-13 on its Consolidated Financial Statements. While we are currently unable to reasonably estimate the impact of the adoption of ASU 2016-13, we expect that the impact of adoption could be influenced by the composition, characteristics and quality of our loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date. As part of our implementation process, the working group that is responsible for quarterly allowance for loan and lease losses (“ALLL”) model review and approval, also serves as the Bank’s CECL Implementation Team. These individuals come from various functional areas including Accounting, Credit Administration, Risk Management and Portfolio Management; as well as the CEO. The Bank has engaged the same third party vendor that currently provides ALLL modeling software and support to assist with the development of a CECL model that will be ready for use as of the adoption date. During the development phase of building a model specific to the needs of the Bank, concurrent CECL modeling will be performed to generate a loss projection using the new model for each quarter of 2019. This model estimate will be reviewed and discussed by the Implementation Team after each quarterly run as it does with the current ALLL Model. The Implementation Team will provide direction to management and the third party vendor throughout the implementation process.

 

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If neither risks and rewards nor control is conveyed, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases – Targeted Improvements. ASU 2018-11 provides entities with relief from the costs of implementing certain aspects of ASU 2016-02. Under the amendments in ASU 2018-11 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard and lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02, January 1, 2019. We elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and did not restate comparative periods. Our operating leases relate primarily to bank branches. As a result of the adoption of ASC 842 on January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets of $1.8 million and lease liabilities of $1.8 million. ROU assets are adjusted for lease incentives. The adoption of ASC 842 did not have a material impact on our Consolidated Statements of Income or Consolidated Statements of Cash Flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded in premises and equipment and other liabilities, respectively, in the Consolidated Balance Sheets. See Note 12 – Leases for additional information.

 

NOTE 4 – BUSINESS COMBINATIONS

 

Acquisitions

 

FPB Financial Corp.

 

On March 2, 2019, the Company completed its acquisition of FPB Financial Corp., (“FPB”), and immediately thereafter merged its wholly-owned subsidiary, Florida Parishes Bank with and into The First. The company paid a total consideration of approximately $78.2 million in stock to the FPB shareholders as consideration in the merger, which included 2,377,501 shares of Company common stock, and approximately $5 thousand in cash.

 

In connection with the acquisition, the Company recorded approximately $29.6 million of goodwill and $4.8 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

 

10

 

 

The Company acquired the $247.8 million loan portfolio at an estimated fair value discount of $3.1 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

 

Expenses associated with the acquisition were $2.1 million for the six months period ended June 30, 2019. These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

 

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed on March 2, 2019 ($ in thousands):

 

Purchase price:  $78,225 
Cash and stock   78,225 
Total purchase price     
      
Identifiable assets:     
Cash and due from banks   14,748 
Investments   93,604 
Loans   244,665 
Bank owned life insurance   7,312 
Core deposit intangible   4,793 
Personal and real property   17,358 
Other assets   2,135 
Total assets   384,615 
      
Liabilities and equity:     
Deposits   312,453 
Borrowed funds   17,250 
Other liabilities   6,291 
Total liabilities   335,994 
Net assets acquired   48,621 
Goodwill resulting from acquisition  $29,604 

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of acquisition and at June 30, 2019, are as follows ($ in thousands):

 

   March 2, 2019   June 30, 2019 
Outstanding principal balance  $247,774   $231,928 
Carrying amount   244,665    229,208 

 

Purchased credit impaired loans are detailed in Note 10 – Loans.

 

FMB Financial Corp.

 

On November 1, 2018, the Company completed its acquisition of FMB Banking Corporation (“FMB”), and immediately thereafter merged its wholly-owned subsidiary, Farmers & Merchants Bank, with and into The First. The Company paid a total consideration of approximately $79.5 million to the former FMB shareholders including 1,763,042 shares of the Company’s common stock and approximately $16.0 million in cash.

 

In connection with the acquisition, the Company recorded approximately $36.2 million of goodwill and $10.2 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

 

The Company acquired FMB’s $325.5 million loan portfolio at an estimated fair value discount of $7.6 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

 

11

 

 

Expenses associated with the acquisition were $556 thousand for the six months period ended June 30, 2019. These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

 

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed on November 1, 2018 ($ in thousands):

 

Purchase price:    
Cash and stock  $79,547 
Total purchase price   79,547 
      
Identifiable assets:     
Cash and due from banks   28,556 
Investments   97,331 
Loans   317,909 
Bank owned life insurance   13,639 
Core deposit intangible   10,203 
Personal and real property   15,204 
Other assets   3,054 
Total assets   485,896 
      
Liabilities and equity:     
Deposits   431,276 
Borrowed funds   5,369 
Other liabilities   5,894 
Total liabilities   442,539 
Net assets acquired   43,357 
Goodwill resulting from acquisition  $36,190 

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the acquisition date and at June 30, 2019, are as follows ($ in thousands):

 

   November 1, 2018   June 30, 2019 
Outstanding principal balance  $325,509   $272,947 
Carrying amount   317,909    266,883 

 

Purchased credit impaired loans are detailed in Note 10 – Loans.

 

Sunshine Financial, Inc.

 

On April 1, 2018, the Company completed its acquisition of Sunshine Financial, Inc., (“Sunshine”), and immediately thereafter merged its wholly-owned subsidiary, Sunshine Community Bank, with and into The First. The Company paid a total consideration of $30.5 million to the Sunshine shareholders as consideration in the merger which included 726,461 shares of Company common stock and $7 million in cash.

 

In connection with the acquisition, the Company recorded $9.5 million of goodwill and $4.1 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

 

The Company acquired the $173.1 million loan portfolio at an estimated fair value discount of $4.5 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

 

Expenses associated with the acquisition were $250 thousand for the six months period ended June 30, 2019. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.

 

12

 

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of acquisition and at June 30, 2019, are as follows ($ in thousands):

 

   April 1, 2018   June 30, 2019 
Outstanding principal balance  $173,052   $152,583 
Carrying amount   168,561    149,665 

 

Purchased credit impaired loans are detailed in Note 10 – Loans.

 

Southwest Banc Shares, Inc.

 

On March 1, 2018, the Company completed its acquisition of Southwest Banc Shares, Inc., (“Southwest”), and immediately thereafter merged its wholly-owned subsidiary, First Community Bank, with and into The First. The Company paid a total consideration of $60.0 million to the Southwest shareholders as consideration in the merger which included 1,134,010 shares of Company common stock and $24 million in cash.

 

In connection with the acquisition, the Company recorded $23.9 million of goodwill and $5.8 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

 

The Company acquired the $274.7 million loan portfolio at an estimated fair value discount of $3.5 million. The discount represents expected credit losses, adjusted for market interest rates, and liquidity adjustments.

 

Expenses associated with the acquisition were $368 thousand for the six months period ended June 30, 2019. These costs included systems conversions and integrating operations charges, as well as legal and consulting expenses, which have been expensed as incurred.

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of acquisition and at June 30, 2019, are as follows ($ in thousands):

 

   March 1, 2018   June 30, 2019 
Outstanding principal balance  $274,669   $174,041 
Carrying amount   271,150    172,343 

 

Purchased credit impaired loans are detailed in Note 10 – Loans.

 

Supplemental Pro-Forma Financial Information

 

The following unaudited pro-forma financial data for the six months ended June 30, 2019 and June 30, 2018 presents supplemental information as if the Southwest, Sunshine, FMB, and FPB acquisitions had occurred on January 1, 2018. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

 

    Pro-Forma     Pro-Forma  
($ in thousands)   Six Months
Ended
June 30, 2019
    Six Months
Ended
June 30, 2018
 
    (unaudited)     (unaudited)  
Net interest income   $ 62,961     $ 50,032  
Non-interest income     11,983       11,515  
Total revenue     74,944       61,547  
Income before income taxes     34,354       22,224  

 

13

 

 

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

 

Non-credit impaired loans acquired in the acquisitions were accounted for in accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs. Purchased credit impaired loans acquired in the Southwest, Sunshine, FMB and FPB acquisitions were accounted for in accordance with ASC 310-30 Accounting for Purchased Loans with Deteriorated Credit Quality.

 

NOTE 5 -- EARNINGS APPLICABLE TO COMMON STOCKHOLDERS

 

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

 

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

 

   For the Three Months Ended 
   June 30, 2019 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
Basic earnings per share  $11,983    17,182   $0.70 
                
Effect of dilutive shares:               
Restricted stock grants        130      
                
Diluted earnings per share  $11,983    17,312   $0.69 

 

   For the Six Months Ended 
   June 30, 2019 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
Basic earnings per share  $19,618    16,414   $1.20 
                
Effect of dilutive shares:               
Restricted stock grants        130      
                
Diluted earnings per share  $19,618    16,544   $1.19 

 

14

 

 

   For the Three Months Ended 
   June 30, 2018 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
Basic earnings per share  $5,245    13,066   $0.40 
                
Effect of dilutive shares:               
Restricted stock grants        102      
                
Diluted earnings per share  $5,245    13,168   $0.40 

 

   For the Six Months Ended 
   June 30, 2018 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
Basic earnings per share  $9,202    12,311   $0.75 
                
Effect of dilutive shares:               
  Restricted stock grants        102      
                
Diluted earnings per share  $9,202    12,413   $0.74 

 

The Company granted 66,132 shares of restricted stock in the first quarter of 2019 and 51,851 shares of restricted stock in the first quarter of 2018. The Company granted 750 shares of restricted stock in the second quarter of 2019 and made no grants of restricted stock during the second quarter of 2018.

 

NOTE 6 – COMPREHENSIVE INCOME

 

As presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive income. The Company’s sources of other comprehensive income are unrealized gains and losses on available-for-sale debt securities. Gains or losses on debt securities that had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose were realized and reflected in net income of the current period, and as a result are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.

 

NOTE 7 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. At June 30, 2019, and December 31, 2018, these financial instruments consisted of the following:

 

   June 30, 2019   December 31, 2018 
($ in thousands)  Fixed Rate   Variable Rate   Fixed Rate   Variable Rate 
Commitments to make loans  $74,224   $8,857   $32,624   $36,780 
Unused lines of credit   111,229    199,977    115,524    131,741 
Commercial & similar letters of credit   2,354    8,759    2,357    8,367 

 

15

 

 

 

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 0.5% to 19.7% and maturities ranging from approximately 1 year to 30 years.

 

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

 

FASB’s standards on financial instruments, and on fair value measurements and disclosures, require all entities to disclose in their financial statement footnotes the estimated fair values of financial instruments for which it is practicable to estimate fair values. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities which are classified as available-for-sale and our equity securities that have readily determinable fair values be measured and reported at fair value in our Consolidated Financial Statements. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any of those financial instruments.

 

Fair value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:

 

·Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
   
·Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
   
·Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

 

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. The estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to realized gains and losses could have a significant effect on fair value estimates but have not been considered in those estimates. Because no active market exists for a significant portion of our financial instruments, fair value disclosures are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. The estimates are subjective and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly alter the fair values presented. The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at June 30, 2019 and December 31, 2018:

 

·Cash and cash equivalents and fed funds sold: The carrying amount is estimated to be fair value.
   
·Securities (available-for-sale, held-to-maturity and other): The fair value for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
   
·Loans and leases: The fair value of loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities, in accordance with the exit price notion as defined by FASB ASC 820, Fair Value Measurement ("ASC 820"). Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments and as a result of the adoption of ASU 2016-01, which also included credit risk and other market factors to calculate the exit price fair value in accordance with ASC 820. Starting with the first quarter of 2018, the Company began using an exit price notion when measuring the fair value of its loan portfolio, excluding loans held for sale, for disclosure purposes.
   
·Loans held for sale: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are held on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.

 

16

 

 

·Collateral-dependent impaired loans: Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.
   
·Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value and is classified as level 2 for accrued interest receivable related to investment securities and Level 3 for accrued interest receivable related to loans.
   
·Deposits (non-interest-bearing and interest-bearing): Fair values for non-maturity deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
   
·FHLB and other borrowings: Current carrying amounts are used as an approximation of fair values for federal funds purchased, overnight advances from the Federal Home Loan Bank (“FHLB”), borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days of the reporting dates. Fair values of other short-term borrowings are estimated by discounting projected cash flows at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
   
·Long-term borrowings: Fair values are estimated using projected cash flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
   
·Subordinated debentures: Fair values are determined based on the current market value for like instruments of a similar maturity and structure.
   
·Accrued interest payable: The carrying amount of accrued interest payable approximates its fair value resulting in a Level 2 classification.
   
·Off-balance sheet instruments: Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.

 

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

 

As of June 30, 2019          Fair Value Measurements 
($ in thousands)  Carrying
Amount
   Estimated
Fair Value
   Quoted
Prices
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial Instruments:                         
Assets:                         
Cash and cash equivalents  $165,984   $165,984   $165,984   $-   $- 
Securities available-for-sale:                         
Obligations of U.S. Government agencies and sponsored entities   65,618    65,618    -    65,618    - 
Municipal securities   161,890    161,890    -    150,837    11,053 
Mortgage-backed securities   360,479    360,479    -    360,479    - 
Corporate obligations   10,620    10,620    -    10,192    428 
Securities held-to-maturity   6,396    7,627    -    7,627    - 
Loans, net   2,348,504    2,315,729    -    -    2,315,729 
Accrued interest receivable   12,828    12,828    -    3,338    9,490 
                          
Liabilities:                         
Non-interest-bearing deposits  $645,838   $645,838   $-   $645,838   $- 
Interest-bearing deposits   2,185,362    2,175,841    -    2,175,841    - 
Subordinated debentures   80,600    77,950    -    -    77,950 
FHLB and other borrowings   71,250    71,250    -    71,250    - 
Accrued interest payable   1,785    1,785    -    1,785    - 

 

 

17

 

 

As of December 31, 2018          Fair Value Measurements 
($ in thousands)  Carrying
Amount
   Estimated
Fair Value
   Quoted
Prices
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial Instruments:                         
Assets:                         
Cash and cash equivalents  $159,107   $159,107   $159,107   $-   $- 
Securities available-for-sale:                         
Obligations of U.S. Government agencies and sponsored entities   47,342    47,342    -    47,342    - 
Municipal securities   150,064    150,064    -    142,490    7,574 
Mortgage-backed securities   287,470    287,470    -    287,470    - 
Corporate obligations   7,348    7,348    -    6,474    874 
Securities held-to-maturity   6,000    7,028    -    7,028    - 
Loans, net   2,055,195    2,020,782    -    -    2,020,782 
Accrued interest receivable   10,778    10,778    -    2,673    8,105 
                          
Liabilities:                         
Noninterest-bearing deposits  $570,148   $570,148   $-   $570,148   $- 
Interest-bearing deposits   1,887,311    1,855,637    -    1,855,637    - 
Subordinated debentures   80,521    76,986    -    -    76,986 
FHLB and other borrowings   85,500    85,500    -    85,500    - 
Accrued interest payable   1,519    1,519    -    1,519    - 

 

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 of the valuation hierarchy, and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities include U. S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

 

Assets measured at fair value on a recurring basis are summarized below:

 

June 30, 2019      Fair Value Measurements Using 
       Quoted Prices in
Active Markets
For
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
($ in thousands)  Fair Value   (Level 1)   (Level 2)   (Level 3) 
Available-for-sale                      
Obligations of U.S. Government agencies and sponsored entities     $  65,618        $                -        $ 65,618        $         -   
Municipal securities   161,890      -    150,837    11,053 
Mortgage-backed securities   360,479    -    360,479    - 
Corporate obligations   10,620    -    10,192    428 
Total available-for-sale  $598,607   $-   $587,126   $11,481 

 

18

 

 

December 31, 2018       Fair Value Measurements Using 
       Quoted Prices in
Active Markets
For
Identical Assets
   Significant Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
($ in thousands)  Fair Value   (Level 1)   (Level 2)   (Level 3) 
Available-for-sale                    
Obligations of U.S. Government agencies and sponsored entities  $47,342   $-   $47,342   $- 
Municipal securities   150,064    -    142,490    7,574 
Mortgage-backed securities   287,470    -    287,470    - 
Corporate obligations   7,348    -    6,474    874 
Total available-for-sale  $492,224   $-   $483,776   $8,448 

 

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information.

 

   Bank-Issued Trust
Preferred Securities
 
($ in thousands)   2019    2018 
Balance, January 1  $874   $2,569 
Unrealized (loss) gain included in comprehensive income   (446)   (1,695)
Balance at June 30, 2019 and December 31, 2018  $428   $874 

 

   Municipal Securities 
($ in thousands)  2019   2018 
Balance, January 1  $7,574   $4,818 
Unrealized (loss) gain included in comprehensive income   3,479    2,756 
Balance at June 30, 2019 and December 31, 2018  $11,053   $7,574 

 

The following table presents quantitative information about recurring Level 3 fair value measurements ($ in thousands):

 

Trust Preferred Securities  Fair Value   Valuation Technique  Significant
Unobservable Inputs
  Range of Inputs
June 30, 2019  $428   Discounted cash flow  Probability of default  3.05% - 4.59%
December 31, 2018  $874   Discounted cash flow  Probability of default  3.71% - 5.03%

 

Municipal Securities  Fair Value   Valuation Technique  Significant
Unobservable Inputs
  Range of Inputs
June 30, 2019  $11,053   Discounted cash flow  Discount Rate  2.00% - 2.80%
December 31, 2018  $7,574   Discounted cash flow  Discount Rate  2.00% - 3.50%

 

Following is a description of the valuation methodologies used for assets measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Impaired Loans

 

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment.

 

19

 

 

Other Real Estate Owned

 

Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals of the collateral less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other non-interest income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recorded in other non-interest income. Other real estate measured at fair value on a non-recurring basis at June 30, 2019, amounted to $11.2 million. Other real estate owned is classified within Level 3 of the fair value hierarchy.

 

The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements were classified at June 30, 2019 and December 31, 2018.

 

June 30, 2019      Fair Value Measurements Using 
       Quoted Prices in
Active Markets
For
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
($ in thousands)  Fair Value   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $11,474   $  -   $  -   $11,474 
                     
Other real estate owned   11,205    -    -    11,205 

 

December 31, 2018      Fair Value Measurements Using 
       Quoted Prices in
Active Markets
For
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
($ in thousands)  Fair Value   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $11,571   $  -   $  -   $11,571 
                     
Other real estate owned   10,869    -    -    10,869 

 

NOTE 9 - SECURITIES

 

The following disclosure of the estimated fair value of financial instruments is made in accordance with authoritative guidance. The estimated fair value amounts have been determined using available market information and valuation methodologies that management believes are appropriate. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

20

 

 

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at June 30, 2019 and December 31, 2018, follows:

 

   June 30, 2019 
($ in thousands)  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Available-for-sale securities:                    
Obligations of U.S. Government agencies and sponsored entities  $63,456   $2,163   $1   $65,618 
Tax-exempt and taxable obligations of states and municipal subdivisions   158,645    3,319    74    161,890 
Mortgage-backed securities   353,271    7,442    234    360,479 
Corporate obligations   10,635    88    103    10,620 
Total  $586,007   $13,012   $412   $598,607 

 

   Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Estimated
Fair
Value
 
Held-to-maturity securities:                    
Taxable obligations of states and municipal subdivisions  $6,000   $1,237   $                        -   $7,237 
Mortgage-backed securities   396    -    6    390 
Total  $6,396   $1,237   $6   $7,627 

 

   December 31, 2018 
($ in thousands)  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Available-for-sale securities:                    
Obligations of U.S. Government agencies sponsored entities  $47,212   $405   $275   $47,342 
Tax-exempt and taxable obligations of states and municipal subdivisions   150,215    1,070    1,221    150,064 
Mortgage-backed securities   289,745    1,171    3,446    287,470 
Corporate obligations   7,518    15    185    7,348 
Total  $494,690   $2,661   $5,127   $492,224 

 

   Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Estimated
Fair
Value
 
Held-to-maturity securities:                    
Taxable obligations of states and municipal subdivisions  $6,000   $1,028   $                        -   $7,028 

 

21

 

 

The scheduled maturities of securities at June 30, 2019 and December 31, 2018 were as follows:

 

   June 30, 2019 
   Available-for-Sale   Held-to-Maturity 
($ in thousands)  Amortized
Cost
   Estimated
Fair
Value
   Amortized
Cost
   Estimated
Fair
Value
 
Due less than one year  $22,825   $22,882   $-   $- 
Due after one year through five years   76,709    77,897    -    - 
Due after five years through ten years   94,170    97,489    6,000    7,237 
Due greater than ten years   39,032    39,860    -    - 
Mortgage-backed securities   353,271    360,479    396    390 
Total  $586,007   $598,607   $6,396   $7,627 

 

   December 31, 2018 
   Available-for-Sale   Held-to-Maturity 
($ in thousands)  Amortized
Cost
   Estimated
Fair
Value
   Amortized
Cost
   Estimated
Fair
Value
 
Due less than one year  $19,825   $19,794   $-   $- 
Due after one year through five years   64,933    64,925    -    - 
Due after five years through ten years   82,455    82,687    6,000    7,028 
Due greater than ten years   37,732    37,348    -    - 
Mortgage-backed securities   289,745    287,470    -    - 
Total  $494,690   $492,224   $6,000   $7,028 

 

Actual maturities can differ from contractual maturities because the obligations may be called or prepaid with or without penalties.

 

The details concerning securities classified as available-for-sale with unrealized losses as of June 30, 2019 and December 31, 2018 were as follows:

 

   June 30, 2019 
   Losses < 12 Months   Losses 12 Months or >   Total 
($ in thousands)  Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 
Obligations of U.S. Government agencies and sponsored entities       $   80           $   -           $   177           $   1           $   257           $   1    
Tax-exempt and taxable obligations of state and municipal subdivisions           3,532               1               10,980               73               14,512               74    
Mortgage-backed securities        8,552           30           30,714           204           39,266           234   
Corporate obligations   1,973    1    455    102    2,428    103 
Total  $14,137   $32   $42,326   $380   $56,463   $412 
                               

 

22

 

 

   December 31, 2018 
   Losses < 12 Months   Losses 12 Months or >   Total 
($ in thousands)  Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 
Obligations of U.S Government agencies and sponsored entities  $  11,034   $  52   $  7,838   $  223   $  18,872   $  275 
Tax-exempt and taxable obligations of state and municipal subdivisions   38,200    311    42,102    910    80,302    1,221 
Mortgage-backed securities   93,294    843    101,005    2,603    194,299    3,446 
Corporate obligations   1,962    40    4,969    145    6,931    185 
Total  $144,490   $1,246   $155,914   $3,881   $300,404   $5,127 

 

At June 30, 2019 and December 31, 2018, the Company’s securities portfolio consisted of 87 and 427 securities, respectively, which were in an unrealized loss position. The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”), with attention given to securities in a continuous loss position of at least ten percent for over twelve months. Management believes that none of the losses on available-for-sale securities noted above constitutes an OTTI. The noted losses are considered temporary due to market fluctuations in available interest rates. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. On January 1, 2018, the Company adopted the new accounting standard for Financial Instruments, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with the changes in fair value recognized in net income. The adoption of this guidance resulted in a $348 thousand decrease to retained earnings. No OTTI losses were recognized during the six months ended June 30, 2019 or the year ended December 31, 2018.

 

NOTE 10 – LOANS

 

Generally, the Company will place a delinquent loan in non-accrual status when the loan becomes 90 days or more past due. At the time a loan is placed in non-accrual 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 following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual or purchased credit impaired (“PCI”):

 

   June 30, 2019 
($ in thousands)  Past Due
30 to 89
Days
   Past Due
90 Days or
More and
Still
Accruing
   Non-
Accrual
   PCI   Total
Past Due,
Non-Accrual
and PCI
   Total
Loans
 
Real Estate-construction  $811   $14   $211   $1,673   $2,709   $352,826 
Residential secured loans including multi-family and farmland   3,606    911    851    8,678    14,046    713,350 
Real Estate-nonfarm nonresidential   534    -    9,357    3,352    13,243    881,831 
Commercial   826    64    1,333    80    2,303    342,535 
Lease financing receivable   -    -    -    -    -    3,616 
Obligations of states and subdivisions   -    -    -    -    -    17,192 
Consumer installment   407    -    53    20    480    40,648 
Total  $6,184   $989   $11,805   $13,803   $32,781   $2,351,998 

 

23

 

 

   December 31, 2018 
($ in thousands)  Past Due
30 to 89
Days
   Past Due 90
Days or
More and
Still
Accruing
   Non-
Accrual
   PCI   Total
Past Due,
Non-Accrual
and PCI
   Total
Loans
 
Real Estate-construction  $818   $114   $8   $1,830   $2,770   $298,718 
Residential secured loans including multi-family and farmland        5,528           650           1,411           7,781           15,370           617,804   
Real Estate-nonfarm, nonresidential   4,319    456    9,179    3,576    17,530    776,880 
Commercial   1,650    -    1,024    184    2,858    301,182 
Lease financing receivable   -    -    -    -    -    2,891 
Obligations of states and subdivisions        -           -           -           -           -           16,941   
Consumer installment   507    45    46    34    632    46,006 
Total  $12,822   $1,265   $11,668   $13,405   $39,160   $2,060,422 

 

We acquired loans with deteriorated credit quality in 2014, 2017, 2018 and 2019. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (purchased non-impaired loans) and those with evidence of credit deterioration (purchased credit impaired or PCI loans). Acquired loans are considered to be impaired if it is probable, based on current available information, that the Company will be unable to collect all cash flows as expected. If the collection of expected cash flows cannot reasonably be estimated, no interest income will be recognized on these loans.

 

The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of PCI loans acquired in the acquisitions from 2018 and 2019. 

 

($ in thousands)  Southwest   Sunshine   FMB   FPB   Total 
Contractually required payments  $925   $4,194   $9,939   $4,715   $19,773 
Cash flows expected to be collected   706    3,894    8,604    4,295    17,499 
Fair value of loans acquired   657    3,837    7,978    3,916    16,388 

 

Total outstanding purchased credit impaired loans were $19.9 million and the related purchase accounting discount was $3.7 million as of June 30, 2019, and $17.7 million and $3.8 million as of December 31, 2018, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged-off. There was no related allowance allocated to the acquired impaired loans.

 

Changes in the accretable yield for purchased credit impaired loans were as follows at June 30, 2019 and 2018:

 

   June 30, 2019   June 30, 2018 
($ in thousands)  Accretable
Yield
   Accretable
Yield
 
Balance at beginning of period January 1  $3,835   $836 
Reclassification from prior years   -    859 
Addition   307    762 
Accretion   (476)   (200)
Transfer from non-accretable   48    129 
Charge-off   -    (10)
Balance at end of period  $3,714   $2,376 

 

 

24

 

 

 

The following tables provide additional detail of impaired loans broken out according to class as of June 30, 2019 and December 31, 2018. The recorded investment included in the following tables represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at June 30, 2019 are on non-accrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

 

June 30, 2019               Average   Interest 
               Recorded   Income 
  Recorded   Unpaid   Related   Investment   Recognized 
($ in thousands)  Investment   Balance   Allowance   YTD   YTD 
Impaired loans with no related allowance:                         
Commercial, financial and agriculture  $671   $671   $-   $865   $11 
Commercial real estate   3,421    3,896    -    9,100    2 
Consumer real estate   545    643    -    4,076    1 
Consumer installment   4    3    -    27    - 
Total  $4,641   $5,213   $-   $14,068   $14 
                          

Impaired loans with a related allowance:

                         
Commercial, financial and agriculture  $1,722   $1,723   $427   $2,506   $18 
Commercial real estate   7,619    7,914    1,839    11,432    47 
Consumer real estate   478    480    69    719    6 
Consumer installment   61    61    37    99    1 
Total  $9,880   $10,178   $2,372   $14,756   $72 
                          
Total Impaired Loans:                         

Commercial, financial and agriculture

  $2,393   $2,394   $427   $3,371   $29 
Commercial real estate   11,040    11,810    1,839    20,532    49 
Consumer real estate   1,023    1,123    69    4,795    7 
Consumer installment   65    64    37    126    1 
Total Impaired Loans  $14,521   $15,391   $2,372   $28,824   $86 

 

As of June 30, 2019, the Company had $1.8 million of foreclosed residential real estate property obtained by physical possession and $1.2 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

 

25

 

 

December 31, 2018               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
($ in thousands)  Investment   Balance   Allowance   YTD   YTD 
Impaired loans with no related allowance:                         
Commercial, financial and agriculture  $709   $709   $-   $379   $27 
Commercial real estate   6,441    8,170    -    7,685    427 
Consumer real estate   445    760    -    4,522    69 
Consumer installment   -    -    -    82    3 
Total  $7,595   $9,639   $-   $12,668   $526 
                          

Impaired loans with a related allowance:

                         
Commercial, financial and agriculture  $960   $960   $329   $968   $3 
Commercial real estate   4,512    4,512    758    2,868    176 
Consumer real estate   366    366    66    555    16 
Consumer installment   26    26    26    24    - 
Total  $5,864   $5,864   $1,179   $4,415   $195 

 

Total Impaired Loans:

                         
Commercial, financial and agriculture  $1,669   $1,669   $329   $1,347   $30 
Commercial real estate   10,953    12,682    758    10,553    603 
Consumer real estate   811    1,126    66    5,077    85 
Consumer installment   26    26    26    106    3 
Total Impaired Loans  $13,459   $15,503   $1,179   $17,083   $721 

 

Interest income recognized during impairment and cash basis interest income recognized on impaired loans was approximately $37 thousand and $159 thousand for the three months and six months ended June 30, 2019, respectively. The gross interest income that would have been recorded in the period that ended if the non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the three months and six months ended June 30, 2019 was $141 thousand and $550 thousand, respectively. The Company had no loan commitments to borrowers in non-accrual status at June 30, 2019 and December 31, 2018.

 

Troubled Debt Restructuring

 

If the Company grants a concession to a borrower in financial difficulty, the loan is classified as a troubled debt restructuring (“TDR”).

 

There were 1 and 4 TDRs modified during the three months and six months ended June 30, 2019, respectively. There were no TDRs modified during the three months or six months ended June 30, 2018. The balance of TDRs was $16.9 million at June 30, 2019 and $14.3 million at December 31, 2018. The increase of $2.6 million is attributable to acquired loans. There was $247 thousand allocated in specific reserves established with respect to these loans as of June 30, 2019. As of June 30, 2019, the Company had no additional amount committed on any loan classified as TDR.

 

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The following tables set forth the amounts and past due status for the Company’s TDRs at June 30, 2019 and December 31, 2018:

 

   June 30, 2019 
($ in thousands)  Current Loans   Past Due
30-89
   Past Due 90
days and still
accruing
   Non-accrual   Total 
Commercial, financial and agriculture  $543   $592   $-   $190   $1,325 
Commercial real estate   5,216    59    -    5,166    10,441 
Residential real estate   1,760    -    58    3,308    5,126 
Consumer installment   30    -    -    -    30 
Total  $7,549   $651   $58   $8,664   $16,922 
Allowance for loan losses  $103   $-   $-   $144   $247 

 

   December 31, 2018 
($ in thousands)  Current Loans   Past Due
30-89
   Past Due 90
days and still
accruing
   Non-accrual   Total 
Commercial, financial and agriculture  $13   $646   $   -   $18   $676 
Commercial real estate   4,827    -    -    5,425    10,252 
Residential real estate   442    86    -    2,801    3,329 
Consumer installment   25    -    -    13    38 
Total  $5,307   $732   $-   $8,257   $14,295 
Allowance for loan losses  $80   $13   $-   $110   $203 

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no loans and 1 loan, which totaled $86 thousand, that were modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the quarters ending June 30, 2019 and June 30, 2018, respectively. There were 12 loans, which totaled $4.7 million, and 3 loans, which totaled $381 thousand that were modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ending June 30, 2019 and June 30, 2018, respectively.

 

Internal Risk Ratings

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:

 

Special Mention: Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

 

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

 

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Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

As of June 30, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk categories of loans by class of loans (excluding mortgage loans held for sale) were as follows:

 

   June 30, 2019 
($ in thousands)  Commercial,
Financial and
Agriculture
   Commercial
Real
Estate
   Consumer Real
Estate
   Installment and
Other
   Total 
Pass  $342,390   $1,476,941   $439,998   $34,726   $2,294,055 
Special Mention   1,117    7,527    1,951    26    10,621 
Substandard   2,829    32,834    12,188    407    48,258 
Doubtful   22    82    -    -    104 
Subtotal   346,358    1,517,384    454,137    35,159    2,353,038 
Less:                         
Unearned discount   -    1,040    -    -    1,040 
Loans, net of unearned discount  $346,358   $1,516,344   $454,137   $35,159   $2,351,998 

 

       December 31, 2018 
($ in thousands)  Commercial,
Financial and
Agriculture
   Commercial
Real
Estate
   Consumer Real
Estate
   Installment and
Other
   Total 
Pass  $300,685   $1,286,151   $377,028   $34,127   $1,997,991 
Special Mention   842    12,401    1,962    13    15,218 
Substandard   2,640    33,856    10,959    270    47,725 
Doubtful   16    85    -    -    101 
Subtotal   304,183    1,332,493    389,949    34,410    2,061,035 
Less:                         
Unearned discount   -    613    -    -    613 
Loans, net of unearned discount  $304,183   $1,331,880   $389,949   $34,410   $2,060,422 

 

Allowance for Loan Losses

 

Activity in the allowance for loan losses for the period was as follows:

 

   Six months ended June 30, 2019 
($ in thousands)  Commercial,
Financial and
Agriculture
   Commercial
Real Estate
   Consumer
Real Estate
   Installment
and Other
   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance  $2,060   $6,258   $1,743   $201   $(197)  $10,065 
Provision for loan losses   351    1,666    (313)   (36)   245    1,913 
Charge-offs   6    66    42    67    -    181 
Recoveries   27    14    101    152    -    294 
Net Charge-offs (recoveries)   (21)   52    (59)   (85)   -    (113)
Ending Balance  $2,432   $7,872   $1,489   $250   $48   $12,091 

 

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  Six months ended June 30, 2018 
($ in thousands)  Commercial,
Financial and
Agriculture
   Commercial
Real Estate
   Consumer
Real Estate
   Installment
and Other
   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance  $1,608   $4,644   $1,499   $173   $364   $8,288 
Provision for loan losses   390    476    69    (20)   219    1,134 
Charge-offs   5    10    7    32    -    54 
Recoveries   18    26    37    63    -    144 
Net Charge-offs (recoveries)   (13)   (16)   (30)   (31)   -    (90)
Ending Balance  $2,011   $5,136   $1,598   $184   $583   $9,512 

 

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of June 30, 2019 and December 31, 2018. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses. See Item 2. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Allowance for Loan and Lease Losses” for a description of our methodology.

 

   June 30, 2019 
   Commercial                     
   Financial   Commercial   Consumer   Installment         
($ in thousands)  and Agriculture   Real Estate   Real Estate   and Other   Unallocated   Total 
Loans                              
Individually evaluated  $2,393   $11,040   $1,023   $65   $-   $14,521 
Collectively evaluated   359,396    1,539,832    377,635    40,708    -    2,317,571 
PCI loans   183    12,113    7,560    50    -    19,906 
Total  $361,972   $1,562,985   $386,218   $40,823    -   $2,351,998 
                               
Allowance for Loan Losses                              
Individually evaluated  $427   $1,839   $69   $37   $-   $2,372 
Collectively evaluated   2,005    6,033    1,420    213    48    9,719 
Total  $2,432   $7,872   $1,489   $250   $48   $12,091 

 

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   December 31, 2018 
   Commercial                     
   Financial   Commercial   Consumer   Installment         
($ in thousands)  and Agriculture   Real Estate   Real Estate   and Other   Unallocated   Total 
Loans                              
Individually evaluated  $1,657   $10,932   $804   $66   $-   $13,459 
Collectively evaluated   302,329    1,309,322    383,368    34,292    -    2,029,311 
PCI loans   197    11,626    5,777    52    -    17,652 
Total  $304,183   $1,331,880   $389,949   $34,410    -   $2,060,422 
                               
Allowance for Loan Losses                              
Individually evaluated  $329   $758   $66   $26   $-   $1,179 
Collectively evaluated   1,731    5,500    1,677    175    (197)   8,886 
Total  $2,060   $6,258   $1,743   $201   $(197)  $10,065 

 

NOTE 11 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract; (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams or the presentation of revenue as gross versus net. No adjustment to retained earnings was required on the adoption date. Because there was no change to the timing and pattern of revenue recognition, there were no material changes to the Company’s processes and internal controls.

 

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within non-interest income.  The guidance does not apply to revenue associated with financial instruments, including loans and investment securities that are accounted for under other GAAP, which comprise a significant portion of our revenue stream. A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

 

Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services.  Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.  Overdraft fees are recognized at the point in time that the overdraft occurs.  Service charges on deposits are withdrawn from the customer’s account balance.

 

Interchange Income: The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided by the cardholder.

 

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.  When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction prices is probable.  Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

 

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All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following table presents the Company’s sources of non-interest income revenue, by operating segments, for the three months ended June 30, 2019 and 2018 and six months ended June 30, 2019 and 2018. Items outside the scope of ASC 606 are noted as such.

 

   Three Months Ended June 30, 2019   Six Months Ended June 30, 2019 
   Commercial/   Mortgage           Commercial/   Mortgage         
   Retail   Banking   Holding       Retail   Banking   Holding     
($ in thousands)  Bank   Division   Company   Total   Bank   Division   Company   Total 
Non-interest income                                        
Service charges on deposits                                        
Overdraft fees  $1,038   $-   $-   $1,038   $2,012   $1   $-   $2,013 
Other   880    1    -    881    1,738    1    -    1,739 
Interchange income   2,045    -    -    2,045    3,697    -    -    3,697 
Investment brokerage fees   24    -    -    24