The First Bancshares(FBMS) - 2023 Q4 - Annual Report

PART I Business The First Bancshares, Inc. is a community-focused bank holding company operating 116 locations across five states, offering a full range of financial services Overview and Operations The First Bancshares, Inc. operates as a community-focused financial institution with 116 locations across five states, growing through organic expansion and strategic acquisitions - The First Bancshares, Inc. operates 116 locations in Mississippi, Alabama, Florida, Georgia, and Louisiana as of December 31, 202327 - The company's growth strategy combines organic loan growth with regional expansion through acquisitions, including the Heritage Southeast Bancorporation, Inc. (HSBI) merger completed on January 1, 202330 38 - The bank offers a full range of deposit services, commercial loans, consumer loans, and residential mortgage services40 41 42 Human Capital Overview (as of Dec 31, 2023) | Metric | Value | | :------------------ | :---- | | Full-Time Employees | 1,078 | | States of Operation | 5 | | Total Locations | 116 | Supervision and Regulation The company and its bank subsidiary are subject to extensive federal and state banking regulations, including capital adequacy and dividend limitations - The company is a registered bank holding company supervised by the Federal Reserve, with its subsidiary regulated by the Federal Reserve and the Mississippi Department of Banking and Consumer Finance53 83 - Dividend payments are restricted by federal and state regulations, requiring adequate capital above regulatory minimums and the capital conservation buffer79 80 81 - The First Bank is subject to the Community Reinvestment Act (CRA) with a "Satisfactory" rating, noting modernized CRA regulations effective January 1, 2026101 102 Regulatory Capital Ratios as of December 31, 2023 | Ratio | The First Bancshares, Inc. | The First (Bank) | Minimum to be Well-Capitalized | | :------------------------------ | :------------------------- | :--------------- | :----------------------------- | | Common Equity Tier 1 risk-based | 12.1% | 13.8% | 6.5% | | Tier 1 risk-based capital ratio | 12.5% | 13.8% | 8.0% | | Total risk-based capital ratio | 15.0% | 14.8% | 10.0% | | Leverage ratio | 9.7% | 10.7% | 5.0% | Risk Factors The company faces significant risks from economic downturns, interest rate fluctuations, merger integration, and cybersecurity threats Risks Associated with Our Business The company's financial performance is exposed to risks from concentrated geographic markets, real estate sector vulnerability, and interest rate fluctuations - The company's operations are concentrated in Mississippi, Louisiana, Alabama, Florida, and Georgia, making it vulnerable to adverse local economic conditions112 - A significant portion of the loan portfolio is secured by real estate, exposing the company to risks from declining property values114 - The business is subject to significant interest rate risk, where rising rates can increase funding costs and falling rates can reduce net interest income121 123 - The company faces risks from information system interruptions or security breaches, including cyber-attacks, which could damage its reputation and lead to financial liability139 Merger-Related Risks The company faces risks in realizing anticipated benefits from acquisitions due to integration challenges and potential goodwill impairment - The company may not realize anticipated cost savings and benefits from recent acquisitions of BBI (August 2022) and HSBI (January 2023) due to integration difficulties150 - Significant non-recurring transaction and merger-related costs have been incurred and may continue, potentially reducing expected efficiencies and strategic benefits151 152 - The company may incur impairment to goodwill if significant negative industry trends, reduced future cash flow estimates, or business disruptions occur153 Risks Relating to Our Securities Investors in the company's common stock face risks from price fluctuation, lower trading volume, and potential limitations on dividend payments - The company's common stock price may fluctuate significantly due to operating results, analyst estimates, and general market volatility155 156 - The trading volume in the company's common stock is less than that of larger financial services companies, which may affect investor liquidity161 - Future dividend payments are not guaranteed and are subject to the company's financial condition, capital requirements, and regulatory limitations162 163 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None165 Cybersecurity The company maintains a comprehensive information security program, overseen by the Board Risk Committee, to protect systems and data - The company has an information security program designed to protect computer systems and information assets, aligning with regulatory guidance and industry standards165 - Oversight of cybersecurity is delegated to the Board Risk Committee, supported by the Chief Information Security Officer (CISO) who provides regular updates177 179 - The company has an Information Security Incident Response Plan, which includes processes for escalation, containment, and remediation, tested annually170 - To date, the company has not experienced a cybersecurity incident that has materially impacted its business or financial condition174 Properties The company operates 110 full-service banking offices, one motor bank, and five loan production offices across five states - As of year-end, the company had 110 full-service banking offices, one motor bank facility, and five loan production offices across its five-state footprint188 - The company leases several of its banking office locations in Alabama, Florida, Georgia, and Mississippi189 190 191 Legal Proceedings The company is involved in a putative class action lawsuit regarding overdraft fees, with the outcome currently unpredictable - A putative class action complaint was filed against the company on December 7, 2023, alleging improper assessment of overdraft fees on certain debit card transactions193 194 - The company filed its Answer and Affirmative Defenses on February 1, 2024, with the outcome and potential loss currently undetermined195 Mine Safety Disclosures This item is not applicable to the company - Not applicable196 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with 31.2 million shares outstanding, and expects to continue quarterly cash dividends - The company's common stock is traded on the Nasdaq Global Market under the symbol "FBMS" with 31,227,881 shares outstanding as of February 21, 2024199 - A share repurchase program authorizing up to $50.0 million in purchases expired on December 31, 2023; 856 shares were withheld in Q4 2023 for employee tax obligations205 202 5-Year Cumulative Shareholder Return Comparison | Index/Company | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :----------------------------- | :----- | :----- | :----- | :----- | :----- | :----- | | The First Bancshares, Inc. | 100.00 | 118.55 | 104.82 | 133.07 | 112.80 | 106.66 | | NASDAQ Composite-Total Returns | 100.00 | 136.69 | 198.10 | 242.03 | 163.28 | 236.17 | | NASDAQ OMX Banks Index | 100.00 | 124.38 | 115.04 | 164.41 | 137.65 | 132.91 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased 19.9% to $75.5 million in 2023, driven by acquisitions and loan growth, with total assets reaching $8.0 billion - Net income available to common shareholders increased by $12.5 million, or 19.9%, to $75.5 million for the year ended December 31, 2023, compared to $62.9 million in 2022217 - The acquisition of Heritage Bank in 2023 contributed $1.565 billion in assets, $1.159 billion in net loans, and $1.392 billion in net deposits at acquisition218 Key Financial Metrics (Year-End) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :------------------- | :------------- | :------------- | | Total Assets | $7.999 billion | $6.462 billion | | Net Loans | $5.119 billion | $3.740 billion | | Total Deposits | $6.463 billion | $5.494 billion | | Stockholders' Equity | $949.0 million | $646.7 million | Results of Operations Consolidated net income available to common stockholders rose to $75.5 million in 2023, driven by increased net interest income and non-interest income - The increase in non-interest expense in 2023 was partially attributable to $2.7 million in acquisition charges, $32.1 million in increased operating expenses from acquisitions, $5.2 million in U.S. Treasury awards, $1.7 million in FDIC premiums, and $4.9 million in core deposit amortization228 - The provision for credit losses was $13.8 million in 2023, compared to $5.4 million in 2022, with a majority of the increase attributed to HSBI and BBI acquisitions259 Consolidated Statement of Income Summary (in thousands) | Metric | 2023 | 2022 | 2021 | | :-------------------------------- | :--------- | :--------- | :--------- | | Net Interest Income | $249,325 | $177,816 | $157,064 | | Provision for Credit Losses (LHFI)| $13,750 | $5,350 | $(1,456) | | Non-interest Income | $46,705 | $36,961 | $37,473 | | Non-interest Expense | $184,726 | $130,483 | $114,559 | | Net Income to Common Stockholders | $75,457 | $62,919 | $64,167 | Analysis of Financial Condition Total assets reached $8.0 billion at year-end 2023, driven by the HSBI acquisition, with strong capital ratios and liquidity - Average loans accounted for 71.4% of average earning assets in 2023, up from 58.0% in 2022, reflecting a strategic focus on loan growth289 - Total deposits grew to $6.463 billion at year-end 2023, an increase of $968.5 million (17.6%), largely driven by $1.392 billion in deposits acquired from Heritage Bank300 - The company's loan-to-deposit ratio was 80.0% at December 31, 2023, up from 68.7% at year-end 2022305 Company Capital Ratios vs. Requirements (Dec 31, 2023) | Capital Ratio | Company Actual | Well-Capitalized Minimum | | :------------------- | :------------- | :----------------------- | | Leverage | 9.7% | 5.0% | | Common Equity Tier 1 | 12.1% | 6.5% | | Tier 1 | 12.5% | 8.0% | | Total | 15.0% | 10.0% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed through policies and modeling, showing asset-sensitivity - The company's principal market risk exposure is interest rate risk, managed to optimize earnings and capital under various rate scenarios348 - The company is considered "asset-sensitive," with more assets repricing than liabilities within the first year, indicated by a one-year cumulative GAP ratio of approximately 118.0% at December 31, 2023353 Net Interest Income (NII) Sensitivity Analysis (Year 1 as of Dec 31, 2023) | Rate Change Scenario | % Change in NII from Static | | :------------------- | :-------------------------- | | +400 bps | (19.0)% | | +200 bps | (2.3)% | | +100 bps | 0.7% | | -100 bps | 0.5% | | -200 bps | 2.3% | Economic Value of Equity (EVE) Sensitivity Analysis (as of Dec 31, 2023) | Rate Change Scenario | % Change in EVE from Base | | :------------------- | :------------------------ | | +400 bps | (12.4)% | | +200 bps | (2.0)% | | +100 bps | 0.6% | | -100 bps | (2.4)% | | -200 bps | (5.0)% | Financial Statements and Supplementary Data This section includes the independent auditor's unqualified opinion on financial statements and internal controls, along with detailed financial statements and notes - The independent registered public accounting firm, FORVIS, LLP, issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2023360 - FORVIS, LLP also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023361 672 - Critical Audit Matters identified were the valuation of the Allowance for Credit Losses (ACL) and the accounting for the Heritage Southeast Bancorporation, Inc. acquisition, both involving significant management judgment365 369 371 Consolidated Financial Statements The consolidated financial statements show total assets of $8.0 billion and net income of $75.5 million for 2023 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :------------------------- | :----------- | :----------- | | Total Assets | $7,999,345 | $6,461,717 | | Loans, net | $5,116,010 | $3,735,240 | | Total Securities | $1,734,658 | $1,982,529 | | Goodwill | $272,520 | $180,254 | | Total Deposits | $6,462,872 | $5,494,404 | | Total Liabilities | $7,050,311 | $5,815,054 | | Total Stockholders' Equity | $949,034 | $646,663 | Consolidated Income Statement Highlights (in thousands) | Metric | 2023 | 2022 | 2021 | | :-------------------------------- | :--------- | :--------- | :--------- | | Net Interest Income | $249,325 | $177,816 | $157,064 | | Provision for Credit Losses (Total)| $14,500 | $5,605 | $(1,104) | | Non-Interest Income | $46,705 | $36,961 | $37,473 | | Non-Interest Expense | $184,726 | $130,483 | $114,559 | | Net Income to Common Stockholders | $75,457 | $62,919 | $64,167 | Earnings Per Share (Diluted) | Year | Diluted EPS | | :--- | :---------- | | 2023 | $2.39 | | 2022 | $2.84 | | 2021 | $3.03 | Notes to Consolidated Financial Statements The notes detail accounting policies, acquisitions, loan portfolios, ACL methodology, goodwill, and regulatory capital - On January 1, 2023, the company completed its acquisition of Heritage Southeast Bancorporation, Inc. (HSBI) for $221.5 million, resulting in $91.9 million goodwill and $43.7 million core deposit intangible471 472 - On August 1, 2022, the company acquired Beach Bancorp, Inc. (BBI) for approximately $101.5 million, resulting in $23.7 million goodwill and $9.8 million core deposit intangible476 478 - The company had $123.4 million of subordinated debt outstanding as of December 31, 2023, a decrease from $145.0 million in 2022 due to the redemption of $24.0 million of its Notes due 2028600 Allowance for Credit Losses (ACL) on Loans (in thousands) | Metric | 2023 | 2022 | 2021 | | :-------------------------- | :--------- | :--------- | :--------- | | Beginning Balance | $38,917 | $30,742 | $35,820 | | Provision for Credit Losses | $13,750 | $5,350 | $(1,456) | | Net Charge-offs | $(1,811) | $1,522 | $(4,019) | | Ending Balance | $54,032 | $38,917 | $30,742 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None663 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023664 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework668 - The scope of management's assessment of internal controls excluded the operations of the HSBI acquisition, as permitted by SEC guidance669 Other Information The Board approved amendments to executive Supplemental Executive Retirement Plan (SERP) agreements in November 2023 - On November 16, 2023, the Board approved amendments to the Supplemental Executive Retirement Plan (SERP) agreements for CEO M. Ray Cole, Jr. and CFO Donna T. Lowery, executed on February 26, 2024681 - The SERP amendments adjust lifetime benefits to 50% of compensation (less prior SERP amounts) and modify provisions for early termination, change in control, and death benefits682 683 - No directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement during the quarter ended December 31, 2023686 PART III Directors, Executive Officers, and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders to be held May 23, 2024688 Executive Compensation Information regarding executive compensation is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders to be held May 23, 2024689 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders to be held May 23, 2024690 Certain Relationships and Related Transactions and Director Independence Information regarding related transactions and director independence is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders to be held May 23, 2024691 Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the Annual Meeting of Shareholders to be held May 23, 2024692 PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K695 696 - All financial statement schedules were omitted because the information is either inapplicable or already included in the Notes to the Consolidated Financial Statements695 Form 10-K Summary The company has not provided a summary under this item - None702