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FIRST BANCSHARES INC /MS/ - Quarter Report: 2013 March (Form 10-Q)

 

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: March 31, 2013

 

 

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  ¨

 

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

 

LARGE ACCELERATED FILER ¨  ACCELERATED FILER ¨ NON-ACCELERATED FILER x

 

ON March 31, 2013, 3,142,235 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)     
   March 31,   December 31, 
   2013   2012 
ASSETS          
           
Cash and due from banks  $24,994   $20,225 
Interest-bearing deposits with banks   59,237    9,588 
Federal funds sold   7,221    1,064 
           
Total cash and cash equivalents   91,452    30,877 
           
Securities held-to-maturity, at amortized cost   8,462    8,470 
Securities available-for-sale, at fair value   212,263    214,393 
Other securities   3,056    3,438 
           
Total securities   223,781    226,301 
           
Loans held for sale   3,677    5,586 
Loans   421,691    408,112 
Allowance for loan losses   (4,918)   (4,727)
           
Loans, net   420,450    408,971 
           
Premises and equipment   22,253    22,243 
Interest receivable   2,936    2,887 
Cash surrender value of life insurance   6,482    6,441 
Goodwill   9,362    9,362 
Other assets   5,471    7,522 
Other real estate owned   6,696    6,782 
           
TOTAL ASSETS  $788,883   $721,386 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Deposits:          
Noninterest-bearing  $111,492   $109,625 
Interest-bearing   551,787    487,002 
           
TOTAL DEPOSITS   663,279    596,627 
           
Interest payable   198    212 
Borrowed funds   16,760    36,771 
Subordinated debentures   10,310    10,310 
Other liabilities   11,268    11,580 
           
TOTAL LIABILITIES   701,815    655,500 
           
STOCKHOLDERS’ EQUITY:          
Preferred stock, Series D, par value $10.25, 1,951,220 issued and outstanding at March 31, 2013 and 0 issued and outstanding at December 31, 2012   20,000    - 
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 issued and outstanding at March 31, 2013 and December 31, 2012, respectively   17,041    17,021 
Common stock, par value $1 per share, 10,000,000 shares authorized; 3,168,729 shares issued at March 31, 2013 and 3,133,596 at December 31, 2012, respectively   3,169    3,134 
Additional paid-in capital   23,753    23,711 
Retained earnings   20,954    19,951 
Accumulated other comprehensive income   2,615    2,533 
Treasury stock, at cost, 26,494 shares at          
March 31, 2013 and at December 31, 2012   (464)   (464)
           
TOTAL STOCKHOLDERS’ EQUITY   87,068    65,886 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $788,883   $721,386 

 

 
 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

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

 

   (Unaudited) 
   Three Months Ended 
   March 31, 
   2013   2012 
         
INTEREST INCOME:          
Interest and fees on loans  $5,231   $5,454 
Interest and dividends on securities:          
Taxable interest and dividends   903    694 
Tax exempt interest   504    507 
Interest on federal funds sold   12    11 
           
TOTAL INTEREST INCOME   6,650    6,666 
           
INTEREST EXPENSE:          
Interest on deposits   618    892 
Interest on borrowed funds   141    289 
           
TOTAL INTEREST EXPENSE   759    1,181 
           
NET INTEREST INCOME   5,891    5,485 
           
PROVISION FOR LOAN LOSSES   311    152 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   5,580    5,333 
           
OTHER INCOME:          
Service charges on deposit accounts   844    870 
Other service charges and fees   1,086    605 
           
TOTAL OTHER INCOME   1,930    1,475 
           
OTHER EXPENSES:          
Salaries and employee benefits   3,183    2,938 
Occupancy and equipment   956    960 
Other   1,840    1,624 
           
TOTAL OTHER EXPENSES   5,979    5,522 
           
INCOME BEFORE INCOME TAXES   1,531    1,286 
           
INCOME TAXES   306    315 
           
NET INCOME   1,225    971 
           
PREFERRED STOCK ACCRETION AND DIVIDENDS   106    106 
           
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS  $1,119   $865 
           
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:          
BASIC  $.36   $.28 
DILUTED   .35    .28 
DIVIDENDS PER SHARE – COMMON   .0375    .0375 

 

 
 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

($ amounts in thousands)

 

   (Unaudited) 
   Three Months Ended 
   March 31, 
   2013   2012 
         
Net income per consolidated statements of income  $1,225   $971 
Other comprehensive income:          
Unrealized holding gains arising during the period on available-for-sale securities   105    556 
Unrealized holding gains (losses) on loans held for sale   20    (27)
Income tax expense   (43)   (180)
Other Comprehensive Income   82    349 
           
Comprehensive Income  $1,307   $1,320 

 

 
 

 

THE FIRST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

($ in thousands)                                
                       Accumulated         
                       Other         
               Additional       Compre-         
   Common   Preferred   Stock   Paid-in   Retained   hensive   Treasury     
   Stock   Stock   Warrants   Capital   Earnings   Income   Stock   Total 
Balance, January 1, 2012  $3,093   $16,939   $284   $23,220   $16,791   $562   $(464)  $60,425 
Net income   -    -    -    -    971    -    -    971 
Other compre- hensive income   -    -    -    -    -    349    -    349 
Accretion and dividends on preferred Stock   -    20    -    -    (106)   -    -    (86)
Dividends on common stock, $.0375 per Share   -    -    -    -    (114)   -    -    (114)
Restricted stock grant   42    -    -    (42)   -    -    -    - 
Compensation expense   -    -    -    43    -    -    -    43 
Balance, March 31, 2012  $3,135   $16,959   $284   $23,221   $17,542   $911   $(464)  $61,588 
                                         
Balance, January 1, 2013  $3,134   $17,021   $284   $23,427   $19,951   $2,533   $(464)  $65,886 
Net income   -    -    -    -    1,225    -    -    1,225 
Other compre- hensive income   -    -    -    -    -    82    -    82 
Accretion and dividends on preferred Stock   -    20    -    -    (106)   -    -    (86)
Dividends on common stock, $.0375 per Share   -    -    -    -    (116)   -    -    (116)
Issuance of 1,951,220 preferred shares   -    20,000    -    -    -    -    -    20,000 
Restricted stock grant   35    -    -    (35)   -    -    -    - 
Compensation expense   -    -    -    77    -    -    -    77 
Balance, March 31, 2013  $3,169   $37,041   $284   $23,469   $20,954   $2,615   $(464)  $87,068 

 

 
 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ Amounts in Thousands)

   (Unaudited) 
   Three Months Ended 
   March 31, 
   2013   2012 
CASH FLOWS FROM OPERATING ACTIVITIES:          
NET INCOME  $1,225   $971 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   421    631 
Provision for loan losses   311    152 
Loss on sale/writedown of ORE   10    143 
Restricted stock expense   77    43 
Increase in cash value of life insurance   (41)   (44)
Federal Home Loan Bank stock dividends   (1)   (1)
Changes in:          
Interest receivable   (49)   (314)
Loans held for sale, net   1,889    578 
Interest payable   (14)   (22)
Other, net   1,805    2,649 
NET CASH PROVIDED BY OPERATING ACTIVITIES   5,633    4,786 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Maturities and calls of securities available- for-sale   18,278    7,716 
Purchases of securities available-for-sale and held-to-maturity   (16,135)   (27,744)
Net redemptions of other securities   382    (157)
Net increase in loans   (13,719)   1,924 
Net additions in premises and equipment   (306)   (234)
NET CASH USED IN INVESTING ACTIVITIES   (11,500)   (18,495)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Increase in deposits   66,652    37,867 
Net decrease in borrowed funds   (20,011)   (231)
Dividends paid on common stock   (113)   (113)
Dividends paid on preferred stock   (86)   (86)
Issuance of 1,951,220 shares preferred series D   20,000    - 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   66,442    37,437 
           
NET INCREASE IN CASH   60,575    23,728 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   30,877    23,181 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $91,452   $46,909 
SUPPLEMENTAL DISCLOSURES:          
           
CASH PAYMENTS FOR INTEREST  $773   $1,203 
CASH PAYMENTS FOR INCOME TAXES   189    174 
LOANS TRANSFERRED TO OTHER REAL ESTATE   96    2,438 
ISSUANCE OF RESTRICTED STOCK GRANTS   35    42 

 

 
 

 

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 three months ended March 31, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012.

 

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 March 31, 2013, the Company had approximately $788.9 million in assets, $425.4 million in loans, $663.3 million in deposits, and $87.1 million in stockholders' equity. For the three months ended March 31, 2013, the Company reported net income of $1.2 million ($1.1 million applicable to common stockholders).

 

In the first quarter of 2013, the Company declared and paid a dividend of $.0375 per common share.

 

NOTE C – BUSINESS COMBINATION

 

The Company entered into an Acquisition Agreement dated January 31, 2013, as amended (the “Agreement”) with First Baldwin Bancshares, Inc., an Alabama corporation (“Baldwin”). The Agreement provided that, upon the terms and subject to the conditions set forth in the Agreement, the Company would acquire all of the outstanding shares (the “Acquisition”) of Baldwin’s wholly-owned subsidiary, First National Bank of Baldwin County, A National Banking Association (“FNB”). Subject to the terms and conditions of the Agreement, as amended, which was approved by both the Company’s Board of Directors and the Board of Directors of Baldwin, on February 21, 2013, Baldwin filed a voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Alabama (“Bankruptcy Court”) and sought Bankruptcy Court approval of the Agreement and the Acquisition through a Chapter 11 plan. Upon approval by the Bankruptcy Court and consummation of the Acquisition, all outstanding FNB common stock would be sold to the Company for cash consideration of $3,300,000 (the “Purchase Price”). Each outstanding share of FNB common stock will remain outstanding and be unaffected by the Acquisition.

 

 
 

 

The Company has recently completed its Acquisition of FNB. On April 23, 2013, the Bankruptcy Court confirmed the Chapter 11 Plan of Reorganization for Baldwin pursuant to which Baldwin had agreed to sell all of the outstanding voting stock of its subsidiary, FNB, under the Agreement. The Bankruptcy Court’s approval received was the last required regulatory approval regarding the Acquisition. Previously, both the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency had granted the requisite approvals to the Acquisition by the Company of all of the outstanding voting stock of FNB on March 28, 2013, and April 4, 2013, respectively. The Acquisition closed and was completed on April 30, 2013. There was no vote required of shareholders of FNB to approve the Acquisition.

 

No further additional action or regulatory approval is required with respect to the Acquisition. As of the closing on April 30, 2013, FNB became a wholly-owned subsidiary of the Company and subsequently was merged with and into the Company’s bank subsidiary, The First, A National Banking Association.

 

NOTE D – PREFERRED STOCK AND WARRANT

 

On February 6, 2009, as part of the U.S. Department of Treasury’s (“Treasury”) Capital Purchase Program (“CPP”), the Company received a $5.0 million equity investment by issuing 5 thousand shares of Series A, no par value preferred stock to the Treasury pursuant to a Letter Agreement and Securities Purchase Agreement that was previously disclosed by the Company. The Company also issued a warrant to the Treasury allowing it to purchase 54,705 shares of the Company’s common stock at an exercise price of $13.71. The warrant can be exercised immediately and has a term of 10 years.

 

The Company allocated the proceeds received from the Treasury, net of transaction costs, on a pro rata basis to the Series A preferred stock and the warrant based on their relative fair values. The Company assigned $.3 million and $4.7 million to the warrant and the Series A preferred stock, respectively. The resulting discount on the Series A preferred stock is being accreted up to the $5.0 million liquidation amount at the time of the exchange that is described in the following paragraphs.

 

On September 29, 2010, and pursuant to the terms of the letter agreement between the Company and the United States Department of the Treasury (“Treasury”), the Company closed a transaction whereby Treasury exchanged its 5,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series UST, (the “CPP Preferred Shares”) for 5,000 shares of a new series of preferred stock designated Fixed Rate Cumulative Perpetual Preferred Stock, Series CD (the “CDCI Preferred Shares”). On the same day, and pursuant to the terms of the letter agreement between the Company and Treasury, the Company issued an additional 12,123 CDCI Preferred Shares to Treasury for a purchase price of $12,123,000. As a result of the CDCI Transactions, the Company is no longer participating in the TARP Capital Purchase Program being administered by Treasury and is now participating in Treasury’s TARP Community Development Capital Initiative (the “CDCI”). The terms of the CDCI Transactions are more fully set forth in the Exchange Letter Agreement and the Purchase Letter Agreement.

 

 
 

 

The Letter Agreement, pursuant to which the Preferred Shares were exchanged, 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 2010, 2011, and 2012) 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 most significant difference in terms between the CDCI Preferred Shares and the CPP Preferred Shares is the dividend rate applicable to each. The CPP Preferred Shares entitled the holder to an annual dividend of 5% increasing to 9% after 5 years of the liquidation value of the shares, payable quarterly in arrears; by contrast, 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. Other differences in terms between the CDCI Preferred Shares and the CPP Preferred Shares, including, without limitation, the restrictions on common stock dividends and on redemption of common stock and other securities exist. The terms of the CDCI Preferred Shares are more fully set forth in the Articles of Amendment creating the CDCI Preferred Shares, which Articles of Amendment were filed with the Mississippi Secretary of State on September 27, 2010.

 

As a condition to participate in the CDCI, the Company was required to obtain certification as a Community Development Financial Institution (a “CDFI”) from the Treasury’s Community Development Financial Fund. On September 28, 2010, the Company was notified that its application for CDFI certification had been approved. In order to become certified and maintain its certification as a CDFI, the Company is required to meet the CDFI eligibility requirements set forth in 12 C.F.R. 1805.201(b).

 

On March 22, 2013, the Company raised $20,000,005 in a private placement of 1,951,220 shares of newly authorized Series D Nonvoting Convertible Preferred Stock (“Convertible Preferred Stock”) at a purchase price of $10.25 per share. The terms of the Convertible Preferred Stock provide for mandatory conversion into the Company’s common stock upon approval. The Company paid $921,487.43 in fees to its financial advisors who acted as placement agents in the private placement.

 

The Company intends to use the net proceeds from the private placement to increase its equity capital and for general corporate purposes, which includes, among other things, support for organic and acquisition-based growth. The private placement was exempt from Securities and Exchange Commission registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder.

 

Upon conversion of the Convertible Preferred Stock, the Company will issue up to 1,951,220 shares of common stock. On April 24, 2013, the Company had 3,142,235 shares of common stock outstanding.

 

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 
   March 31, 2013 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $1,119,000    3,117,480   $.36 
                
Effect of dilutive shares:               
Restricted stock grants        39,360      
                
Diluted per share  $1,119,000    3,156,840   $.35 

 

   For the Three Months Ended 
   March 31, 2012 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $865,000    3,079,337   $.28 
                
Effect of dilutive shares:               
 Restricted stock grants        16,591      
                
Diluted per share  $865,000    3,095,928   $.28 

 

The Company granted 35,133 shares of restricted stock in the first quarter of 2013 and 42,795 shares of restricted stock in the first quarter of 2012.

 

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 March 31, 2013 and December 31, 2012 (in thousands):

 

March 31, 2013

 

       Fair Value Measurements Using 
       Quoted Prices         
       in         
       Active         
       Markets   Significant     
       For   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                     
Obligations of U. S. Government Agencies  $27,893   $-   $27,893   $- 
Municipal securities   98,520    -    98,520    - 
Mortgage-backed securities   67,975    -    67,975    - 
Corporate obligations   16,907    -    14,093    2,814 
Other   968    968    -    - 
Total  $212,263   $968   $208,481   $2,814 

 

December 31, 2012

 

       Fair Value Measurements Using 
       Quoted Prices         
       in         
       Active         
       Markets   Significant     
       For   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                     
Obligations of  U. S. Government Agencies  $36,359   $-   $36,359   $- 
Municipal securities   98,910    -    98,910    - 
Mortgage-backed securities   61,967    -    61,967    - 
Corporate obligations   16,187    -    13,519    2,668 
Other   970    970    -    - 
Total  $214,393   $970   $210,755   $2,668 

 

 
 

 

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

 

   Bank-Issued 
   Trust 
   Preferred 
   Securities 
(Dollars in thousands)   2013    2012 
Balance, January 1   2,668    2,252 
Transfers into Level 3   -    - 
Transfers out of Level 3   -    - 
Other-than-temporary impairment loss included in earnings   -    - 
Unrealized gain included in comprehensive income   146    416 
Balance at March 31, 2013 and December 31, 2012   2,814    2,668 

 

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 March 31, 2013, amounted to $6.7 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 March 31, 2013 and December 31, 2012.

 

($ in thousands)

 

March 31, 2013

 

       Fair Value Measurements Using 
       Quoted         
       Prices in         
       Active         
       Markets   Significant     
       For   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                     
Impaired loans  $4,091   $-   $4,091   $- 
Other real estate owned   6,696    -    6,696    - 

 

December 31, 2012

       Fair Value Measurements Using 
       Quoted         
       Prices in         
       Active         
       Markets   Significant     
       For   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Impaired loans  $3,589   $-   $3,589   $- 
Other real estate owned   6,782    -    6,782    - 

 

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.

 

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   As of 
   March 31, 2013   December 31, 2012 
       Estimated       Estimated 
   Carrying   Fair   Carrying   Fair 
   Amount   Value   Amount   Value 
   (In thousands) 
Financial Instruments:                    
Assets:                    
Cash and cash equivalents  $91,452   $91,452   $30,877   $30,877 
Securities available-for-sale   212,263    212,263    214,393    214,393 
Securities held-to-maturity   8,462    10,212    8,470    7,055 
Other securities   3,056    3,056    3,438    3,438 
Loans, net   420,450    434,814    408,971    422,029 
                     
Liabilities:                    
Noninterest-bearing Deposits  $111,492   $111,492   $109,625   $109,625 
Interest-bearing deposits   551,787    552,339    487,002    487,599 
Subordinated debentures   10,310    10,310    10,310    10,310 
FHLB and other borrowings   16,760    16,760    36,771    36,771 

 

 
 

 

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 March 31, 2013 and December 31, 2012, loans accounted for 59.4% and 63.6% of 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:

 

Composition of Loan Portfolio

   March 31, 2013   December 31, 2012 
   Amount  

Percent

of

Total

   Amount  

Percent

of

Total

 
   (Dollars in thousands) 
Mortgage loans held for sale  $3,677    .9%  $5,586    1.4%
Commercial, financial and agricultural   52,941    12.4    53,234    12.9 
Real Estate:                    
Mortgage-commercial   154,085    36.2    142,046    34.3 
Mortgage-residential   144,345    34.0    140,703    34.0 
Construction   56,293    13.2    57,529    13.9 
Consumer and other   14,027    3.3    14,600    3.5 
Total loans   425,368    100%   413,698    100%
Allowance for loan losses   (4,918)        (4,727)     
Net loans  $420,450        $408,971      

 

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 is as follows:

 

(In thousands)

 

   Three Months 
   Ended 
   March 31, 2013 
     
Balance at beginning of period  $4,727 
Loans charged-off:     
Real Estate   (30)
Installment and Other   (55)
Commercial, Financial and Agriculture   (66)
Total   (151)
Recoveries on loans previously charged-off:     
Real Estate   4 
Installment and Other   21 
Commercial, Financial and Agriculture   6 
Total   31 
Net Charge-offs   (120)
Provision for Loan Losses   311 
Balance at end of period  $4,918 

 

 
 

 

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 March 31, 2013 and December 31, 2012.

 

Allocation of the Allowance for Loan Losses

 

   March 31, 2013 
   (Dollars in thousands) 
       % of loans 
       in each category 
   Amount   to total loans 
         
Commercial Non Real Estate  $406    12.5%
Commercial Real Estate   3,382    64.4 
Consumer Real Estate   978    19.5 
Consumer   148    3.6 
Unallocated   4    - 
Total  $4,918    100%

 

   December 31, 2012 
   (Dollars in thousands) 
       % of loans 
       in each category 
   Amount   to total loans 
         
Commercial Non Real Estate  $420    13.3%
Commercial Real Estate   3,338    63.7 
Consumer Real Estate   810    19.0 
Consumer   151    4.0 
Unallocated   8    - 
Total  $4,727    100%

 

The following table represents the Company’s impaired loans at March 31, 2013, and December 31, 2012.

 

   March 31,   December 31, 
   2013   2012 
   (In thousands) 
Impaired Loans:          
Impaired loans without a valuation allowance  $1,700   $1,445 
Impaired loans with a valuation allowance   2,391    2,144 
Total impaired loans  $4,091   $3,589 
Allowance for loan losses on impaired loans at period end   992    936 
           
Total nonaccrual loans   3,127    3,401 
           
Past due 90 days or more and still accruing   161    158 
Average investment in impaired loans   3,840    2,979 

 

 
 

 

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

 

   Three Months 
   Ended 
   March 31, 2013 
     
Average of individually impaired loans during period  $3,840 
Interest income recognized during impairment   - 
Cash-basis interest income recognized   3 

 

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 ended March 31, 2013, was $66,000. The Company had no loan commitments to borrowers in non-accrual status at March 31, 2013 and 2012.

 

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 March 31, 2013 and December 31, 2012. 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.

 

March 31, 2013

 

           Commercial,     
       Installment   Financial     
   Real    and   and      
   Estate   Other   Agriculture   Total 
   (In thousands) 
Loans                    
Individually evaluated  $3,893   $50   $148   $4,091 
Collectively evaluated   349,992    15,145    52,463    417,600 
Total  $353,885   $15,195   $52,611   $421,691 
                     
Allowance for Loan Losses                    
Individually evaluated  $895   $44   $53   $992 
Collectively evaluated   3,465    108    353    3,926 
Total  $4,360   $152   $406   $4,918 

 

 
 

 

December 31, 2012

 

           Commercial,     
       Installment   Financial     
   Real   and   and      
   Estate   Other   Agriculture   Total 
   (In thousands) 
Loans                    
Individually evaluated  $4,111   $55   $221   $4,387 
Collectively evaluated   333,299    16,401    54,025    403,725 
Total  $337,410   $16,456   $54,246   $408,112 
                     
Allowance for Loan Losses                    
Individually evaluated  $917   $110   $76   $1,103 
Collectively evaluated   3,231    49    344    3,624 
Total  $4,148   $159   $420   $4,727 

 

The following tables provide additional detail of impaired loans broken out according to class as of March 31, 2013 and December 31, 2012. 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 March 31, 2013, 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.

 

March 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  $14   $14   $-   $15   $- 
Commercial real estate   1,262    1,672    -    1,139    8 
Consumer real estate   424    424    -    264    1 
Consumer installment   -    -    -    155    - 
Total  $1,700   $2,110   $-   $1,573   $9 
Impaired loans with a related allowance:                         
Commercial installment  $134   $134   $53   $168   $- 
Commercial real estate   1,760    1,760    794    1,654    5 
Consumer real estate   447    447    101    246    4 
Consumer installment   50    50    44    199    1 
Total  $2,391   $2,391   $992   $2,267   $10 
Total Impaired Loans:                         
Commercial installment  $148   $148   $53   $183   $- 
Commercial real estate   3,022    3,432    794    2,793    13 
Consumer real estate   871    871    101    510    5 
Consumer installment   50    50    44    354    1 
Total Impaired Loans  $4,091   $4,501   $992   $3,840   $19 

 

 
 

 

December 31, 2012

 

               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
   (In thousands) 
Impaired loans with no related allowance:                         
Commercial installment  $15   $15   $-   $46   $- 
Commercial real estate   1,013    1,529    -    1,004    39 
Consumer real estate   106    969    -    168    8 
Consumer installment   311    311    -    156    1 
Total  $1,445   $2,824   $-   $1,374   $48 
Impaired loans with a related allowance:                         
Commercial installment  $203   $203   $73   $173   $8 
Commercial real estate   1,549    1,549    747    1,546    38 
Consumer real estate   44    44    44    72    4 
Consumer installment   348    348    72    197    2 
Total  $2,144   $2,144   $936   $1,988   $52 
Total Impaired Loans:                         
Commercial installment  $218   $218   $73   $219   $8 
Commercial real estate   2,562    3,078    747    2,550    77 
Consumer real estate   150    1,013    44    240    12 
Consumer installment   659    659    72    353    3 
Total Impaired Loans  $3,589   $4,968   $936   $3,362   $100 

 

 
 

 

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 $177,000. The allowance for credit losses associated with those receivables on the basis of a current evaluation of loss was $29,000. All loans were performing as agreed with modified terms.

 

During the three month period ending March 31, 2013, there was one loan modified as TDR, and is 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:

 

   March 31, 2013 
   (In thousands) 
       Past Due       Total     
       90 Days       Past Due     
   Past Due   or More       and     
   30 to 89   and Still   Non-   Non-   Total 
   Days   Accruing   Accrual   Accrual   Loans 
                     
Real Estate-construction  $419   $-   $1,570   $1,989   $56,293 
Real Estate-mortgage   2,817    66    886    3,769    143,507 
Real Estate-non farm non residential   33    90    602    725    154,085 
Commercial   114    -    64    178    52,611 
Consumer   76    5    5    86    15,195 
Total  $3,459   $161   $3,127   $6,747   $421,691 

 

   December 31, 2012 
   (In thousands) 
       Past Due             
       90 Days       Total     
       or More       Past Due     
   Past Due   and       and     
   30 to 89   Still   Non-   Non-   Total 
   Days   Accruing   Accrual   Accrual   Loans 
                          
Real Estate-construction  $990   $-   $1,667   $2,657   $57,529 
Real Estate-mortgage   3,045    147    986    4,178    140,703 
Real Estate-non farm non residential   389    -    608    997    142,046 
Commercial   88    -    135    223    53,234 
Consumer   132    11    5    148    14,600 
Total  $4,644   $158   $3,401   $8,203   $408,112 

 

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 March 31, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:

 

($ in thousands)

March 31, 2013

               Commercial,     
   Real Estate   Real
Estate
   Installment
and
   Financial
and
     
   Commercial   Mortgage   Other   Agriculture   Total 
Pass  $253,865   $80,605   $15,167   $52,322   $401,959 
Special Mention   5,597    140    15    302    6,054 
Substandard   12,651    1,361    13    -    14,025 
Doubtful   -    -    -    -    - 
Subtotal   272,113    82,106    15,195    52,624    422,038 
Less:                         
Unearned discount   238    96    -    13    347 
Loans, net of unearned discount  $271,875   $82,010   $15,195   $52,611   $421,691 

 

December 31, 2012

 

               Commercial,     
   Real Estate   Real
Estate
   Installment
and
   Financial
and
     
   Commercial   Mortgage   Other   Agriculture   Total 
Pass  $241,927   $76,206   $16,426   $53,880   $388,439 
Special Mention   5,653    144    17    -    5,814 
Substandard   12,606    1,059    15    320    14,000 
Doubtful   -    -    -    60    60 
Subtotal   260,186    77,409    16,458    54,260    408,313 
Less:                         
Unearned discount   91    94    2    14    201 
Loans, net of unearned discount  $260,095   $77,315   $16,456   $54,246   $408,112 

 

 
 

 

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 March 31, 2013, follows:

($ in thousands)

 

   March 31, 2013 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
Available-for-sale securities:                    
Obligations of U.S. Government Agencies  $27,665   $228   $-   $27,893 
Tax-exempt and taxable obligations of states and municipal subdivisions   94,733    3,827    40    98,520 
Mortgage-backed securities   66,472    1,515    12    67,975 
Corporate obligations   18,768    322    2,183    16,907 
Other   1,255    -    287    968 
Total  $208,893   $5,892   $2,522   $212,263 
Held-to-maturity securities:                    
Mortgage-backed securities  $2,462   $60   $-   $2,522 
Taxable obligations of states and municipal subdivisions   6,000    1,690    -    7,690 
Total  $8,462   $1,750   $-   $10,212 

 

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 2012 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 $788.0 million at March 31, 2013, compared to $720.0 million at December 31, 2012. Loans increased $11.7 million, or 2.8%, during the first three months of 2013. Deposits at March 31, 2013, totaled $683.3 million compared to $596.7 million at December 31, 2012. For the three month period ended March 31, 2013, The First reported net income of $1.6 million compared to $1.1 million for the three months ended March 31, 2012.

 

NONPERFORMING ASSETS AND RISK ELEMENTS. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At March 31, 2013, 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 March 31, 2013, The First had loans past due as follows:

 

   ($ In Thousands) 
     
Past due 30 through 89 days  $3,459 
Past due 90 days or more and still accruing   161 

 

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 $3.1 million at March 31, 2013, a decrease of $.3 million from December 31, 2012. Any other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $6.7 million at March 31, 2013. 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 March 31, 2013, the Bank had $177,000 in loans that were modified as troubled debt restructurings.

 

 
 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is adequate with cash and cash equivalents of $91.5 million as of March 31, 2013. In addition, loans and investment securities repricing or maturing within one year or less exceeded $165.9 million at March 31, 2013. Approximately $68.6 million in loan commitments could fund within the next three months and other commitments, primarily standby letters of credit, totaled $.7 million at March 31, 2013.

 

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 March 31, 2013, was $87.1 million, or approximately 11.0% 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 March 31, 2013, were as follows:

 

Tier 1 leverage   11.24%
Tier 1 risk-based   16.73%
Total risk-based   17.73%

 

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

 

The Company had a consolidated net income of $1,225,000 for the three months ended March 31, 2013, compared with consolidated net income of $971,000 for the same period last year.

 

Net interest income increased to $5.9 million from $5.5 million for the three months ended March 31, 2013, or an increase of 7.4% as compared to the same period in 2012. Earning assets through March 31, 2013, increased $56.0 million, or 8.5% and interest-bearing liabilities also increased $40.6 million or 7.5% when compared to March 31, 2012.

 

 
 

Noninterest income for the three months ended March 31, 2013, was $1,930,000 compared to $1,475,000 for the same period in 2012, reflecting an increase of $455,000 or 30.8%. The majority of the increase, $415,000, was from an award granted to our Company by the Community Development Institutions Fund due to our increased level of community development products and services throughout the markets we serve.

 

The provision for loan losses was $311,000 for the three months ended March 31, 2013, compared with $152,000 for the same period in 2012. The allowance for loan losses of $4.9 million at March 31, 2013 (approximately 1.16% of total loans and 1.21% of loans excluding those booked at fair value due to a 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 $457,000 or 8.3% for the three months ended March 31, 2013, when compared with the same period in 2012. This increase is primarily related to costs associated with the acquisition of First National Bank of Baldwin County in the amount of $341,000, as well as an increase in salaries and employee benefits associated with the start of our Private Banking Division.

 

ITEM NO. 3. CONTROLS AND PROCEDURES

 

As of March 31, 2013, (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 March 31, 2013, that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

ITEM NO. 4. RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet Disclosures about Offsetting Assets and Liabilities.” The ASU amends ASC Topic 210 by requiring additional improved information to be disclosed regarding financial instruments and derivative instruments that are offset in accordance with the conditions under ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendment is effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by the amendments should be applied retrospectively for all comparative periods presented. In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The ASU clarifies that ordinary trade receivables and receivables are not in the scope of ASU 2011-11. Only derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Codification or subject to a master netting arrangement or similar agreement are applicable. The adoption did not have a material impact on the financial statements.

 

 
 

 

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. These amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U. S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U. S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U. S. GAAP that provide additional details about these amounts. ASU 2013-02 is effective for interim and annual periods beginning after December 15, 2012. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In February 2013, the FASB issued ASU No. 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” The ASU requires entities to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The measurement is the sum of both the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint-and-several arrangement and the total outstanding amount of the obligation for all joint parties. ASI 2013-04 is effective for interim and annual periods beginning on or after December 15, 2013. The ASU should be applied retrospectively to obligations existing at the beginning of an entity’s fiscal year of adoption. Early adoption is permitted. The Company is currently evaluating the possible effects of this guidance on its financial statement disclosures.

 

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, 2012. Please refer to the Annual Report on Form 10-K of The First Bancshares, Inc., filed with the Securities and Exchange Commission on March 28, 2013.

 

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 will automatically convert into a number of shares of the Company's common stock after the Company has received shareholder approval of such conversion at a meeting of shareholders scheduled to be held no later than May 31, 2013. Upon conversion of the Series D Preferred Stock, each share of Series D Preferred Stock will be 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 will be 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 will be 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 is payable at the same time on the Series D Preferred Stock; provided, however, in the event the shareholders of the Company do 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 shall be 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 will be 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 is payable at the time on the Series D Preferred Stock. Such Fixed Preferred Dividends will be payable semi-annually in arrears on June 30 and December 31, beginning on December 31, 2013, until the shareholders of the Company have approved the conversion of the Series D Preferred Shares into the Common Stock. The Series D Preferred Stock is 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 intends to call 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 intends to unanimously recommend 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 has agreed to file 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 use 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 may result 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.

 

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

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 six reports on Form 8-K during the quarter ended March 31, 2013

 

 
 

 

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.
May 10, 2013   M. Ray (Hoppy) Cole, Jr.
(Date)   Chief Executive Officer
     
    /s/ DEEDEE LOWERY
May 10, 2013   DeeDee Lowery, Executive
(Date)  

Vice President and Chief

Financial Officer