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FIRST BANCSHARES INC /MS/ - Quarter Report: 2014 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, 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 March 31, 2014, 5,149,280 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,
 
 
 
 
2014
 
 
2013
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
28,514
 
$
24,080
 
Interest-bearing deposits with banks
 
 
31,203
 
 
14,205
 
Federal funds sold
 
 
22,261
 
 
967
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
 
 
81,978
 
 
39,252
 
 
 
 
 
 
 
 
 
Securities held-to-maturity, at amortized cost
 
 
8,429
 
 
8,438
 
Securities available-for-sale, at fair value
 
 
236,460
 
 
244,051
 
Other securities
 
 
6,148
 
 
5,534
 
 
 
 
 
 
 
 
 
Total securities
 
 
251,037
 
 
258,023
 
 
 
 
 
 
 
 
 
Loans held for sale
 
 
2,586
 
 
3,680
 
Loans
 
 
590,947
 
 
579,623
 
Allowance for loan losses
 
 
(5,811)
 
 
(5,728)
 
 
 
 
 
 
 
 
 
Loans, net
 
 
587,722
 
 
577,575
 
 
 
 
 
 
 
 
 
Premises and equipment
 
 
31,416
 
 
32,072
 
Interest receivable
 
 
3,431
 
 
3,292
 
Cash surrender value of life insurance
 
 
9,182
 
 
6,593
 
Goodwill
 
 
10,621
 
 
10,621
 
Other assets
 
 
7,959
 
 
8,992
 
Other real estate owned
 
 
5,221
 
 
4,470
 
 
 
 
 
 
 
 
 
TOTAL ASSETS
 
$
988,567
 
$
940,890
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Noninterest-bearing
 
$
179,334
 
$
173,794
 
Interest-bearing
 
 
684,247
 
 
606,177
 
 
 
 
 
 
 
 
 
TOTAL DEPOSITS
 
 
863,581
 
 
779,971
 
 
 
 
 
 
 
 
 
Interest payable
 
 
351
 
 
400
 
Borrowed funds
 
 
15,000
 
 
52,000
 
Subordinated debentures
 
 
10,310
 
 
10,310
 
Other liabilities
 
 
11,829
 
 
13,101
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES
 
 
901,071
 
 
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 March 31, 2014 and December 31, 2013, respectively
 
 
17,123
 
 
17,103
 
Common stock, par value $1 per share, 10,000,000 shares authorized; 5,175,774 shares
    issued at March 31, 2014 and 5,122,941 at December 31, 2013, respectively
 
 
5,176
 
 
5,123
 
Additional paid-in capital
 
 
42,107
 
 
42,086
 
Retained earnings
 
 
23,637
 
 
22,509
 
Accumulated other comprehensive income (loss)
 
 
(83)
 
 
(1,249)
 
Treasury stock, at cost, 26,494 shares at March 31, 2014 and at December 31, 2013
 
 
(464)
 
 
(464)
 
 
 
 
 
 
 
 
 
TOTAL STOCKHOLDERS’ EQUITY
 
 
87,496
 
 
85,108
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
988,567
 
$
940,890
 
 
 
2

 
3

 
THE FIRST BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
($ amounts in thousands, except earnings and dividends per share)
 
 
 
(Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
 
$
7,004
 
$
5,231
 
Interest and dividends on securities:
 
 
 
 
 
 
 
Taxable interest and dividends
 
 
903
 
 
903
 
Tax exempt interest
 
 
529
 
 
504
 
Interest on federal funds sold
 
 
11
 
 
12
 
 
 
 
 
 
 
 
 
TOTAL INTEREST INCOME
 
 
8,447
 
 
6,650
 
 
 
 
 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Interest on deposits
 
 
466
 
 
618
 
Interest on borrowed funds
 
 
157
 
 
141
 
 
 
 
 
 
 
 
 
TOTAL INTEREST EXPENSE
 
 
623
 
 
759
 
 
 
 
 
 
 
 
 
NET INTEREST INCOME
 
 
7,824
 
 
5,891
 
 
 
 
 
 
 
 
 
PROVISION FOR LOAN LOSSES
 
 
358
 
 
311
 
 
 
 
 
 
 
 
 
NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR LOAN LOSSES
 
 
7,466
 
 
5,580
 
 
 
 
 
 
 
 
 
OTHER INCOME:
 
 
 
 
 
 
 
Service charges on deposit accounts
 
 
984
 
 
844
 
Other service charges and fees
 
 
688
 
 
1,086
 
TOTAL OTHER INCOME
 
 
1,672
 
 
1,930
 
 
 
 
 
 
 
 
 
OTHER EXPENSES:
 
 
 
 
 
 
 
Salaries and employee benefits
 
 
4,097
 
 
3,183
 
Occupancy and equipment
 
 
1,220
 
 
956
 
Other
 
 
1,910
 
 
1,840
 
 
 
 
 
 
 
 
 
TOTAL OTHER EXPENSES
 
 
7,227
 
 
5,979
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
1,911
 
 
1,531
 
 
 
 
 
 
 
 
 
INCOME TAXES
 
 
484
 
 
306
 
 
 
 
 
 
 
 
 
NET INCOME
 
 
1,427
 
 
1,225
 
 
 
 
 
 
 
 
 
PREFERRED STOCK ACCRETION AND DIVIDENDS
 
 
106
 
 
106
 
 
 
 
 
 
 
 
 
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS
 
$
1,321
 
$
1,119
 
 
 
 
 
 
 
 
 
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:
 
 
 
 
 
 
 
BASIC
 
$
.26
 
$
.36
 
DILUTED
 
 
.25
 
 
.35
 
DIVIDENDS PER SHARE – COMMON
 
 
.0375
 
 
.0375
 
 
 
4

 
THE FIRST BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
($ amounts in thousands)
 
 
 
(Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Net income per consolidated statements of income
 
$
1,427
 
$
1,225
 
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized holding gains arising during the period on available-for-sale securities
 
 
1,749
 
 
105
 
Unrealized holding gains on loans held for sale
 
 
45
 
 
20
 
Income tax expense
 
 
(628)
 
 
(43)
 
Other Comprehensive Income
 
 
1,166
 
 
82
 
 
 
 
 
 
 
 
 
Comprehensive Income
 
$
2,593
 
$
1,307
 
 
 
5

 
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 (Loss)
 
Stock
 
Total
 
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 comprehensive income
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
82
 
 
-
 
 
82
 
Accretion and dividends on preferred Stock
 
 
-
 
 
20
 
 
-
 
 
-
 
 
(106)
 
 
-
 
 
-
 
 
(86)
 
Dividends on common stock, $0.0375 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
 
$
5,123
 
$
17,103
 
$
284
 
$
41,802
 
$
22,509
 
$
(1,249)
 
$
(464)
 
$
85,108
 
Net income
 
 
-
 
 
-
 
 
-
 
 
-
 
 
1,427
 
 
-
 
 
-
 
 
1,427
 
Other comprehensive income
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
1,166
 
 
-
 
 
1,166
 
Accretion and dividends on preferred Stock
 
 
-
 
 
20
 
 
-
 
 
-
 
 
(106)
 
 
-
 
 
-
 
 
(86)
 
Dividends on common stock, $0.0375 per
    share
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(193)
 
 
-
 
 
-
 
 
(193)
 
Repurchase of restricted stock for payment
    of taxes
 
 
(4)
 
 
-
 
 
-
 
 
(60)
 
 
-
 
 
-
 
 
-
 
 
(64)
 
Restricted stock grant
 
 
57
 
 
-
 
 
-
 
 
(57)
 
 
-
 
 
-
 
 
-
 
 
-
 
Compensation expense
 
 
-
 
 
-
 
 
-
 
 
138
 
 
-
 
 
-
 
 
-
 
 
138
 
Balance, March 31, 2014
 
$
5,176
 
$
17,123
 
$
284
 
$
41,823
 
$
23,637
 
$
(83)
 
$
(464)
 
$
87,496
 
 
 
6

 
THE FIRST BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
($ Amounts in Thousands)
 
 
 
(Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
 
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
NET INCOME
 
$
1,427
 
$
1,225
 
Adjustments to reconcile net income to net cash
    provided by operating activities:
 
 
 
 
 
 
 
Depreciation, amortization and accretion
 
 
523
 
 
421
 
Provision for loan losses
 
 
358
 
 
311
 
Loss on sale/writedown of ORE
 
 
149
 
 
10
 
Restricted stock expense
 
 
138
 
 
77
 
Increase in cash value of life insurance
 
 
(39)
 
 
(41)
 
Federal Home Loan Bank stock dividends
 
 
-
 
 
(1)
 
Changes in:
 
 
 
 
 
 
 
Interest receivable
 
 
(139)
 
 
(49)
 
Loans held for sale, net
 
 
1,140
 
 
1,889
 
Interest payable
 
 
(49)
 
 
(14)
 
Other, net
 
 
(48)
 
 
1,805
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
 
3,460
 
 
5,633
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Maturities and calls of securities available-for-sale
 
 
9,615
 
 
18,278
 
Purchases of securities available-for-sale and held-to-maturity
 
 
(1,008)
 
 
(16,135)
 
Net redemptions (purchases) of other securities
 
 
(614)
 
 
382
 
Net increase in loans
 
 
(12,898)
 
 
(13,719)
 
Purchase of bank owned life insurance
 
 
(2,550)
 
 
-
 
Net (increase) decrease in premises and equipment
 
 
279
 
 
(306)
 
NET CASH USED IN INVESTING ACTIVITIES
 
 
(7,176)
 
 
(11,500)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Increase in deposits
 
 
83,781
 
 
66,652
 
Net decrease in borrowed funds
 
 
(37,000)
 
 
(20,011)
 
Dividends paid on common stock
 
 
(189)
 
 
(113)
 
Dividends paid on preferred stock
 
 
(86)
 
 
(86)
 
Repurchase of restricted stock for payment of taxes
 
 
(64)
 
 
-
 
Issuance of 1,951,220 common shares, net
 
 
-
 
 
20,000
 
 
 
 
 
 
 
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
 
 
46,442
 
 
66,442
 
 
 
 
 
 
 
 
 
NET INCREASE IN CASH
 
 
42,726
 
 
60,575
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
 
39,252
 
 
30,877
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
81,978
 
$
91,452
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CASH PAYMENTS FOR INTEREST
 
 
672
 
 
773
 
CASH PAYMENTS FOR INCOME TAXES
 
 
275
 
 
189
 
LOANS TRANSFERRED TO OTHER REAL ESTATE
 
 
1,297
 
 
96
 
ISSUANCE OF RESTRICTED STOCK GRANTS
 
 
57
 
 
35
 
 
 
7

 
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, 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 March 31, 2014,  the Company had approximately $988.6 million in assets, $587.7 million in net loans, $863.6 million in deposits, and $87.5 million in stockholders' equity.  For the three months ended March 31, 2014, the Company reported net income of $1.4 million ($1.3 million applicable to common stockholders). 
 
In the first quarter of 2014, the Company declared and paid a dividend of $.0375 per common share.
 
 
8

 
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 is expected to close in the second quarter of 2014.
 
Concurrently, the Company and BCB will enter into an agreement and plan of merger pursuant to which BCB’s wholly-owned subsidiary, Bay Bank, will be merged with and into the Company’s wholly-owned subsidiary, the Bank.
 
First Baldwin Bancshares, Inc.
 
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, based 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 was sold to the Company for cash consideration of $3,300,000 (the “Purchase Price”). Each outstanding share of FNB common stock remains outstanding and was unaffected by the Acquisition.
 
 
9

 
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 Bank.  
 
In connection with the acquisition, the Company recorded $1.3 million of goodwill and $.7 million of core deposit intangible.  The core deposit will be expensed over 10 years. 
 
The Company acquired the $124.2 million loan portfolio at a fair value discount of $.5 million.  The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments. 
 
The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):
 
Purchase price:
 
 
 
 
Cash
 
$
3,300
 
Total purchase price
 
 
3,300
 
Identifiable assets:
 
 
 
 
Cash and due from banks
 
 
46,450
 
Investments
 
 
2,508
 
Loans and leases
 
 
124,165
 
Other Real Estate
 
 
87
 
Core deposit intangible
 
 
680
 
Personal and real property
 
 
10,655
 
Deferred tax asset
 
 
2,969
 
Other assets
 
 
1,034
 
Total assets
 
 
188,548
 
Liabilities and equity:
 
 
 
 
Deposits
 
 
185,771
 
Other liabilities
 
 
736
 
Total liabilities
 
 
186,507
 
Net assets acquired
 
 
2,041
 
Goodwill resulting from acquisition
 
$
1,259
 
 
The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at March 31, 2014, are as follows (dollars in thousands):
 
Outstanding principal balance
 
$
103,618
 
Carrying amount
 
$
103,418
 
 
All loans obtained in the acquisition reflect no specific evidence of credit deterioration and very low probability that the Company would be unable to collect all contractually required principal and interest payments.
  
 
10

 
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 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 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).
 
 
11

 
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 provided for mandatory conversion into the Company’s common stock upon approval, which occurred at the annual meeting, May 23, 2013. The Company paid $921,487.43 in fees to its financial advisors who acted as placement agents in the private placement.
 
The Company used 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 issued 1,951,220 shares of common stock.  On March 31, 2014, the Company had 5,149,280 shares of common stock outstanding, excluding treasury shares.

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, 2014
 
 
 
Net Income
 
Shares
 
Per
 
 
 
(Numerator)
 
(Denominator)
 
Share Data
 
 
 
 
 
 
 
 
 
 
 
Basic per share
 
$
1,321,000
 
5,140,500
 
$
.26
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive shares:
 
 
 
 
 
 
 
 
 
Restricted stock grants
 
 
 
 
49,429
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted per share
 
$
1,321,000
 
5,189,929
 
$
.25
 
 
 
 
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
 
 
The Company granted 57,327 shares of restricted stock in the first quarter of 2014, 35,133 shares of restricted stock in the first quarter of 2013, and 15,500 shares of restricted stock in the third quarter of 2013.
 
 
12

 
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, 2014 and December 31, 2013 (in thousands):
 
March 31, 2014
 
(Dollars in thousands)
 
 
 
 
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
 
$
25,381
 
$
-
 
$
25,381
 
$
-
 
Municipal securities
 
 
106,228
 
 
-
 
 
106,228
 
 
-
 
Mortgage-backed securities
 
 
76,973
 
 
-
 
 
76,973
 
 
-
 
Corporate obligations
 
 
26,908
 
 
-
 
 
23,980
 
 
2,928
 
Other
 
 
970
 
 
970
 
 
-
 
 
-
 
Total
 
$
236,460
 
$
970
 
$
232,562
 
$
2,928
 
 
 
13

 
December 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
 
$
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
 
 
130
 
 
130
 
Balance at March 31, 2014 and December 31, 2013
 
$
2,928
 
$
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
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
$
2,928
 
Discounted cash flow
 
Probability of default
 
0 – 100
%
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
2,798
 
Discounted cash flow
 
Probability of default
 
0 – 100
%
 
 
14

 
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, 2014, amounted to $5.2 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, 2014 and December 31, 2013.
 
($ in thousands)
 
March 31, 2014
 
 
 
 
 
 
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
 
$
4,142
 
$
-
 
$
4,142
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 
 
5,221
 
 
-
 
 
5,221
 
 
-
 
 
 
15

 
December 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
 
$
4,830
 
$
-
 
$
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.
 
 
16

 
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 March 31, 2014
 
 
 
Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
Significant
 
 
 
 
 
 
Estimated
 
Quoted
 
Observable
 
Unobservable
 
 
 
Carrying
 
Fair
 
Prices
 
Inputs
 
Inputs
 
 
 
Amount
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
81,978
 
$
81,978
 
$
81,978
 
$
-
 
$
-
 
Securities available-for-sale
 
 
236,460
 
 
236,460
 
 
970
 
 
232,562
 
 
2,928
 
Securities held-to-maturity
 
 
8,429
 
 
9,774
 
 
-
 
 
9,774
 
 
-
 
Other securities
 
 
6,148
 
 
6,148
 
 
-
 
 
6,148
 
 
-
 
Loans, net
 
 
587,722
 
 
601,141
 
 
-
 
 
-
 
 
601,141
 
Bank-owned life insurance
 
 
9,182
 
 
9,182
 
 
-
 
 
9,182
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
 
$
179,394
 
$
179,334
 
$
-
 
$
179,334
 
$
-
 
Interest-bearing deposits
 
 
684,247
 
 
683,631
 
 
-
 
 
683,631
 
 
-
 
Subordinated debentures
 
 
10,310
 
 
10,310
 
 
-
 
 
-
 
 
10,310
 
FHLB and other borrowings
 
 
15,000
 
 
15,000
 
 
-
 
 
15,000
 
 
-
 
 
As of December 31, 2013
 
 
 
 
 
 
 
Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
Significant
 
 
 
 
 
 
Estimated
 
Quoted
 
Observable
 
Unobservable
 
 
 
Carrying
 
Fair
 
Prices
 
Inputs
 
Inputs
 
 
 
Amount
 
Value
 
(Level 1)
 
(Level 2)
 
(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 March 31, 2014 and December 31, 2013, average loans accounted for 67.7% 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:
 
 
17

 
Composition of Loan Portfolio
 
 
 
March 31, 2014
 
 
December 31, 2013
 
 
 
Amount
 
Percent
of
Total
 
 
Amount
 
Percent
of
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
Mortgage loans held for sale
 
$
2,586
 
0.4
%
 
$
3,680
 
0.6
%
Commercial, financial and agricultural
 
 
84,898
 
14.3
 
 
 
81,792
 
14.0
 
Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-commercial
 
 
198,984
 
33.5
 
 
 
202,343
 
34.7
 
Mortgage-residential
 
 
218,901
 
36.9
 
 
 
212,388
 
36.4
 
Construction
 
 
73,523
 
12.4
 
 
 
67,287
 
11.5
 
Consumer and other
 
 
14,641
 
2.5
 
 
 
15,813
 
2.8
 
Total loans
 
 
593,533
 
100
%
 
 
583,303
 
100
%
Allowance for loan losses
 
 
(5,811)
 
 
 
 
 
(5,728)
 
 
 
Net loans
 
$
587,722
 
 
 
 
$
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
 
 
 
Ended
 
 
 
March 31, 2014
 
 
 
 
 
 
Balance at beginning of period
 
$
5,728
 
Loans charged-off:
 
 
 
 
Real Estate
 
 
300
 
Installment and Other
 
 
43
 
Commercial, Financial and Agriculture
 
 
-
 
Total
 
 
(343)
 
Recoveries on loans previously charged-off:
 
 
 
 
Real Estate
 
 
43
 
Installment and Other
 
 
21
 
Commercial, Financial and Agriculture
 
 
4
 
Total
 
 
68
 
Net charge-offs
 
 
(275)
 
Provision for Loan Losses
 
 
358
 
Balance at end of period
 
$
5,811
 
 
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, 2014 and December 31, 2013.
 
 
18

 
Allocation of the Allowance for Loan Losses
 
 
 
March 31, 2014
 
 
 
 
(Dollars in thousands)
 
 
 
 
Amount
 
% of loans
 in each category
to total loans
 
 
 
 
 
 
 
 
Commercial Non Real Estate
 
$
548
 
14.2
%
Commercial Real Estate
 
 
3,308
 
56.5
 
Consumer Real Estate
 
 
1,778
 
25.6
 
Consumer
 
 
175
 
3.7
 
Unallocated
 
 
2
 
-
 
Total
 
$
5,811
 
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 March 31, 2014, and December 31, 2013.
 
 
 
March 31,
 
December 31,
 
 
 
2014
 
2013
 
 
 
(In thousands)
 
Impaired Loans:
 
 
 
 
 
 
 
Impaired loans without a valuation allowance
 
$
605
 
$
759
 
Impaired loans with a valuation allowance
 
 
3,537
 
 
4,071
 
Total impaired loans
 
$
4,142
 
$
4,830
 
Allowance for loan losses on impaired loans at period end
 
 
1,025
 
 
849
 
 
 
 
 
 
 
 
 
Total nonaccrual loans
 
 
2,267
 
 
3,181
 
 
 
 
 
 
 
 
 
Past due 90 days or more and still accruing
 
 
443
 
 
159
 
Average investment in impaired loans
 
 
4,486
 
 
4,007
 
 
The following table is a summary of interest recognized and cash-basis interest earned on impaired loans:
 
 
 
Three Months
Ended
March 31, 2014
 
 
 
 
 
 
Average of individually impaired loans during period
 
$
4,486
 
Interest income recognized during impairment
 
 
-
 
Cash-basis interest income recognized
 
 
40
 
 
 
19

 
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 ended March 31, 2014, was $33,000. The Company had no loan commitments to borrowers in non-accrual status at March 31, 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 March 31, 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.
 
March 31, 2014
 
 
 
 
 
 
 
 
 
Commercial,
 
 
 
 
 
 
 
 
 
Installment
 
Financial
 
 
 
 
 
 
Real
 
and
 
and
 
 
 
 
 
 
Estate
 
Other
 
Agriculture
 
Total
 
 
 
(In thousands)
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
 
$
3,778
 
$
47
 
$
317
 
$
4,142
 
Collectively evaluated
 
 
481,203
 
 
21,830
 
 
83,772
 
 
586,805
 
Total
 
$
484,981
 
$
21,877
 
$
84,089
 
$
590,947
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
 
$
983
 
$
33
 
$
9
 
$
1,025
 
Collectively evaluated
 
 
4,103
 
 
144
 
 
539
 
 
4,786
 
Total
 
$
5,086
 
$
177
 
$
548
 
$
5,811
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
Commercial,
 
 
 
 
 
 
 
 
 
Installment
 
Financial
 
 
 
 
 
 
Real
 
and
 
and
 
 
 
 
 
Estate
 
 Other
 
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
 
 
 
20

 
The following tables provide additional detail of impaired loans broken out according to class as of March 31, 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 March 31, 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.
 
March 31, 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
 
$
242
 
$
242
 
$
-
 
$
123
 
$
5
 
Commercial real estate
 
 
312
 
 
370
 
 
-
 
 
332
 
 
1
 
Consumer real estate
 
 
41
 
 
41
 
 
-
 
 
220
 
 
4
 
Consumer installment
 
 
10
 
 
10
 
 
-
 
 
7
 
 
1
 
Total
 
$
605
 
$
663
 
$
-
 
$
682
 
$
11
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with a related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial installment
 
$
76
 
$
76
 
$
9
 
$
77
 
$
1
 
Commercial real estate
 
 
1,896
 
 
1,966
 
 
303
 
 
2,291
 
 
28
 
Consumer real estate
 
 
1,529
 
 
1,529
 
 
680
 
 
1,400
 
 
-
 
Consumer installment
 
 
36
 
 
36
 
 
33
 
 
36
 
 
-
 
Total
 
$
3,537
 
$
3,607
 
$
1,025
 
$
3,804
 
$
29
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Impaired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial installment
 
$
318
 
$
318
 
$
9
 
$
200
 
$
6
 
Commercial real estate
 
 
2,208
 
 
2,336
 
 
303
 
 
2,623
 
 
29
 
Consumer real estate
 
 
1,570
 
 
1,570
 
 
680
 
 
1,620
 
 
4
 
Consumer installment
 
 
46
 
 
46
 
 
33
 
 
43
 
 
1
 
Total Impaired Loans
 
$
4,142
 
$
4,270
 
$
1,025
 
$
4,486
 
$
40
 
 
 
21

 
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 March 31, 2014.
 
For the Three Months Ending March 31, 2014
 
 
 
 
 
Outstanding
 
 
 
 
 
 
 
Outstanding
 
Recorded
 
 
 
 
 
 
 
Recorded
 
Investment
 
 
 
Interest
 
 
 
Investment
 
Post-
 
Number of
 
Income
 
 
 
Pre-Modification
 
Modification
 
Loans
 
Recognized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial installment
 
$
239
 
$
239
 
1
 
$
5
 
Commercial real estate
 
 
-
 
 
-
 
-
 
 
-
 
Consumer real estate
 
 
-
 
 
-
 
-
 
 
-
 
Consumer installment
 
 
-
 
 
-
 
-
 
 
-
 
Total
 
$
239
 
$
239
 
1
 
$
5
 
 
 
22

 
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 $.2 million. The allowance for credit losses associated with those receivables on the basis of a current evaluation of loss was $0. All loans were performing as agreed with modified terms.
 
During the three month period ending March 31, 2014, there was 1 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, 2014
 
 
 
(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
 
$
684
 
$
37
 
$
19
 
$
740
 
$
73,523
 
Real Estate-mortgage
 
 
2,821
 
 
406
 
 
1,733
 
 
4,960
 
 
218,901
 
Real Estate-non farm non residential
 
 
851
 
 
-
 
 
497
 
 
1,348
 
 
198,984
 
Commercial
 
 
14
 
 
-
 
 
8
 
 
22
 
 
84,898
 
Consumer
 
 
48
 
 
-
 
 
10
 
 
58
 
 
14,641
 
Total
 
$
4,418
 
$
443
 
$
2,267
 
$
7,128
 
$
590,947
 
 
 
 
December 31, 2013
 
 
 
(In thousands)
 
 
 
 
 
 
Past Due
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
90 Days
 
 
 
 
Total
 
 
 
 
 
 
Past Due
 
or More
 
 
 
 
Past Due
 
 
 
 
 
 
30 to 89
 
and Still
 
Non-
 
and Non-
 
Total
 
 
 
Days
 
Accruing
 
Accrual
 
Accrual
 
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:
 
 
23

 
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, 2014 and December 31, 2013, 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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial,
 
 
 
 
 
 
Real Estate
Commercial
 
Real
Estate
Mortgage
 
Installment
and
Other
 
Financial
and
Agriculture
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
322,113
 
$
149,263
 
$
21,809
 
$
83,484
 
$
576,669
 
Special Mention
 
 
1,358
 
 
31
 
 
-
 
 
411
 
 
1,800
 
Substandard
 
 
10,746
 
 
1,776
 
 
68
 
 
216
 
 
12,806
 
Doubtful
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Subtotal
 
 
334,217
 
 
151,070
 
 
21,877
 
 
84,111
 
 
591,275
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unearned discount
 
 
208
 
 
98
 
 
-
 
 
22
 
 
328
 
Loans, net of unearned discount
 
$
334,009
 
$
150,972
 
$
21,877
 
$
84,089
 
$
590,947
 
 
 
24

 
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 March 31, 2014, follows:
($ in thousands)
 
 
March 31, 2014
 
 
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated
 
 
 
Cost
 
Gains
 
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. Government Agencies
 
$
25,380
 
$
97
 
$
96
 
$
25,381
 
Tax-exempt and taxable obligations of states and municipal
    subdivisions
 
 
104,882
 
 
2,312
 
 
966
 
 
106,228
 
Mortgage-backed securities
 
 
77,111
 
 
872
 
 
1,010
 
 
76,973
 
Corporate obligations
 
 
27,934
 
 
224
 
 
1,250
 
 
26,908
 
Other
 
 
1,255
 
 
-
 
 
285
 
 
970
 
Total
 
$
236,562
 
$
3,505
 
$
3,607
 
$
236,460
 
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
2,429
 
$
-
 
$
57
 
$
2,372
 
Taxable obligations of states and municipal subdivisions
 
 
6,000
 
 
1,402
 
 
-
 
 
7,402
 
Total
 
$
8,429
 
$
1,402
 
$
57
 
$
9,774
 
 
 
25

 
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.
 
 
26

 
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 $987.7 million at March 31, 2014, compared to $941.0 million at December 31, 2013. Loans increased $10.2 million, or 1.8%, during the first three months of 2014. Deposits at March 31, 2014, totaled $863.6 million compared to $780 million at December 31, 2013. For the three month period ended March 31, 2014, The First reported net income of $1.6 million compared to $1.6 million for the three months ended March 31, 2013.
 
NONPERFORMING ASSETS AND RISK ELEMENTS. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At March 31, 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.
 
 
27

 
At March 31, 2014, The First had loans past due as follows:
 
 
 
 
($ In Thousands)
 
 
 
 
 
 
Past due 30 through 89 days
 
$
4,418
 
Past due 90 days or more and still accruing
 
 
443
 
 
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 $2.3 million at March 31, 2014, a decrease of $.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 $5.2 million at March 31, 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 March 31, 2014, the Bank had $2.4 million in loans that were modified as troubled debt restructurings, of which $1.7 million were performing as agreed with modified terms.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity is adequate with cash and cash equivalents of $82.0 million as of March 31,2014. In addition, loans and investment securities repricing or maturing within one year or less exceeded $209.6 million at March 31, 2014. Approximately $120.1 million in loan commitments could fund within the next six months and other commitments, primarily standby letters of credit, totaled .7 million at March 31, 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 March 31, 2014, was $87.5 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 March 31, 2014, were as follows:
 
Tier 1 leverage
8.84
%
 
Tier 1 risk-based
12.57
%
 
Total risk-based
13.44
%
 
 
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.
 
 
28

 
RESULTS OF OPERATIONS
 
The Company had a consolidated net income of $1,427,000 for the three months ended March 31, 2014, compared with consolidated net income of $1,225,000 for the same period last year.
 
Net interest income increased to $7.8 million from $5.9 million for the three months ended March 31, 2014, or an increase of 32.8% as compared to the same period in 2013. Average earning assets through March 31, 2014, increased $208.3 million, or 31.5% and average interest-bearing liabilities also increased $143.4 million or 25.7% when compared to March 31, 2013.
 
Noninterest income for the three months ended March 31, 2014, was $1,672,000 compared to $1,930,000 for the same period in 2013, reflecting a decrease of $258,000 or 13.4%. The decrease for the quarter ended March 31, 2014, as compared to the first quarter of 2013 is attributed to an award in the amount of $415,000 granted to our Company in the first quarter of 2013 by the CDFI.
 
The provision for loan losses was $358,000 for the three months ended March 31, 2014, compared with $311,000 for the same period in 2013. The allowance for loan losses of $5.8 million at March 31, 2014 (approximately .98% of total loans and 1.20% 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 $1,248,000 or 20.9% for the three months ended March 31, 2014, when compared with the same period in 2013.  This increase is primarily related to increases in operating costs as well as acquisition costs associated with the acquisition of First National Bank of Baldwin County. One-time acquisition costs, mainly related to Bay Bank, expensed during the first quarter of 2014 amounted to $91,000 and one-time acquisition costs, related to Baldwin County, expensed during the first quarter of 2013 amounted to $341,000.
 
Net non-interest expense related to non-recurring items amounted to $91,000 during the first quarter of 2014 compared to net non-interest income of $74,000 during the first quarter of 2013, reflecting a total difference of $165,000 between the first quarters.
  
ITEM NO. 3. CONTROLS AND PROCEDURES
 
As of March 31, 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.
 
 
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There have been no changes, significant or otherwise, in our internal controls over financial reporting that occurred during the quarter ended March 31, 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 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. 
 
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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.
 
 
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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.
 
 
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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).
 

33

 
 
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 three reports on Form 8-K during the quarter ended March 31, 2014
 
 
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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 9, 2014
 
 
M. Ray (Hoppy) Cole, Jr.
(Date)
 
 
Chief Executive Officer
 
 
 
 
 
 
/s/
DEEDEE LOWERY
May 9, 2014
 
 
DeeDee Lowery, Executive
(Date)
 
 
Vice President and Chief
 
 
 
Financial Officer
 
 
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