FIRST BANCSHARES INC /MS/ - Quarter Report: 2014 March (Form 10-Q)

 

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

 

FOR THE QUARTERLY PERIOD ENDED: March 31, 2014

——————

OR

 

 

COMMISSION FILE NUMBER:    33-94288

(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)

 

 

 

 

 

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.

 

 

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).

 

 

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.

 

 

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):

 

 

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

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

 

 

 

	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

 

 

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

 

 

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

 

 

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

 

 

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.

 

 

NOTE C – BUSINESS COMBINATION

 

 

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.

 

 

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.

 

 

 

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.

  

 

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).

 

 

 

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.

 

 

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

 

 

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	%

 

 

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

-

 

 

 

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.

 

 

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 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			-