XNAS:FBMS First Bancshares Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

S QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
  OF THE SECURITIES EXCHANGE ACT OF 1934
   
  FOR THE QUARTERLY PERIOD ENDED: June 30, 2012 

  

OR

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

 

COMMISSION FILE NUMBER: 33-94288

 

THE FIRST BANCSHARES, INC.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)

 

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

 

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

 

(601) 268-8998
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

NONE
(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 

INDICATE BY CHECK MARK WHETHER THE ISSUER: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES  x   NO  ¨

 

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

 

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

 

ON JUNE 30, 2012, 3,108,867 SHARES OF THE ISSUER'S COMMON STOCK, PAR VALUE $1.00 PER SHARE, WERE ISSUED AND OUTSTANDING.

 

TRANSITIONAL DISCLOSURE FORMAT (CHECK ONE):

 

YES  ¨ NO  x

 

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

YES   ¨   NO   x

 

 
 

 

PART I - FINANCIAL INFORMATION

 

ITEM NO. 1. FINANCIAL STATEMENTS

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

 

($ amounts in thousands)

 

   (Unaudited)     
   June 30,   December 31, 
   2012   2011 
         
 ASSETS          
           
Cash and due from banks  $11,871   $10,152 
Interest-bearing deposits with banks   10,495    12,788 
Federal funds sold   764    241 
           
Total cash and cash equivalents   23,130    23,181 
           
Securities held-to-maturity, at amortized cost   8,484    6,002 
Securities available-for-sale, at fair value   229,703    212,529 
Other securities   3,090    2,645 
           
Total securities   241,277    221,176 
           
Loans held for sale   3,210    2,906 
Loans   382,341    385,022 
Allowance for loan losses   (4,468)   (4,511)
           
Loans, net   381,083    383,417 
           
Premises and equipment   22,592    22,991 
Interest receivable   3,010    2,772 
Cash surrender value of life insurance   6,358    6,270 
Goodwill   9,362    9,362 
Other assets   13,804    12,244 
           
TOTAL ASSETS  $700,616   $681,413 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Deposits:          
Noninterest-bearing  $104,482   $107,129 
Interest-bearing   483,547    466,265 
           
TOTAL DEPOSITS   588,029    573,394 
           
Interest payable   259    308 
Borrowed funds   28,291    27,032 
Subordinated debentures   10,310    10,310 
Other liabilities   10,427    9,944 
           
TOTAL LIABILITIES   637,316    620,988 
           
STOCKHOLDERS’ EQUITY:          
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 issued and outstanding at June 30, 2012 and at December 31, 2011   16,980    16,939 
Common stock, par value $1 per share, 10,000,000 shares authorized; 3,135,361 and 3,092,566 shares issued at June 30, 2012 and at December 31, 2011   3,135    3,093 
Additional paid-in capital   23,570    23,504 
Retained earnings   18,356    16,791 
Accumulated other comprehensive income   1,723    562 
Treasury stock, at cost, 26,494 shares at June 30, 2012 and at December 31, 2011   (464)   (464)
           
TOTAL STOCKHOLDERS’ EQUITY   63,300    60,425 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $700,616   $681,413 

 

 
 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

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

 

   (Unaudited) 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
INTEREST INCOME:                    
Interest and fees on loans  $5,353   $5,117   $10,807   $10,131 
Interest and dividends on securities:                    
Taxable interest and dividends   729    468    1,423    838 
Tax exempt interest   507    333    1,014    663 
Interest on federal funds sold   20    23    31    42 
                     
TOTAL INTEREST INCOME   6,609    5,941    13,275    11,674 
                     
INTEREST EXPENSE:                    
Interest on deposits   834    1,127    1,726    2,308 
Interest on borrowed funds   267    303    556    604 
                     
TOTAL INTEREST EXPENSE   1,101    1,430    2,282    2,912 
                     
NET INTEREST INCOME   5,508    4,511    10,993    8,762 
                     
PROVISION FOR LOAN LOSSES   221    305    373    653 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   5,287    4,206    10,620    8,109 
                     
OTHER INCOME:                    
Service charges on deposit accounts   857    567    1,727    1,126 
Other service charges and fees   653    461    1,258    817 
Impairment loss on securities:                    
Total other-than-temporary impairment (gain)loss   -    469    -    380 
Portion of gain (loss) recognized in other comprehensive income   -    (473)   -    (384)
Net impairment loss recognized in earnings   -    (4)   -    (4)
                     
TOTAL OTHER INCOME   1,510    1,024    2,985    1,939 
                     
OTHER EXPENSES:                    
Salaries and employee benefits   2,996    2,217    5,934    4,473 
Occupancy and equipment   949    530    1,909    1,067 
Other   1,469    1,546    3,093    3,277 
                     
TOTAL OTHER EXPENSES   5,414    4,293    10,936    8,817 
                     
INCOME BEFORE INCOME TAXES   1,383    937    2,669    1,231 
                     
INCOME TAXES   346    267    661    60 
                     
NET INCOME   1,037    670    2,008    1,171 
                     
PREFERRED STOCK ACCRETION AND DIVIDENDS   106    85    212    171 
                     
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS  $931   $585   $1,796   $1,000 
                     
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:                    
BASIC  $.30   $.19   $.58   $.33 
DILUTED   .30    .19    .58    .33 
DIVIDENDS PER SHARE – COMMON   .0375    .0375    .075    .075 

 

 
 

 

THE FIRST BANCSHARES, Inc.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

($ in thousands)   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2012   2011   2012   2011 
                 
Net income per consolidated statements of income  $1,037   $670   $2,008   $1,171 
Other comprehensive income, net of tax:                    
Unrealized gains on available for sale securities:                    
Unrealized holding gains arising during the period   770    954    1,137    1,138 
Unrealized gain (loss) on derivative carried at fair value during the period   42    (18)   24    (17)
Comprehensive Income  $1,849   $1,606   $3,169   $2,292 

 

 
 

 

THE FIRST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

($ in thousands)                                
  

Common

Stock

  

Preferred

Stock

  

Stock

Warrants

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Accumulated

Other

Compre-

hensive

Income(Loss)

  

Treasury

Stock

   Total 
Balance, January 1, 2011  $3,059   $16,939   $284   $23,135   $14,723   $(577)  $(464)  $57,099 
Net income   -    -    -    -    1,171    -    -    1,171 
Net change in unrealized gain(loss)on available- for-sale securities, net of tax   -    -    -    -    -    1,138    -    1,138 
Net change in unrealized gain(loss)on derivative, net of tax   -    -    -    -    -    (17)   -    (17)
Dividends on preferred stock   -    -    -    -    (171)   -    -    (171)
Dividends on common stock, $.075 per share   -    -    -    -    (232)   -    -    (232)
Restricted stock grant   34    -    -    (34)   -    -    -    - 
Compensation expense   -    -    -    56    -    -    -    56 
Balance, June 30, 2011  $3,093   $16,939   $284   $23,157   $15,491   $544   $(464)  $59,044 
                                         
Balance, January 1, 2012  $3,093   $16,939   $284   $23,220   $16,791   $562   $(464)  $60,425 
Net income   -    -    -    -    2,008    -    -    2,008 
Net change in unrealized gain(loss)on available- for-sale securities, net of tax   -    -    -    -    -    1,137    -    1,137 
Net change in unrealized gain(loss)on derivative, net of tax   -    -    -    -    -    24    -    24 
Accretion and dividends on preferred stock   -    41    -    -    (212)   -    -    (171)
Dividends on common stock, $.075 per share   -    -    -    -    (231)   -    -    (231)
Restricted stock grant   42    -    -    (42)   -    -    -    - 
Compensation expense   -    -    -    108    -    -    -    108 
Balance, June 30, 2012  $3,135   $16,980   $284   $23,286   $18,356   $1,723   $(464)  $63,300 

 

 
 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ Amounts in Thousands)

 

   (Unaudited)
 Six Months Ended
 
   June 30, 
   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES:          
NET INCOME  $2,008   $1,171 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   1,259    525 
Impairment loss on securities   -    4 
Provision for loan losses   373    653 
Loss on sale/writedown of ORE   309    127 
Restricted stock expense   108    56 
Increase in cash value of life insurance   (88)   (93)
Federal Home Loan Bank stock dividends   (2)   (2)
Changes in:          
Interest receivable   (238)   (125)
Loans held for sale, net   (268)   271 
Interest payable   (49)   (47)
Other, net   1,891    (222)
NET CASH PROVIDED BY OPERATING ACTIVITIES   5,303    2,318 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Maturities and calls of securities available- for-sale   24,455    17,583 
Purchases of securities available-for-sale and held-to-maturity   (42,876)   (43,225)
Purchases of other securities   (443)   - 
Net increase in loans   (1,725)   (17,319)
Net additions in premises and equipment   (200)   (838)
NET CASH USED IN INVESTING ACTIVITIES   (20,789)   (43,799)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Increase in deposits   14,573    37,302 
Net increase (decrease) in borrowed funds   1,259    (37)
Dividends paid on common stock   (226)   (226)
Dividends paid on preferred stock   (171)   (171)
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   15,435    36,868 
           
NET DECREASE IN CASH   (51)   (4,613)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   23,181    33,976 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $23,130   $29,363 
SUPPLEMENTAL DISCLOSURES:          
           
CASH PAYMENTS FOR INTEREST  $2,331   $2,959 
CASH PAYMENTS FOR INCOME TAXES   768    648 
LOANS TRANSFERRED TO OTHER REAL ESTATE   4,142    1,848 
ISSUANCE OF RESTRICTED STOCK GRANTS   42    34 

 

 
 

 

THE FIRST BANCSHARES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE A — BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

 

NOTE B — SUMMARY OF ORGANIZATION

 

The First Bancshares, Inc., Hattiesburg, Mississippi (the "Company"), was incorporated June 23, 1995, under the laws of the State of Mississippi for the purpose of operating as a bank holding company. The Company’s primary asset is its interest in its wholly-owned subsidiary, The First, A National Banking Association (the Bank).

 

At June 30, 2012, the Company had approximately $700.6 million in assets, $385.6 million in loans, $588.0 million in deposits, and $63.3 million in stockholders' equity. For the six months ended June 30, 2012, the Company reported net income of $2.0 million ($1.8 million applicable to common stockholders).

 

In the first and second quarters of 2012, the Company declared and paid a dividend of $.0375 per common share.

 

NOTE C – BUSINESS COMBINATION

 

On September 16, 2011 the Company completed the purchase of seven (7) branches located on the Mississippi Gulf Coast and one (1) branch located in Bogalusa, Louisiana from Whitney National Bank and Hancock Bank of Louisiana (the “Whitney branches”). As part of the agreement, the Company purchased loans of $46.8 million and assumed deposit liabilities of $179.3 million, and purchased the related fixed assets and cash of the branches. The Company operates the acquired bank branches under the name The First, A National Banking Association. The acquisition allowed the Company to expand its presence in South Mississippi as well as enter a new market in Louisiana. The Company’s condensed consolidated statements of income include the results of operations of the Whitney branches.

 

 
 

 

In connection with the acquisition, the Company recorded $8.7 million of goodwill and $2.4 million of core deposit intangible. The core deposit intangible of $2.4 million will be expensed over 10 years. The recorded goodwill is deductible for tax purposes.

 

The Company acquired the $46.8 million loan portfolio at a fair value discount of $.7 million. The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments. The non credit quality portion of the discount was $.1 million and the credit quality portion of the discount was $.6 million.

 

The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):

 

Purchase price:     
Cash  $9,100 
Total purchase price   9,100 
Identifiable assets:     
Cash   125,243 
Loans and leases   46,118 
Core deposit intangible   2,402 
Personal and real property   7,481 
Other assets   95 
Total assets   181,339 
Liabilities and equity:     
Deposits   179,196 
Other liabilities   1,703 
Total liabilities   180,899 
Net assets acquired   440 
Goodwill resulting from acquisition  $8,660 

 

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at June 30, 2012 are as follows (dollars in thousands):

 

Outstanding principal balance  $28,987 
Carrying amount   28,543 

 

All loans obtained in the acquisition of the Whitney branches 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 non-voting Series A preferred shares issued, with a liquidation preference of $1 thousand per share, will pay a cumulative cash dividend quarterly at 5% per annum during the first five years the preferred shares are outstanding, resetting to 9% thereafter if not redeemed. The CPP also includes certain restrictions on dividend payments of the Company’s lower ranking equity and the ability to purchase its outstanding common shares.

 

 
 

 

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

 

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

 

The Letter Agreement, pursuant to which the Preferred Shares were exchanged, contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid in 2010) 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).

 

NOTE E — EARNINGS APPLICABLE TO COMMON STOCKHOLDERS

 

Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock outstanding, such as stock options.

 

 
 

 

   For the Three Months Ended 
   June 30, 2012 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $931,000    3,108,867   $.30 
                
Effect of dilutive shares:               
Restricted stock grants        21,557      
                
Diluted per share  $931,000    3,130,424   $.30 

 

   For the Six Months Ended 
   June 30, 2012 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $1,796,000    3,094,102   $.58 
                
Effect of dilutive shares:               
Restricted stock grants        21,557      
                
Diluted per share  $1,796,000    3,115,659   $.58 

 

   For the Three Months Ended 
   June 30, 2011 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $585,000    3,066,072   $.19 
                
Effect of dilutive shares:               
Restricted stock grants        5,978      
                
Diluted per share  $585,000    3,072,050   $.19 

 

   For the Six Months Ended 
   June 30, 2011 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $1,000,000    3,060,430   $.33 
                
Effect of dilutive shares:               
Restricted stock grants        5,978      
                
Diluted per share  $1,000,000    3,066,408   $.33 

 

The Company granted 42,795 shares of restricted stock in the first quarter of 2012 and 33,850 shares of restricted stock in the first quarter of 2011.

 

 
 

 

NOTE F — COMPREHENSIVE INCOME

 

The following table discloses Comprehensive Income for the periods reported in the Consolidated Statements of Income:

 

(In thousands)

   Three Months   Six Months 
   Ended   Ended 
   June 30,   June 30 
   2012   2011   2012   2011 
                 
Unrealized holding gains on available-for-sale securities during the period, net of tax  $770   $954   $1,137   $1,138 
                     
Unrealized gain (loss) on derivative carried at fair value during the period, net of tax   42    (18)   24    (17)
                     
Accumulated Other Comprehensive Income (Loss), beginning of period   911    (392)   562    (577)
                     
Accumulated Other Comprehensive Income, end of period  $1,723   $544   $1,723   $544 

 

NOTE G — FAIR VALUE OF ASSETS AND LIABILITIES

 

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

 

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

 

 
 

 

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

 

Available-for-Sale Securities

 

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

 

The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of June 30,2012 and December 31, 2011 (in thousands):

 

June 30, 2012

       Fair Value Measurements Using 
       Quoted Prices
in
Active
Markets
For
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Obligations of U. S. Government Agencies  $47,709   $-   $47,709   $- 
Municipal securities   99,248    -    99,248    - 
Mortgage-backed securities   61,281    -    61,281    - 
Corporate obligations   20,491    -    18,201    2,290 
Other   974    974    -    - 
Total  $229,703   $974   $226,439   $2,290 

 

 
 

 

December 31, 2011

 

       Fair Value Measurements Using 
       Quoted Prices
in
Active
Markets
For
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Obligations of U. S. Government Agencies  $43,673   $-   $43,673   $- 
Municipal securities   94,259    -    94,259    - 
Mortgage-backed securities   59,330    -    59,330    - 
Corporate obligations   14,293    -    12,041    2,252 
Other   974    974    -    - 
Total  $212,529   $974   $209,303   $2,252 

 

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

 

(Dollars in thousands)  Bank-Issued
Trust
Preferred
Securities
 
   2012   2011 
Balance, January 1  $2,252   $2,619 
Transfers into Level 3   -    - 
Transfers out of Level 3   -    - 
Other-than-temporary impairment loss included in earnings   -    (4)
Unrealized gain (loss) included in comprehensive income   38    (363)
Balance at June 30, 2012 and December 31, 2011  $2,290   $2,252 

 

Following is a description of the valuation methodologies used for assets measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Impaired Loans

 

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

 

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

 

 
 

 

Other Real Estate Owned

 

Other real estate owned acquired through loan foreclosure is initially recorded at fair value less estimated costs to sell, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense. Other real estate owned measured at fair value on a non-recurring basis at June 30, 2012, amounted to $6.7 million. Other real estate owned is classified within Level 2 of the fair value hierarchy.

 

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at June 30, 2012 and December 31, 2011.

 

($ in thousands)

 

June 30, 2012

       Fair Value Measurements Using 
       Quoted
Prices in
Active
Markets
For
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Impaired loans  $2,303   $-   $2,303   $- 
Other real estate owned   6,744    -    6,744    - 

 

 
 

 

December 31, 2011

       Fair Value Measurements Using 
       Quoted
Prices in
Active
Markets
For
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Impaired loans  $5,125   $-   $5,125   $- 
Other real estate  owned   4,353    -    4,353    - 

 

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
June 30, 2012
   As of
December 31, 2011
 
  

Carrying

Amount

  

Estimated

Fair
Value

  

Carrying

Amount

  

Estimated

Fair
Value

 
   (In thousands) 
Financial Instruments:                    
Assets:                    
Cash and cash equivalents  $23,130   $23,130   $23,181   $23,181 
Securities available-for-sale   229,703    229,703    212,529    212,529 
Securities held-to-maturity   8,484    8,850    6,002    6,002 
Other securities   3,090    3,090    2,645    2,645 
Loans, net   381,083    394,334    383,417    396,905 
                     
Liabilities:                    
Noninterest-bearing deposits  $104,482   $104,482   $107,129   $107,129 
Interest-bearing deposits   483,547    484,272    466,265    467,198 
Subordinated debentures   10,310    10,310    10,310    10,310 
FHLB and other borrowings   28,291    28,291    27,032    27,032 

 

NOTE H — LOANS

 

Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At June 30, 2012 and December 31, 2011, respectively, loans accounted for 60.4% and 62.4% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

 

 
 

 

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

 

 Composition of Loan Portfolio 

    
   June 30, 2012   December 31, 2011 
   Amount  

Percent
of

Total

   Amount  

Percent

of
Total

 
   (Dollars in thousands) 
Mortgage loans held for sale  $3,210    0.8%  $2,906    0.7%
Commercial, financial and agricultural   50,306    13.0    48,385    12.5 
Real Estate:                    
Mortgage-commercial   134,933    35.0    138,943    35.8 
Mortgage-residential   121,611    31.5    117,692    30.3 
Construction   60,939    15.8    63,357    16.3 
Consumer and other   14,552    3.9    16,645    4.4 
Total loans   385,551    100%   387,928    100%
Allowance for loan losses   (4,468)        (4,511)     
Net loans  $381,083        $383,417      

 

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

 

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

 

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

 

(In thousands)

 

   Three Months   Six Months 
   Ended   Ended 
   June 30, 2012   June 30, 2012 
         
Balance at beginning of period  $4,372   $4,511 
Loans charged-off:          
Real Estate   (96)   (364)
Installment and Other   (65)   (98)
Commercial, Financial and Agriculture   (2)   (26)
Total   (163)   (488)
Recoveries on loans previously charged-off:          
Real Estate   13    14 
Installment and Other   22    39 
Commercial, Financial and Agriculture   3    19 
Total   38    72 
Net Charge-offs   (125)   (416)
Provision for Loan Losses   221    373 
Balance at end of period  $4,468   $4,468 

 

 
 

 

The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at June 30, 2012 and December 31, 2011.

 

Allocation of the Allowance for Loan Losses

 

   June 30, 2012 
   (Dollars in thousands) 
   Amount  

% of loans

in each category
to total loans

 
         
Commercial Non Real Estate  $552    12.7%
Commercial Real Estate   2,924    66.5 
Consumer Real Estate   710    16.4 
Consumer   133    4.3 
Unallocated   149    .1 
Total  $4,468    100%

 

   December 31, 2011 
   (Dollars in thousands) 
   Amount  

% of loans

in each category
to total loans

 
         
Commercial Non Real Estate  $397    16.3%
Commercial Real Estate   3,356    63.8 
Consumer Real Estate   680    15.7 
Consumer   78    4.2 
Unallocated   -    - 
Total  $4,511    100%

 

The following table represents the Company’s impaired loans at June 30, 2012 and December 31, 2011. This table excludes performing troubled debt restructurings.

 

   June 30,   December 31, 
   2012   2011 
   (In thousands) 
Impaired Loans:          
Impaired loans without a valuation allowance  $1,230   $2,791 
Impaired loans with a valuation allowance   1,073    2,334 
Total impaired loans  $2,303   $5,125 
Allowance for loan losses on impaired loans at period end   290    738 
           
Total nonaccrual loans   2,303    5,125 
           
Past due 90 days or more and still accruing   1,205    496 
Average investment in impaired loans   3,439    4,185 

 

 
 

 

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

 

   Three Months
Ended
June 30, 2012
   Six Months
Ended
June 30, 2012
 
         
Average of individually impaired loans during period  $2,596   $3,439 
Interest income recognized during impairment   -    - 
Cash-basis interest income recognized   -    2 

 

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 and six months ended June 30, 2012, was $67,100 and $69,400, respectively. The Company had no loan commitments to borrowers in non-accrual status at June 30, 2012 and 2011.

 

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of June 30, 2012 and December 31, 2011. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.

 

June 30, 2012

 

           Commercial,     
       Installment   Financial     
   Real
Estate
  

and

Other

   and
Agriculture
   Total 
   (In thousands) 
Loans                    
Individually evaluated  $2,016   $27   $260   $2,303 
Collectively evaluated   315,180    16,475    48,383    380,038 
Total  $317,196   $16,502   $48,643   $382,341 
                     
Allowance for Loan Losses                    
Individually evaluated  $181   $12   $97   $290 
Collectively evaluated   3,453    270    455    4,178 
Total  $3,634   $282   $552   $4,468 

 

 
 

 

December 31, 2011

 

           Commercial,     
       Installment   Financial     
   Real
Estate
  

and

Other

   and
Agriculture
   Total 
   (In thousands) 
Loans                    
Individually evaluated  $4,841   $38   $246   $5,125 
Collectively evaluated   301,271    16,107    62,519    379,897 
Total  $306,112   $16,145   $62,765   $385,022 
                     
Allowance for Loan Losses                    
Individually evaluated  $662   $13   $63   $738 
Collectively evaluated   3,375    64    334    3,773 
Total  $4,037   $77   $397   $4,511 

 

The following tables provide additional detail of impaired loans broken out according to class as of June 30, 2012 and December 31, 2011. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at June 30, 2012 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

 

 
 

 

 

 

June 30, 2012

 

               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
   (In thousands) 
Impaired loans with no related allowance:                         
Commercial installment  $77   $77   $-   $77   $- 
Commercial real estate   920    920    -    904    2 
Consumer real estate   231    231    -    274    - 
Consumer installment   2    2    -    5    - 
Total  $1,230   $1,230   $-   $1,260   $2 
                          
Impaired loans with a related allowance:                         
Commercial installment  $183   $183   $97   $200   $- 
Commercial real estate   613    613    157    810    - 
Consumer real estate   252    252    24    298    - 
Consumer installment   25    25    12    28    - 
Total  $1,073   $1,073   $290   $1,336   $- 
                          
Total Impaired Loans:                         
Commercial installment  $260   $260   $97   $277   $- 
Commercial real estate   1,533    1,533    157    1,714    2 
Consumer real estate   483    483    24    572    - 
Consumer installment   27    27    12    33    - 
Total Impaired Loans  $2,303   $2,303   $290   $2,596   $2 

 

December 31, 2011

 

               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
   (Inthousands) 
                     
Impaired loans with no related allowance:                         
Commercial installment  $121   $121   $-   $69   $5 
Commercial real estate   2,420    2,420    -    1,457    85 
Consumer real estate   241    241    -    288    3 
Consumer installment   9    9    -    11    - 
Total  $2,791   $2,791   $-   $1,825   $93 
                          
Impaired loans with a related allowance:                         
Commercial installment  $125   $125   $63   $128   $- 
Commercial real estate   1,533    1,533    571    1,463    23 
Consumer real estate   647    647    91    740    12 
Consumer installment   29    29    13    29    6 
Total  $2,334   $2,334   $738   $2,360   $41 
                          
Total Impaired Loans:                         
Commercial installment  $246   $246   $63   $197   $5 
Commercial real estate   3,953    3,953    571    2,920    108 
Consumer real estate   888    888    91    1,028    15 
Consumer installment   38    38    13    40    6 
Total Impaired Loans  $5,125   $5,125   $738   $4,185   $134 

 

 
 

 

The following tables provide additional detail of troubled debt restructurings at June 30, 2012.

 

For the Three Months Ending June 30, 2012

 

       Outstanding         
   Outstanding
Recorded
   Recorded
Investment
       Interest 
   Investment
Pre-Modification
   Post -
Modification
   Number of
Loans
   Income
Recognized
 
   (in thousands except number of loans) 
                 
Commercial installment  $-   $-    -   $- 
Commercial real estate   -    -    -    - 
Consumer real estate   63    63    1    1 
Consumer installment   -    -    -    - 
   $63   $63    1   $1 

 

For the Six Months Ending June 30, 2012

 

       Outstanding         
   Outstanding
Recorded
   Recorded
Investment
       Interest 
   Investment
Pre-Modification
   Post -
Modification
   Number of
Loans
   Income
Recognized
 
   (in thousands except number of loans) 
                 
Commercial installment  $-   $-    -   $- 
Commercial real estate   -    -    -    - 
Consumer real estate   63    63    1    1 
Consumer installment   -    -    -    - 
   $63   $63    1   $1 

 

The balance of troubled debt restructurings at June 30, 2012 was $104,000. There was no allocation in specific reserves established with respect to these loans as of June 30, 2012. As of June 30, 2012, the Company had no additional amount committed on any loan classified as troubled debt restructuring.

 

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 $-0-. 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 and six month period ending June 30, 2012, there was 1 loan modified as TDR.

 

 
 

 

The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual:

 

   June 30, 2012 
   (In thousands) 
  

Past Due

30 to 89
Days

  

Past Due

90 Days
or More
and Still
Accruing

   Non-
Accrual
  

Total

Past Due
and

Non-
Accrual

  

Total

Loans

 
                     
Real Estate-construction  $1,108   $33   $712   $1,853   $60,939 
Real Estate-mortgage   2,096    464    723    3,283    121,611 
Real Estate-non farm non residential   68    685    581    1,334    134,933 
Commercial   106    -    260    366    50,306 
Consumer   158    23    27    208    14,552 
Total  $3,536   $1,205   $2,303   $7,044   $382,341 

 

   December 31, 2011 
   (In thousands) 
   Past Due
30 to 89
Days
   Past Due
90 Days
or More
and
Still
Accruing
   Non-
Accrual
   Total
Past Due
and
Non-
Accrual
   Total
Loans
 
                     
Real Estate-construction  $70   $22   $945   $1,037   $63,357 
Real Estate-mortgage   2,189    311    984    3,484    117,692 
Real Estate-non farm non residential   1,662    144    2,877    4,683    138,943 
Commercial   138    19    246    403    48,385 
Consumer   214    -    73    287    16,645 
Total  $4,273   $496   $5,125   $9,894   $385,022 

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience credit documentation, public information, and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

 
 

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

As of June 30, 2012 and December 31, 2011, 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)

June 30, 2012

 

               Commercial,     
  

Real Estate

Commercial

  

Real
Estate

Mortgage

  

Installment
and

Other

  

Financial
and

Agriculture

   Total 
                     
Pass  $234,512   $60,222   $16,406   $46,280   $357,420 
Special Mention   4,329    152    32    1,824    6,337 
Substandard   15,731    2,408    64    475    18,678 
Doubtful   -    -    -    68    68 
Subtotal   254,572    62,782    16,502    48,647    382,503 
Less:                         
Unearned discount   98    60    -    4    162 
Loans, net of unearned discount  $254,474   $62,722   $16,502   $48,643   $382,341 

 

December 31, 2011

 

               Commercial,     
  

Real Estate

Commercial

  

Real
Estate

Mortgage

  

Installment
and

Other

   Financial
and
Agriculture
   Total 
                     
Pass  $223,692   $57,835   $16,004   $60,741   $358,272 
Special Mention   5,169    71    45    3    5,288 
Substandard   16,815    2,553    99    1,846    21,313 
Doubtful   -    104    -    175    279 
Subtotal   245,676    60,563    16,148    62,765    385,152 
Less:                         
Unearned discount   94    34    -    2    130 
Loans, net of unearned discount  $245,582   $60,529   $16,148   $62,763   $385,022 

 

 
 

 

NOTE I — SECURITIES

 

The following disclosure of the estimated fair value of financial instruments is made in accordance with authoritative guidance. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at June 30, 2012, follows:

($ in thousands)

 

   June 30, 2012 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
Available-for-sale securities:                    
Obligations of U.S. Government Agencies  $47,544   $170   $5   $47,709 
Tax-exempt and taxable obligations of states and municipal subdivisions   95,843    3,435    30    99,248 
Mortgage-backed securities   59,944    1,384    47    61,281 
Corporate obligations   22,565    294    2,368    20,491 
Other   1,255    -    281    974 
Total  $227,151   $5,283   $2,731   $229,703 
Held-to-maturity securities:                    
Mortgage-backed securities  $2,484   $66   $-   $2,550 
Taxable obligations of states and municipal subdivisions   6,000    300    -    6,300 
Total  $8,484   $366   $-   $8,850 

 

NOTE J — 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 short operating history and rapid growth. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

 

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

 

 
 

 

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

 

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

 

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

 

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

 

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

 

NOTE K – SUBSEQUENT EVENTS

 

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

 

NOTE L – RECLASSIFICATION

 

Certain amounts in the 2011 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

 

 
 

 

ITEM NO. 2MANAGEMENT’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 $699.3 million at June 30, 2012, compared to $679.9 million at December 31, 2011. Loans decreased $2.4 million, or .6%, during the first six months of 2012. Deposits at June 30, 2012, totaled $588.0 million compared to $573.4 million at December 31, 2011. For the six month period ended June 30, 2012, The First reported net income of $2.2 million compared to $1.6 million for the six months ended June 30, 2011.

 

NONPERFORMING ASSETS AND RISK ELEMENTS. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At June 30, 2012, The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas.

 

At June 30, 2012, The First had loans past due as follows:

 

   ($ In Thousands) 
     
Past due 30 through 89 days  $3,536 
Past due 90 days or more and still accruing   1,205 

 

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 June 30, 2012, a decrease of $2.8 million from December 31, 2011. Any other real estate owned is carried at fair value, determined by an appraisal. Other real estate owned totaled $6.7 million at June 30, 2012. A loan is classified as a restructured loan when the following two conditions are present: First, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower’s financial difficulties. At June 30, 2012, the Bank had $104,000 in loans that were modified as troubled debt restructurings.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is adequate with cash and cash equivalents of $23.1 million as of June 30, 2012. In addition, loans and investment securities repricing or maturing within one year or less exceeded $174.9 million at June 30, 2012. Approximately $63.3 million in loan commitments could fund within the next six months and other commitments, primarily standby letters of credit, totaled $.5 million at June 30, 2012.

 

 
 

 

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

 

Total consolidated equity capital at June 30, 2012, was $63.3 million, or approximately 9.0% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies. The Company’s capital ratios as of June 30, 2012, were as follows:

 

Tier 1 leverage   8.49%
Tier 1 risk-based   12.95%
Total risk-based   13.92%

 

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 2012 or later, at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the authoritative guidance, the trusts are not included in the consolidated financial statements.

 

RESULTS OF OPERATIONS – QUARTERLY

 

The Company had a consolidated net income of $1,037,000 for the three months ended June 30, 2012, compared with consolidated net income of $670,000 for the same period last year.

 

Net interest income increased to $5,508,000 from $4,511,000 for the three months ended June 30, 2012, or an increase of 22.1% as compared to the same period in 2011. Earning assets through June 30, 2012, increased $136.0 million, or 27.1% and interest-bearing liabilities also increased $98.1 million or 23.1% when compared to June 30, 2011.

 

Noninterest income for the three months ended June 30, 2012, was $1,510,000 compared to $1,024,000 for the same period in 2011, reflecting an increase of $486,000 or 47.5%. Included in noninterest income is service charges on deposit accounts, which for the three months ended June 30 2012, totaled $857,000 compared to $567,000 for the same period in 2011.

 

 
 

 

The provision for loan losses was $221,000 for the three months ended June 30, 2012, compared with $305,000 for the same period in 2011. The allowance for loan losses of $4.5 million at June 30, 2012 (approximately 1.16% of loans) 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 $1,121,000 or 26.1% for the three months ended June 30, 2012, when compared with the same period in 2011. This increase is primarily related to nonrecurring events including compromises of contingent claims and costs associated with the acquisition of the Whitney branches.

 

RESULTS OF OPERATIONS – YEAR TO DATE

 

The Company had a consolidated net income of $2,008,000 for the six months ended June 30, 2012, compared with consolidated net income of $1,171,000 for the same period last year.

 

Net interest income increased to $11.0 million from $8.8 million for the six months ended June 30, 2012, or an increase of 25.5% as compared to the same period in 2011. This increase was a result of increased loan volume and lower funding costs.

 

Noninterest income for the six months ended June 30, 2012, was $2,985,000 compared to $1,939,000 for the same period in 2011, reflecting an increase of $1,046,000 or 53.9%. Included in noninterest income is service charges on deposit accounts, which for the six months ended June 30, 2012, totaled $1,727,000 compared to $1,126,000 for the same period in 2011. An increase in fee income associated with higher loan and deposit volumes attributed to this income as well as fee income generated from our mortgage division.

 

The provision for loan losses was $373,000 for the six months ended June 30, 2012, compared with $653,000 for the same period in 2011. The allowance for loan losses of $4.5 million at June 30, 2012 (approximately 1.16% of total loans and 1.25% of loans excluding those booked at fair value due to 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 $2.1 million or 24.0% for the six months ended June 30, 2012, when compared with the same period in 2011. This increase is primarily related to an increase in operating costs associated with the acquisition of the Whitney branches acquired in the fourth quarter of 2011, as more fully discussed at Note C.

 

 
 

 

ITEM NO. 3. CONTROLS AND PROCEDURES

 

As of June 30, 2012, (the “Evaluation Date”), we carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

 

There have been no changes, significant or otherwise, in our internal controls over financial reporting that occurred during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

ITEM NO. 4. RECENT ACCOUNTING PRONOUNCEMENTS

 

The Company has adopted ASU No. 2011-05, “Presentation of Comprehensive Income.” This guidance (ASC Topic 220, Comprehensive Income) revises the manner in which entities present comprehensive income in their financial statements. It requires entities to report components in either a continuous statement of comprehensive income or in two separate but consecutive statements. The Company chose the latter presentation. The items that must be reported in other comprehensive income did not change. In December 2011, the FASB issued ASU No. 2011-12 to defer changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments until the FASB has time to reconsider the presentation of such adjustments.

 

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet Disclosures about Offsetting Assets and Liabilities.” The ASU amends ASC Topic 210 by requiring additional improved information to be disclosed regarding financial instruments and derivative instruments that are offset in accordance with the conditions under ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendment is effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by the amendments should be applied retrospectively for all comparative periods presented. The Company does not believe the amendments will have a material impact on the financial statements.

 

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, 2011. Please refer to the Annual Report on Form 10-K of The First Bancshares, Inc., filed with the Securities and Exchange Commission on March 29, 2012.

 

 
 

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS

 

Not Applicable

 

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.    
     
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.

 

(b)The Company filed three reports on Form 8-K during the quarter ended June 30, 2012

 

SIGNATURES

 

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

 

    THE FIRST BANCSHARES, INC.
    (Registrant)
     
    /s/ M. RAY (HOPPY)COLE, JR.
August 14, 2012     M. Ray (Hoppy) Cole, Jr.
(Date)     Chief Executive Officer
     
    /s/ DEEDEE LOWERY
August 14, 2012   DeeDee Lowery, Executive
(Date)   Vice President and Chief
    Financial Officer

 

 

XNAS:FBMS First Bancshares Inc Quarterly Report 10-Q Filling

First Bancshares Inc XNAS:FBMS Stock - Get Quarterly Report SEC Filing of First Bancshares Inc XNAS:FBMS stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:FBMS First Bancshares Inc Quarterly Report 10-Q Filing - 6/30/2012
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