U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: June 30, 2014          

 

OR

¨

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

 

COMMISSION FILE NUMBER:    33-94288                     

  

THE FIRST BANCSHARES, INC.

(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)

 

MISSISSIPPI	64-0862173
(STATE OF INCORPORATION)	(I.R.S. EMPLOYER IDENTIFICATION NO.)

 

6480 U.S. HIGHWAY 98 WEST
HATTIESBURG, MISSISSIPPI		39402
(ADDRESS OF PRINCIPAL		(ZIP CODE)
EXECUTIVE OFFICES)

 

(601) 268-8998

(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

NONE

(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 

INDICATE BY CHECK MARK WHETHER THE ISSUER: (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 x  NO ¨

  

INDIATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATION S-T (§232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT HE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).

YES x  NO ¨

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY. SEE THE DEFINITIONS OF “LARGE ACCELERATED FILER,” “ACCELERATED FILER,” “NON-ACCELERATED FILER” AND “SMALLER REPORTING COMPANY” IN RULE 12B-2 OF THE EXCHANGE ACT.

 

LARGE ACCELERATED FILER	¨	ACCELERATED FILER	¨
NON-ACCELERATED FILER	x	SMALLER REPORTING COMPANY	¨

 

ON June 30, 2014, 5,153,793 SHARES OF THE ISSUER'S COMMON STOCK, PAR VALUE $1.00 PER SHARE WERE ISSUED AND OUTSTANDING.

 

TRANSITIONAL DISCLOSURE FORMAT (CHECK ONE): 

YES ¨  NO x

  

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT):

YES ¨  NO x

  

 

PART I - FINANCIAL INFORMATION

 

ITEM NO. 1. FINANCIAL STATEMENTS

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

 

($ amounts in thousands)

 

		(Unaudited)
		June 30,				December 31,
		2014				2013
ASSETS
Cash and due from banks		$	25,677			$	24,080
Interest-bearing deposits with banks			27,289				14,205
Federal funds sold			2,477				967
Total cash and cash equivalents			55,443				39,252
Securities held-to-maturity, at amortized cost			8,421				8,438
Securities available-for-sale, at fair value			263,653				244,051
Other securities			4,025				5,534
Total securities			276,099				258,023
Loans held for sale			3,220				3,680
Loans			606,812				579,623
Allowance for loan losses			(5,999	)			(5,728	)
Loans, net			604,033				577,575
Premises and equipment			31,339				32,072
Interest receivable			3,374				3,292
Cash surrender value of life insurance			14,251				6,593
Goodwill			10,621				10,621
Other assets			9,254				8,992
Other real estate owned			4,875				4,470
TOTAL ASSETS		$	1,009,289			$	940,890
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing		$	183,226			$	173,794
Interest-bearing			700,646				606,177
TOTAL DEPOSITS			883,872				779,971
Interest payable			297				400
Borrowed funds			13,500				52,000
Subordinated debentures			10,310				10,310
Other liabilities			11,533				13,101
TOTAL LIABILITIES			919,512				855,782
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 issued and outstanding at June 30, 2014 and December 31, 2013, respectively			17,123				17,103
Common stock, par value $1 per share, 10,000,000 shares authorized; 5,180,287 shares issued at June 30, 2014 and 5,122,941 at December 31, 2013, Respectively			5,180				5,123
Additional paid-in capital			42,239				42,086
Retained earnings			24,972				22,509
Accumulated other comprehensive income (loss)			727				(1,249	)
Treasury stock, at cost, 26,494 shares at June 30, 2014 and at December 31, 2013			(464	)			(464	)
TOTAL STOCKHOLDERS’ EQUITY			89,777				85,108
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,009,289			$	940,890

 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

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

 

		(Unaudited)								(Unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
INTEREST INCOME:
Interest and fees on loans		$	7,091			$	6,318			$	14,095			$	11,549
Interest and dividends on securities:
Taxable interest and dividends			956				740				1,859				1,643
Tax exempt interest			497				529				1,026				1,033
Interest on federal funds sold			30				22				41				34
TOTAL INTEREST INCOME			8,574				7,609				17,021				14,259
INTEREST EXPENSE:
Interest on deposits			584				666				1,050				1,284
Interest on borrowed funds			142				157				299				298
TOTAL INTEREST EXPENSE			726				823				1,349				1,582
NET INTEREST INCOME			7,848				6,786				15,672				12,677
PROVISION FOR LOAN LOSSES			277				349				635				660
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			7,571				6,437				15,037				12,017
OTHER INCOME:
Service charges on deposit accounts			1,053				1,010				2,037				1,854
Other service charges and fees			1,002				880				1,690				1,966
TOTAL OTHER INCOME			2,055				1,890				3,727				3,820
OTHER EXPENSES:
Salaries and employee benefits			4,260				3,729				8,357				6,912
Occupancy and equipment			1,242				1,104				2,462				2,060
Other			1,882				2,412				3,792				4,252
TOTAL OTHER EXPENSES			7,384				7,245				14,611				13,224
INCOME BEFORE INCOME TAXES			2,242				1,082				4,153				2,613
INCOME TAXES			629				270				1,113				576
NET INCOME			1,613				812				3,040				2,037
PREFERRED STOCK ACCRETION AND DIVIDENDS			86				106				192				212
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS		$	1,527			$	706			$	2,848			$	1,825
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:
BASIC		$	.30			$	.18			$	.55			$	.52
DILUTED			.29				.18				.55				.51
DIVIDENDS PER SHARE – COMMON			.0375				.0375				.075				.075

 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

($ amounts in thousands)

 

		(Unaudited)								(Unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Net income per consolidated statements of income		$	1,613			$	812			$	3,040			$	2,037
Other comprehensive income:
Unrealized holding gains (losses) arising during the period on available-for-sale securities			1,144				(6,174	)			2,893				(6,068	)
Unrealized holding gains (losses) on loans held for sale			56				(123	)			101				(105	)
Income tax benefit (expense)			(390	)			2,140				(1,018	)			2,099
Other Comprehensive Income (Loss)			810				(4,157	)			1,976				(4,074	)
Comprehensive Income (Loss)		$	2,423			$	(3,345	)		$	5,016			$	(2,037	)

 

 

THE FIRST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

($ in thousands)
		Common Stock				Preferred Stock				Stock Warrants				Additional Paid-in Capital				Retained Earnings				Accumulated Other Compre- hensive Income(Loss)				Treasury Stock				Total
Balance, January 1, 2013		$	3,134			$	17,021			$	284			$	23,427			$	19,951			$	2,533			$	(464	)		$	65,886
Net income			-				-				-				-				2,037				-				-				2,037
Other compre- hensive income(loss)			-				-				-				-				-				(4,074	)			-				(4,074	)
Accretion and dividends on preferred stock			-				41				-				-				(212	)			-				-				(171	)
Dividends on common stock, $.075 per share			-				-				-				-				(235	)			-				-				(235	)
Issuance of 1,951,220 common shares			1,951				-				-				18,049				(1,003	)			-				-				18,997
Restricted stock grant			35				-				-				(35	)			-				-				-				-
Compensation expense			-				-				-				177				-				-				-				177
Balance, June 30, 2013		$	5,120			$	17,062			$	284			$	41,618			$	20,538			$	(1,541	)		$	(464	)		$	82,617
Balance, January 1, 2014		$	5,123			$	17,103			$	284			$	41,802			$	22,509			$	(1,249	)		$	(464	)		$	85,108
Net income			-				-				-				-				3,040				-				-				3,040
Other compre- hensive income			-				-				-				-				-				1,976				-				1,976
Accretion and dividends on preferred stock			-				20				-				-				(191	)			-				-				(171	)
Dividends on common stock, $0.0375 per share			-				-				-				-				(386	)			-				-				(386	)
Repurchase of restricted stock for payment of taxes			(6	)			-				-				(79	)			-				-				-				(85	)
Restricted stock grant			63				-				-				(63	)			-				-				-				-
Compensation expense			-				-				-				295				-				-				-				295
Balance, June 30, 2014		$	5,180			$	17,123			$	284			$	41,955			$	24,972			$	727			$	(464	)		$	89,777

 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ Amounts in Thousands)

 

		(Unaudited)
		Six Months Ended
		June 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME		$	3,040			$	2,037
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion			1,096				1,038
Provision for loan losses			635				660
Loss on sale/writedown of ORE			195				122
Restricted stock expense			295				177
Increase in cash value of life insurance			(158	)			(72	)
Federal Home Loan Bank stock dividends			(2	)			(2	)
Changes in:
Interest receivable			(82	)			(26	)
Loans held for sale, net			566				3,584
Interest payable			(103	)			(83	)
Other, net			(1,505	)			1,900
NET CASH PROVIDED BY OPERATING ACTIVITIES			3,977				9,335
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in excess of cash paid for acquisition			-				43,150
Maturities and calls of securities available- for-sale			19,633				38,146
Purchases of securities available-for-sale and held-to-maturity			(37,452	)			(73,521	)
Net redemptions (purchases) of other securities			1,409				(208	)
Net increase in loans			(28,912	)			(24,662	)
Purchase of bank owned life insurance			(7,500	)			-
Net increase in premises and equipment			(17	)			(432	)
NET CASH USED IN INVESTING ACTIVITIES			(52,839	)			(17,527	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits			104,185				60,827
Net decrease in borrowed funds			(38,500	)			(20,271	)
Dividends paid on common stock			(376	)			(226	)
Dividends paid on preferred stock			(171	)			(171	)
Repurchase of restricted stock for payment of taxes			(85	)			-
Issuance of 1,951,220 common shares, net			-				18,997
NET CASH PROVIDED BY FINANCING ACTIVITIES			65,053				59,156
NET INCREASE IN CASH			16,191				50,964
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			39,252				30,877
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	55,443			$	81,841
SUPPLEMENTAL DISCLOSURES:
CASH PAYMENTS FOR INTEREST			926			$	1,324
CASH PAYMENTS FOR INCOME TAXES			275				980
LOANS TRANSFERRED TO OTHER REAL ESTATE			1,354				1,437
ISSUANCE OF RESTRICTED STOCK GRANTS			63				35

 

 

THE FIRST BANCSHARES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE A — BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with 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, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2013.

 

NOTE B — 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”).

 

At June 30, 2014, the Company had approximately $1.0 billion in assets, $604.0 million in net loans, $883.9 million in deposits, and $89.8 million in stockholders' equity. For the six months ended June 30, 2014, the Company reported net income of $3.0 million ($2.8 million applicable to common stockholders).

 

In the first quarter and second quarter of 2014, the Company declared and paid a dividend of $.0375 per common share.

 

 

NOTE C – BUSINESS COMBINATION

 

BCB Holding Company, Inc.

 

On March 3, 2014, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with BCB Holding Company, Inc., an Alabama corporation (“BCB”) and parent of Bay Bank, Mobile, Alabama. The Agreement provides that, upon the terms and subject to the conditions set forth in the Agreement, BCB will merge with and into the Company (the “Merger”) and Bay Bank will merge with and into The First, A National Banking Association (“Bank Merger”). Subject to the terms and conditions of the Agreement, which has been approved by the Boards of Directors of the Company and BCB, each outstanding share of BCB common stock, other than shares held by the Company or BCB, or, shares with respect to which the holders thereof have perfected dissenters’ rights, will receive (i) for the BCB common stock that was outstanding prior to August 1, 2013, $3.60 per share which may be received in cash or the Company common stock provided that at least 30% of the aggregate consideration paid to such shareholders is in the Company common stock and one non-transferable contingent value right (“CVR”) of the CVR Consideration, and (ii) for the BCB common stock that was issued on August 1, 2013, $2.25 per share in cash. Each CVR is eligible to receive a cash payment equal to up to $0.40, with the exact amount based on the resolution of certain identified BCB loans over a three-year period following the closing of the transaction. Payout of the CVR will be overseen by a special committee of the Company’s Board of Directors. The Company will also either assume or redeem in full a note payable by BCB to Alostar Bank, as well as the preferred stock issued under the U.S. Treasury’s Capital Purchase Program. The total consideration to be paid in connection with the acquisition will range between approximately $6.2 million and $6.6 million depending upon the payout of the CVR, as well as the price of the Company common stock on the closing of the transaction, which is subject to a cap and a collar regarding its price.

 

The transaction closed on July 1, 2014. Accounting for the business combination and the determination of historical information have not been completed, but will be included in the September 30, 2014 Form 10Q.

 

Concurrently, the Company and BCB entered into an agreement and plan of merger pursuant to which BCB’s wholly-owned subsidiary, Bay Bank, was merged with and into the Company’s wholly-owned subsidiary, the Bank.

 

NOTE D – PREFERRED STOCK AND WARRANT

 

Pursuant to the terms of the letter agreement between the Company and the United States Department of the Treasury (“Treasury”), the Company issued 17,123 CDCI Preferred Shares.

 

The Letter Agreement contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid in 2011, 2012, and 2013) and on the Company’s ability to repurchase its common stock, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as previously disclosed by the Company. The CDCI Preferred Shares entitle the holder to an annual dividend of 2% for 8 years of the liquidation value of the shares, payable quarterly in arrears.

 

NOTE E — 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 stock options.

 

 

		For the Three Months Ended
		June 30, 2014
		Net Income				Shares				Per
		(Numerator)				(Denominator)				Share Data
Basic per share		$	1,527,000				5,152,784			$	.30
Effect of dilutive shares:
Restricted stock grants							37,792
Diluted per share		$	1,527,000				5,190,576			$	.29

 

		For the Six Months Ended
		June 30, 2014
		Net Income				Shares				Per
		(Numerator)				(Denominator)				Share Data
Basic per share		$	2,848,000				5,142,227			$	.55
Effect of dilutive shares:
Restricted stock grants							37,792
Diluted per share		$	2,848,000				5,180,019			$	.55

 

		For the Three Months Ended
		June 30, 2013
		Net Income				Shares				Per
		(Numerator)				(Denominator)				Share Data
Basic per share		$	706,000				3,955,243			$	.18
Effect of dilutive shares:
Restricted stock grants							46,238
Diluted per share		$	706,000				4,001,481			$	.18

 

		For the Six Months Ended
		June 30, 2013
		Net Income				Shares				Per
		(Numerator)				(Denominator)				Share Data
Basic per share		$	1,825,000				3,536,362			$	.52
Effect of dilutive shares:
Restricted stock grants							46,238
Diluted per share		$	1,825,000				3,582,600			$	.51

 

The Company granted 6,000 shares of restricted stock in the second quarter of 2014, and 57,327 shares of restricted stock in the first quarter of 2014.

  

 

NOTE F — FAIR VALUE OF ASSETS AND LIABILITIES

  

The Company groups its financial assets measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1:	Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2:	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities
Level 3:	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets.

 

Available-for-Sale Securities

 

The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of June 30, 2014 and December 31, 2013 (in thousands):

 

June 30, 2014

 

(Dollars in thousands)						Fair Value Measurements Using
						Quoted Prices in Active Markets For Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
Obligations of U. S. Government Agencies		$	36,701			$	-			$	36,701			$	-
Municipal securities			109,451				-				109,451				-
Mortgage-backed securities			87,273				-				87,273				-
Corporate obligations			29,259				-				26,460				2,799
Other			969				969				-				-
Total		$	263,653			$	969			$	259,885			$	2,799

 

 

December 31, 2013

 

						Fair Value Measurements Using
						Quoted Prices in Active Markets For Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
Obligations of U. S. Government Agencies		$	29,962			$	-			$	29,962			$	-
Municipal securities			108,078				-				108,078				-
Mortgage-backed securities			78,187				-				78,187				-
Corporate obligations			26,852				-				24,054				2,798
Other			972				972				-				-
Total		$	244,051			$	972			$	240,281			$	2,798

 

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

 

		Bank-Issued
		Trust
		Preferred
(Dollars in thousands)		Securities
		2014				2013
Balance, January 1		$	2,798			$	2,668
Transfers into Level 3			-				-
Transfers out of Level 3			-				-
Other-than-temporary impairment loss included in earnings			-				-
Unrealized gain included in comprehensive income			1				130
Balance at June 30, 2014 and December 31, 2013		$	2,799			$	2,798

 

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, 2014		$	2,799			Discounted cash flow		Probability of default		0 – 100%
December 31, 2013			2,798			Discounted cash flow		Probability of default		0 – 100%

 

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. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

 

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 and applying a discount factor to the value. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, or premium or discount existing at origination or acquisition of the loan. Impaired loans are classified within Level 2 of the fair value hierarchy.

 

Other Real Estate Owned

 

Other real estate owned acquired through loan foreclosure is initially recorded at fair value less estimated costs to sell, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value, 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 non-interest expense. Operating costs associated with the assets are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense. Other real estate owned measured at fair value on a non-recurring basis at June 30, 2014, amounted to $4.9 million. Other real estate owned is classified within Level 2 of the fair value hierarchy.

 

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at June 30, 2014 and December 31, 2013.

 

($ in thousands)

 

June 30, 2014

						Fair Value Measurements Using
						Quoted Prices in Active Markets For Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
Impaired loans		$	8,193			$	-			$	8,193			$	-
Other real estate owned			4,875				-				4,875				-

 

 

December 31, 2013

						Fair Value Measurements Using
						Quoted Prices in Active Markets For Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
Impaired loans		$	4,830			$	-			$	4,830			$	-
Other real estate owned			4,470				-				4,470				-

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

 

Cash and Cash Equivalents – For such short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Investment in securities available-for-sale and held-to-maturity – The fair value measurement for securities available-for-sale was discussed earlier. The same measurement approach was used for securities held-to-maturity.

 

Loans – The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

 

Bank-Owned Life Insurance– The fair value of bank-owned life insurance approximates the carrying amount, because upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

 

Deposits – The fair values of demand deposits are, as required by ASC Topic 825, equal to the carrying value of such deposits. Demand deposits include noninterest-bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts. The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of these deposits. Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after six months. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.

 

Short-Term Borrowings – The carrying value of any federal funds purchased and other short-term borrowings approximates their fair values.

 

FHLB and Other Borrowings – The fair value of the fixed rate borrowings are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of any variable rate borrowing approximates its fair value.

 

Subordinated Debentures – The subordinated debentures bear interest at a variable rate and the carrying value approximates the fair value.

 

 

Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.

 

As of June 30, 2014										Fair Value Measurements
		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		$	55,443			$	55,443			$	55,443			$	-			$	-
Securities available-for- sale			263,653				263,653				969				259,885				2,799
Securities held- to-maturity			8,421				9,813				-				9,813				-
Other securities			4,025				4,025				-				4,025				-
Loans, net			604,033				617,920				-				-				617,920
Bank-owned life insurance			14,251				14,251				-				14,251				-
Liabilities:
Noninterest- bearing deposits		$	183,226			$	183,226			$	-			$	183,226			$	-
Interest-bearing deposits			700,646				699,953				-				699,953				-
Subordinated debentures			10,310				10,310				-				-				10,310
FHLB and other borrowings			13,500				13,500				-				13,500				-

 

As of December 31, 2013										Fair Value Measurements
		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		$	39,252			$	39,252			$	39,252			$	-			$	-
Securities available-for- sale			244,051				244,051				972				240,281				2,798
Securities held- to-maturity			8,438				9,624				-				9,624				-
Other securities			5,534				5,534				-				5,534				-
Loans, net			577,575				590,866				-				-				590,866
Bank-owned life insurance			6,593				6,593				-				6,593				-
Liabilities:
Noninterest- bearing deposits		$	173,794			$	173,794			$	-			$	173,794			$	-
Interest-bearing deposits			606,177				605,737				-				605,737				-
Subordinated debentures			10,310				10,310				-				-				10,310
FHLB and other borrowings			52,000				52,000				-				52,000				-

 

 

NOTE G — LOANS

 

Loans typically provide higher yields than the other types of earning assets, and, thus, one of the Company's goals is for loans to be the largest category of the Company's earning assets. At June 30, 2014 and December 31, 2013, average loans accounted for 65.2% and 67.1% of average earning assets, respectively. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

 

The following table shows the composition of the loan portfolio by category:

 

		June 30, 2014								December 31, 2013
						Percent								Percent
						of								of
		Amount				Total				Amount				Total
		(Dollars in thousands)
Mortgage loans held for sale		$	3,220				0.5	%		$	3,680				0.6	%
Commercial, financial and agricultural			81,958				13.4				81,792				14.0
Real Estate:
Mortgage-commercial			204,101				33.5				202,343				34.7
Mortgage-residential			230,310				37.7				212,388				36.4
Construction			74,105				12.1				67,287				11.5
Consumer and other			16,338				2.8				15,813				2.8
Total loans			610,032				100	%			583,303				100	%
Allowance for loan losses			(5,999	)							(5,728	)
Net loans		$	604,033							$	577,575

 

In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.

 

Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.

 

 

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

 

(In thousands)

 

		Three Months				Six Months
		Ended				Ended
		June 30, 2014				June 30, 2014
Balance at beginning of period		$	5,811			$	5,728
Loans charged-off:
Real Estate			(449	)			(749	)
Installment and Other			(16	)			(59	)
Commercial, Financial and Agriculture			(-	)			(-	)
Total			(465	)			(808	)
Recoveries on loans previously charged-off:
Real Estate			357				400
Installment and Other			15				36
Commercial, Financial and Agriculture			4				8
Total			376				444
Net recoveries			(89	)			(364	)
Provision for Loan Losses			277				635
Balance at end of period		$	5,999			$	5,999

 

The following tables represent how the allowance for loan losses is allocated to a particular loan type, as well as the percentage of the category to total loans at June 30, 2014 and December 31, 2013.

 

Allocation of the Allowance for Loan Losses
		June 30, 2014
		(Dollars in thousands)
		Amount				% of loans in each category to total loans
Commercial Non Real Estate		$	563				13.8	%
Commercial Real Estate			3,669				57.0
Consumer Real Estate			1,525				25.6
Consumer			149				3.6
Unallocated			93				-
Total		$	5,999				100	%

 

		December 31, 2013
		(Dollars in thousands)
		Amount				% of loans in each category to total loans
Commercial Non Real Estate		$	582				14.0	%
Commercial Real Estate			3,384				57.2
Consumer Real Estate			1,427				25.4
Consumer			173				3.4
Unallocated			162				-
Total		$	5,728				100	%

 

 

The following table represents the Company’s impaired loans at June 30, 2014, and December 31, 2013.

 

		June 30,				December 31,
		2014				2013
		(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance		$	3,902			$	701
Impaired loans with a valuation allowance			4,291				4,001
Total impaired loans		$	8,193			$	4,702
Allowance for loan losses on impaired loans at period end			772				849
Total nonaccrual loans			6,063				3,181
Past due 90 days or more and still accruing			447				159
Average investment in impaired loans			5,722				4,007

 

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans:

 

		Three Months Ended June 30, 2014				Six Months Ended June 30, 2014
Average of individually impaired loans during period		$	6,168			$	5,722
Interest income recognized during impairment			-				-
Cash-basis interest income recognized			57				159

 

The gross interest income that would have been recorded in the period that ended if the nonaccrual 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 month ended June 30, 2014, was $64,000 and $97,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at June 30, 2014 and December 31, 2013.

 

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, 2014 and December 31, 2013. 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.

 

June 30, 2014

										Commercial,
						Installment				Financial
		Real Estate				and Other				and Agriculture				Total
		(In thousands)
Loans
Individually evaluated		$	7,836			$	44			$	313			$	8,193
Collectively evaluated			493,426				21,891				83,302				598,619
Total		$	501,262			$	21,935			$	83,615			$	606,812
Allowance for Loan Losses
Individually evaluated		$	750			$	2			$	20			$	772
Collectively evaluated			4,444				240				543				5,227
Total		$	5,194			$	242			$	563			$	5,999

 

 

December 31, 2013

										Commercial,
						Installment				Financial
		Real Estate				and Other				and Agriculture				Total
		(In thousands)
Loans
Individually evaluated		$	4,709			$	39			$	82			$	4,830
Collectively evaluated			473,832				19,725				81,236				574,793
Total		$	478,541			$	19,764			$	81,318			$	579,623
Allowance for Loan Losses
Individually evaluated		$	804			$	35			$	10			$	849
Collectively evaluated			4,007				300				572				4,879
Total		$	4,811			$	335			$	582			$	5,728

 

The following tables provide additional detail of impaired loans broken out according to class as of June 30, 2014 and December 31, 2013. The recorded investment included in the following table 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, 2014, are on nonaccrual 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, 2014
														Average				Interest
														Recorded				Income
		Recorded				Unpaid				Related				Investment				Recognized
		Investment				Balance				Allowance				YTD				YTD
		(In thousands)
Impaired loans with no related allowance:
Commercial installment		$	2			$	2			$	-			$	122			$	-
Commercial real estate			3,678				3,736				-				1,995				72
Consumer real estate			212				212				-				127				3
Consumer installment			10				10				-				10				-
Total		$	3,902			$	3,960			$	-			$	2,254			$	75
Impaired loans with a related allowance:
Commercial installment		$	311			$	311			$	20			$	193			$	11
Commercial real estate			2,367				2,437				341				2,132				60
Consumer real estate			1,579				1,579				409				1,554				12
Consumer installment			34				34				2				35				1
Total		$	4,291			$	4,361			$	772			$	3,914			$	84
Total Impaired Loans:
Commercial installment		$	313			$	313			$	20			$	315			$	11
Commercial real estate			6,045				6,173				341				4,127				132
Consumer real estate			1,791				1,791				409				1,681				15
Consumer installment			44				44				2				45				1
Total Impaired Loans		$	8,193			$	8,321			$	772			$	6,168			$	159

 

 

December 31, 2013
														Average				Interest
														Recorded				Income
		Recorded				Unpaid				Related				Investment				Recognized
		Investment				Balance				Allowance				YTD				YTD
		(In thousands)
Impaired loans with  no related allowance:
Commercial installment		$	3			$	3			$	-			$	45			$	-
Commercial real estate			353				353				-				1,035				8
Consumer real estate			341				399				-				262				9
Consumer installment			4				4				-				5				-
Total		$	701			$	759			$	-			$	1,347			$	17
Impaired loans with a related allowance:
Commercial installment		$	79			$	79			$	10			$	42			$	6
Commercial real estate			2,685				2,685				400				2,147				100
Consumer real estate			1,202				1,272				404				1,019				21
Consumer installment			35				35				35				36				4
Total		$	4,001			$	4,071			$	849			$	3,244			$	131
Total Impaired Loans:
Commercial installment		$	82			$	82			$	10			$	87			$	6
Commercial real estate			3,038				3,038				400				3,182				108
Consumer real estate			1,543				1,671				404				1,281				30
Consumer installment			39				39				35				41				4
Total Impaired Loans		$	4,702			$	4,830			$	849			$	4,591			$	148

 

 

The following tables provide additional detail of troubled debt restructurings at June 30, 2014.

 

For the Three Months Ending June 30, 2014
						Outstanding
		Outstanding				Recorded
		Recorded				Investment								Interest
		Investment				Post-				Number of				Income
		Pre-Modification				Modification				Loans				Recognized
Commercial installment		$	-			$	-				-			$	-
Commercial real estate			325				325				1				3
Consumer real estate			-				-				-				-
Consumer installment			-				-				-				-
Total		$	325			$	325				1			$	3

 

For the Six Months Ending June 30, 2014
						Outstanding
		Outstanding				Recorded
		Recorded				Investment								Interest
		Investment				Post-				Number of				Income
		Pre-Modification				Modification				Loans				Recognized
Commercial installment		$	239			$	239				1			$	8
Commercial real estate			325				325				1				7
Consumer real estate			-				-				-				-
Consumer installment			-				-				-				-
Total		$	564			$	564				2			$	15

 

The recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $3.3 million. The allowance for credit losses associated with those receivables on the basis of a current evaluation of loss was $28,000. All loans were performing as agreed with modified terms.

 

During the three and six month period ending June 30, 2014, there were 2 loans modified as TDR, and are considered non-performing.

 

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:

 

 

		June 30, 2014
		(In thousands)
		Past Due 30 to 89 Days				Past Due 90 Days or More and Still Accruing				Non- Accrual				Total Past Due and Non- Accrual				Total Loans
Real Estate-construction		$	235			$	92			$	3,030			$	3,357			$	74,105
Real Estate-mortgage			3,555				355				2,092				6,002				204,101
Real Estate-non farm non residential			172				-				924				1,096				230,310
Commercial			286				-				7				293				81,958
Consumer			74				-				10				84				16,338
Total		$	4,322			$	447			$	6,063			$	10,832			$	606,812

 

		December 31, 2013
		(In thousands)
		Past Due 30 to 89 Days				Past Due 90 Days or More and Still Accruing				Non- Accrual				Total Past Due and Non- Accrual				Total Loans
Real Estate-construction		$	478			$	-			$	212			$	690			$	67,287
Real Estate-mortgage			4,696				143				2,453				7,292				202,343
Real Estate-non farm non residential			252				-				507				759				212,388
Commercial			12				-				9				21				81,792
Consumer			115				16				-				131				15,813
Total		$	5,553			$	159			$	3,181			$	8,893			$	579,623

 

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.

 

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, 2014 and December 31, 2013, 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:

 

($ in thousands)

June 30, 2014

 

														Commercial,
		Real Estate Commercial				Real Estate Mortgage				Installment and Other				Financial and Agriculture				Total
Pass		$	333,981			$	153,781			$	21,870			$	83,012			$	592,644
Special Mention			371				116				-				399				886
Substandard			11,487				1,818				66				222				13,593
Doubtful			-				-				-				-				-
Subtotal			345,839				155,715				21,936				83,633				607,123
Less:
Unearned discount			196				96				-				19				311
Loans, net of Uunearned discount		$	345,643			$	155,619			$	21,936			$	83,614			$	606,812

 

December 31, 2013

														Commercial,
		Real Estate Commercial				Real Estate Mortgage				Installment and Other				Financial and Agriculture				Total
Pass		$	316,573			$	145,787			$	19,725			$	80,087			$	562,172
Special Mention			4,084				32				-				1,033				5,149
Substandard			10,972				1,426				39				225				12,662
Doubtful			-				-				-				-				-
Subtotal			331,629				147,245				19,764				81,345				579,983
Less:
Unearned discount			236				97				-				27				360
Loans, net of  unearned discount		$	331,393			$	147,148			$	19,764			$	81,318			$	579,623

 

 

NOTE H — 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 appropriate valuation methodologies. However, considerable judgment is necessarily 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.

 

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at June 30, 2014, follows:

($ in thousands)

 

		June 30, 2014
						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Available-for-sale securities:
Obligations of U.S. Government Agencies		$	36,666			$	113			$	78			$	36,701
Tax-exempt and taxable obligations of states and municipal subdivisions			107,532				2,525				606				109,451
Mortgage-backed securities			86,850				1,122				699				87,273
Corporate obligations			30,282				288				1,311				29,259
Other			1,255				-				286				969
Total		$	262,585			$	4,048			$	2,980			$	263,653
Held-to-maturity securities:
Mortgage-backed securities		$	2,421			$	-			$	10			$	2,411
Taxable obligations of states and municipal subdivisions			6,000				1,402				-				7,402
Total		$	8,421			$	1,402			$	10			$	9,813

 

NOTE I — ALLOWANCE FOR LOAN LOSSES

 

The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions which it believes to be reasonable, but which may not prove to be accurate, particularly given the Company’s growth and the economy. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

 

The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance regarding contingencies. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the three year quarterly moving average is utilized in determining the appropriate allowance. Historical loss factors are determined by graded and ungraded loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio. These factors require judgment upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committee, and data and guidance received or obtained from the Company’s regulatory authorities.

 

 

The second part of the allowance is determined in accordance with authoritative guidance regarding loan impairment. Impaired loans are determined based upon a review by internal loan review and senior loan officers.

 

The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

Impairment is measured on a loan by loan basis, and a specific allowance is assigned to each loan determined to be impaired. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if, in the Company’s opinion, the ultimate source of repayment will be generated from the liquidation of collateral.

 

The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

 

NOTE J – SUBSEQUENT EVENTS

 

Subsequent events have been evaluated by management through the date the financial statements were issued.

 

 

NOTE K – RECLASSIFICATION

 

Certain amounts in the 2013 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

 

ITEM NO. 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FINANCIAL CONDITION

 

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

 

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

 

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

 

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

 

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

 

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

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

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

 

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

 

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

 

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

 

RESULTS OF OPERATIONS - QUARTERLY

 

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

 

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

 

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

 

 

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

 

Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.

 

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

 

RESULTS OF OPERATIONS – YEAR TO DATE

 

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

 

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

 

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

 

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

 

 

Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.

 

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

 

ITEM NO. 3. CONTROLS AND PROCEDURES

 

As of June 30, 2014, (the “Evaluation Date”), we carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

 

There have been no changes, significant or otherwise, in our internal controls over financial reporting that occurred during the quarter ended June 30, 2014, that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

ITEM NO. 4. RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the FASB issued ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323), “Accounting for Investments in Qualified Affordable Housing Projects,” which permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional method, the investment should be accounted for as an equity method investment or a cost method investment. The decision to apply the proportional amortization method of accounting is an accounting policy decision that should be applied consistently to all qualifying affordable housing project investments rather than a decision to be applied to individual investments. This amendment should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. ASU 2014-01 is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those annual periods. The Company is evaluating the possible effects of this guidance on its financial statements.

 

 

In January 2014, the FASB issued ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors”, which will eliminate diversity in practice regarding the timing of derecognition for residential mortgage loans when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. Under ASU 2014-04, physical possession of residential real estate property is achieved when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or the borrower conveys all interest in the residential real estate property through completion of a deed in lieu or foreclosure in order to satisfy the loan. Once physical possession has been achieved, the loan is derecognized and the property recorded within other assets at the lower of cost or fair value (less estimated costs to sell). In addition, the guidance requires both interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The additional disclosure requirements are effective for annual reporting periods beginning on or after December 15, 2014, and interim periods within those annual periods with retrospective disclosure necessary for all comparative periods presented. The adoption of this standard will result in additional disclosures but is not expected to have any impact on the Company’s financial statements or results of operations.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), “Revenue from Contracts with Customers,” which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The ASU defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The new accounting guidance, which does not apply to financial instruments, is effective on a retrospective basis beginning on January 1, 2017, and early adoption is prohibited. The Company does not expect the new guidance to have a material impact on its consolidated financial position or results of operation.

 

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860), “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The FASB issued ASU 2014-11 to change the accounting for repurchase-to-maturity transactions and linked repurchase financials to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The new guidance is effective beginning on January 1, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial position or results of operation.

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation-Stock Compensation (Topic 718), “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company's current accounting treatment of performance conditions for employees who are or become retirement eligible prior to the achievement of the performance target are consistent with ASU 2014-12, and as such does not expect the new guidance to have a material effect on the Corporation’s financial condition and results of operations. The Company expects to prospectively adopt ASU 2014-12 in the first quarter 2015.

 

 

PART II — OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

None

 

ITEM 1A.

RISK FACTORS

 

There are no material changes in the Company’s risk factors since December 31, 2013. Please refer to the Annual Report on Form 10-K of The First Bancshares, Inc., filed with the Securities and Exchange Commission on March 31, 2014.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS

 

On March 20, 2013, The First Bancshares, Inc., a Mississippi corporation (the "Company") entered into Securities Purchase Agreements with a limited number of institutional and other accredited investors, including certain directors and executive officers of the Company (collectively, the "Purchasers') to sell a total of 1,951,220 shares of mandatorily convertible non-cumulative, non-voting, perpetual Preferred Stock, Series D, $1.00 par value (the "Series D Preferred Stock") at a price of $10.25 per share, for an aggregate gross purchase price of $20,000,005 (the "Private Placement"). The Private Placement closed on March 22, 2013, after the Company issued an aggregate of 1,951,220 shares of Series D Preferred Stock against receipt of $20,000,005 in cash from the Purchasers. The Private Placement was not registered under the Securities Act of 1933, as amended (the "Act"), in reliance on Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder.

 

The Series D Preferred Stock automatically converted into a like number of shares of the Company's common stock after the Company received shareholder approval of such conversion at a meeting of shareholders held on May 23, 2013. Upon conversion of the Series D Preferred Stock, each share of Series D Preferred Stock was automatically converted into one share of the Company’s common stock par value of one U.S. dollar ($1.00) per share (“Common Stock”). The holders of record of Series D Preferred Stock were entitled to receive as, when, and if declared by the Company’s board of directors, dividends on each share of Series D Preferred Stock equal to the per share amount paid on a share of Common Stock (the “Preferred Dividend”), and no dividends were payable on the Common Stock or any other class or series of capital stock ranking with respect to dividends pari passu with the Common Stock unless a Preferred Dividend was payable at the same time on the Series D Preferred Stock; provided, however, in the event the shareholders of the Company did not approve the conversion of the Series D Preferred Stock to Common Stock within six (6) months of issuance, the holders of record of Series D Preferred Stock would have been entitled to receive as, when, and if declared by the board of directors of the Company, dividends on each share of Series D Preferred Stock equal to six (6) percent of liquidation value per annum or $0.62 per share (the “Fixed Preferred Dividend”) and no dividends would have been payable on the Common Stock or any other class or series of capital stock ranking with respect to dividends pari passu with the Common Stock unless a Preferred Dividend was payable at the time on the Series D Preferred Stock. Such Fixed Preferred Dividends would have been payable semi-annually in arrears on June 30 and December 31, beginning on December 31, 2013, until the shareholders of the Company approved the conversion of the Series D Preferred Shares into the Common Stock. The Series D Preferred Stock was not redeemable by the Company or by the holders. Complete details concerning the Series D Preferred Stock are contained in the Certificate of Designation filed with the Mississippi Secretary of State on March 20, 2013, a copy of which was attached as Exhibit 4.1 to the Form 8-K filed by the Company on March 25, 2013 and incorporated herein by reference.

 

 

In accordance with Section 4.11 of the Securities Purchase Agreement, the Company called a meeting of the Company shareholders to vote on proposals to approve the conversion of shares of Series D Preferred Stock into shares of Common Stock for purposes of compliance with NASDAQ Stock Market Rule 5635. The board of directors of the Company unanimously recommended shareholder approval of this proposal.

 

Also on March 20, 2013, pursuant to the Securities Purchase Agreements, the Company entered into a Registration Rights Agreement with each of the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed a registration statement with the Securities and Exchange Commission to register for resale the Common Stock to be issued upon conversion of the Series D Preferred Stock, within 90 calendar days after the closing of the Private Placement, and to used commercially reasonable efforts to cause such registration statement to be declared effective upon the earlier of (i) the 120th calendar day following March 22, 2013 (or the 150th calendar day following March 22, 2013 in the event that such registration statement is subject to review by the Securities and Exchange Commission) and (ii) the 5th trading day (as defined in the Registration Rights Agreement) after the date the Company is notified (orally or in writing, whichever is earlier) by the Securities and Exchange Commission that such registration statement will not be “reviewed” or will not be subject to further review. Failure to meet these deadlines and certain other events could have resulted in the Company's payment of liquidated damages to the holders of the rights, monthly in the amount of 0.5% of the aggregate purchase price of each holder of the converted Common Stock.

 

Copies of the form of Securities Purchase Agreements and the form of Registration Rights Agreements were attached to the Company’s Form 8-K filed on March 25, 2013 as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by reference. The foregoing descriptions of the Securities Purchase Agreements, the Registration Rights Agreements and the Certificate of Designation do not purport to be complete and are qualified in their entirety by reference to the full text of the Securities Purchase Agreements, the Registration Rights Agreements and the Certificate of Designation filed as exhibits to this report.

 

Pursuant to shareholder approval obtained at the Annual Meeting held on May 23, 2013, the Series D Nonvoting Convertible Preferred Stock has been converted to common stock.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not Applicable

 

 

ITEM 4.

REMOVED AND RESERVED

 

ITEM 5.

OTHER INFORMATION

 

Not Applicable

 

ITEM 6.

EXHIBITS

 

(a)

Exhibits

 

Exhibit No.

 

2.1

Agreement and Plan of merger, dated as of March 2, 2014, between The First Bancshares, Inc. and BCB Holding Company, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 3-7-2014)

 

2.1

Acquisition Agreement, dated as of January 31, 2013, between The First Bancshares, Inc. and First Baldwin Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 2-1-13) and First Amendment to Acquisition Agreement, dated as of March 15, 2013, between First Bancshares, Inc. and First Baldwin Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 3-20-13)

 

3.1

Articles of Amendment and Certificate of Designation, Preferences and Rights of Series D Nonvoting Convertible Preferred Stock dated as of March 18,2013(incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on 3-21-13).

 

3.2

Restated Articles of Incorporation dated as of March 21, 2013 (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on 3-21-13).

 

4.1

Certificate of Designation of Series D Nonvoting Convertible Preferred Stock, as filed with the Mississippi Secretary of State on March 20, 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on March 25, 2013).

 

10.1

Form of Securities Purchase Agreement between the Company and each of the Purchasers, dated as of March 20, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 25, 2013)

 

10.2

Form of Registration Rights Agreement between the Company and each of the Purchasers, dated as of March 20, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 25, 2013)

 

 

31.1

Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

Certification of principal executive officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

Certification of principal financial officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

101.INS**

XBRL Instance Document

 

101.SCH**

XBRL Taxonomy Extension Schema

 

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase

 

101.DEF**

XBRL Taxonomy Extension Definition Linkbase

 

101.LAB**

XBRL Taxonomy Extension Label Linkbase

 

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase

 

______________

 

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

 

(b)

The Company filed five reports on Form 8-K during the quarter ended June 30, 2014

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			THE FIRST BANCSHARES, INC.
			(Registrant)
		/s/	M. RAY (HOPPY)COLE, JR.
August 14, 2014			M. Ray (Hoppy) Cole, Jr.
(Date)			Chief Executive Officer
		/s/	DEEDEE LOWERY
Augsut  14, 2014			DeeDee Lowery, Executive
(Date)			Vice President and Chief Financial Officer