U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED: March 31, 2016  

 

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

EXECUTIVE OFFICES)

  (ZIP CODE)

 

(601) 268-8998

 

(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

NONE

 

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

 

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

YES x   NO  ¨

 

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

YES x   NO  ¨

 

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

 

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

 

ON March 31, 2016, 5,458,508 SHARES OF THE ISSUER'S COMMON STOCK, PAR VALUE $1.00 PER SHARE WERE ISSUED AND OUTSTANDING.

 

TRANSITIONAL DISCLOSURE FORMAT (CHECK ONE):

YES  ¨   NO  x

 

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

YES  ¨   NO  x

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM NO. 1. FINANCIAL STATEMENTS

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS

 

($ amounts in thousands)

 

   (Unaudited)     
   March 31,   December 31, 
   2016   2015 
         
ASSETS          
           
Cash and due from banks  $31,957   $23,635 
Interest-bearing deposits with banks   37,316    17,303 
Federal funds sold   26,692    321 
           
Total cash and cash equivalents   95,965    41,259 
           
Securities held-to-maturity, at amortized cost   6,851    7,092 
Securities available-for-sale, at fair value   253,126    239,732 
Other securities   9,570    8,135 
           
Total securities   269,547    254,959 
           
Loans held for sale   6,095    3,974 
Loans   797,764    772,515 
Allowance for loan losses   (6,982)   (6,747)
           
Loans, net   796,877    769,742 
           
Premises and equipment   33,353    33,623 
Interest receivable   4,266    3,953 
Cash surrender value of life insurance   14,971    14,872 
Goodwill   13,776    13,776 
Other real estate owned   4,363    3,083 
Other assets   8,833    9,864 
           
TOTAL ASSETS  $1,241,951   $1,145,131 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Deposits:          
Noninterest-bearing  $194,433   $189,445 
Interest-bearing   846,672    727,250 
           
TOTAL DEPOSITS   1,041,105    916,695 
           
Interest payable   236    246 
Borrowed funds   78,976    110,321 
Subordinated debentures   10,310    10,310 
Other liabilities   4,127    4,123 
           
TOTAL LIABILITIES   1,134,754    1,041,695 
           
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, 2016 and December 31, 2015, respectively   17,123    17,123 
Common stock, par value $1 per share, 20,000,000 shares authorized and 5,458,508 shares issued at March 31,2016; and 5,403,159 shares issued at December 31, 2015, respectively   5,459    5,403 
Additional paid-in capital   44,668    44,650 
Retained earnings   37,939    35,625 
Accumulated other comprehensive income   2,472    1,099 
Treasury stock, at cost, 26,494 shares at March 31, 2016 and at December 31, 2015   (464)   (464)
           
TOTAL STOCKHOLDERS’ EQUITY   107,197    103,436 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $1,241,951   $1,145,131 

 

See Notes to Consolidated Financial Statements

 

 

 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

 

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

 

   (Unaudited) 
   Three Months Ended 
   March 31, 
   2016   2015 
         
INTEREST INCOME:          
Interest and fees on loans  $9,035   $8,148 
Interest and dividends on securities:          
Taxable interest and dividends   1,072    1,011 
Tax exempt interest   460    501 
Interest on federal funds sold   30    23 
           
TOTAL INTEREST INCOME   10,597    9,683 
           
INTEREST EXPENSE:          
Interest on deposits   701    632 
Interest on borrowed funds   221    172 
           
TOTAL INTEREST EXPENSE   922    804 
           
NET INTEREST INCOME   9,675    8,879 
           
PROVISION FOR LOAN LOSSES   190    150 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   9,485    8,729 
           
OTHER INCOME:          
Service charges on deposit accounts   1,281    1,051 
Other service charges and fees   1,202    799 
           
TOTAL OTHER INCOME   2,483    1,850 
           
OTHER EXPENSES:          
Salaries and employee benefits   5,149    4,626 
Occupancy and equipment   1,073    1,109 
Other   2,173    2,083 
           
TOTAL OTHER EXPENSES   8,395    7,818 
           
INCOME BEFORE INCOME TAXES   3,573    2,761 
           
INCOME TAXES   969    732 
           
NET INCOME   2,604    2,029 
           
PREFERRED STOCK ACCRETION AND DIVIDENDS   85    85 
           
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS  $2,519   $1,944 
           
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:          
BASIC  $.47   $.36 
DILUTED   .46    .36 
DIVIDENDS PER SHARE – COMMON   .0375    .0375 

 

See Notes to Consolidated Financial Statements

 

 

 

 

THE FIRST BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

($ amounts in thousands)

 

   (Unaudited) 
   Three Months Ended 
   March 31, 
   2016   2015 
         
Net income per consolidated statements of income  $2,604   $2,029 
Other Comprehensive Income:          
Unrealized holding gains arising during the period on available-for-sale securities   2,071    1,124 
Unrealized holding gains on loans held for sale   12    16 
Income tax expense   (710)   (388)
Other Comprehensive Income   1,373    752 
           
Comprehensive Income  $3,977   $2,781 

 

See Notes to Consolidated Financial Statements

 

 

 

 

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, 2015  $5,343   $17,123   $284   $44,137   $27,975   $1,818   $(464)  $96,216 
Net income   -    -    -    -    2,029    -    -    2,029 
Other comprehensive income   -    -    -    -    -    752    -    752 
Dividends on preferred stock   -    -    -    -    (85)   -    -    (85)
Dividends on common stock, $0.0375 per share   -    -    -    -    (202)   -    -    (202)
Repurchase of restricted stock for payment of taxes   (6)   -    -    (86)   -    -    -    (92)
Restricted stock grant   67    -    -    (67)   -    -    -    - 
Compensation expense   -    -    -    184    -    -    -    184 
Reversal of 2,514 common shares for BCB Holdings   (3)   -    -    (33)   -    -    -    (36)
Balance, March 31, 2015  $5,401   $17,123   $284   $44,135   $29,717   $2,570   $(464)  $98,766 
                                         
Balance, January 1, 2016  $5,403   $17,123   $-   $44,650   $35,625   $1,099   $(464)  $103,436 
Net income   -    -    -    -    2,604    -    -    2,604 
Other comprehensive income   -    -    -    -    -    1,373    -    1,373 
Dividends on preferred stock   -    -    -    -    (85)   -    -    (85)
Dividends on common stock, $0.0375 per share   -    -    -    -    (205)   -    -    (205)
Repurchase of restricted stock for payment of taxes   (5)   -    -    (100)   -    -    -    (105)
Restricted stock grant   61    -    -    (61)   -    -    -    - 
Compensation expense   -    -    -    179    -    -    -    179 
Balance, March 31, 2016  $5,459   $17,123   $-   $44,668   $37,939   $2,472   $(464)  $107,197 

 

See Notes to Consolidated Financial Statements

 

 

 

 

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ Amounts in Thousands)

 

   (Unaudited) 
   Three Months Ended 
   March 31, 
   2016   2015 
CASH FLOWS FROM OPERATING ACTIVITIES:          
NET INCOME  $2,604   $2,029 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation, amortization and accretion   870    871 
Provision for loan losses   190    150 
Loss on sale/writedown of ORE   62    94 
Gain on sale of bank premises   -    (119)
Restricted stock expense   179    184 
Increase in cash value of life insurance   (99)   (106)
Federal Home Loan Bank stock dividends   (2)   (1)
Changes in:          
Interest receivable   (313)   (291)
Loans held for sale, net   (2,109)   462 
Interest payable   (10)   (41)
Other, net   365    (1,650)
NET CASH PROVIDED BY OPERATING ACTIVITIES   1,737    1,582 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Maturities, calls and paydowns of available-for-sale and held-to-maturity securities   9,150    12,188 
Purchases of securities available-for-sale and held-to-maturity securities   (20,541)   (3,520)
Net purchases of other securities   (1,433)   - 
Net increase in loans   (26,736)   (12,650)
Proceeds from sale of bank premises   -    949 
Net increase in premises and equipment   (151)   (197)
NET CASH USED IN INVESTING ACTIVITIES   (39,711)   (3,230)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Increase in deposits   124,410    91,915 
Net decrease in borrowed funds   (31,345)   (40,004)
Dividends paid on common stock   (195)   (194)
Dividends paid on preferred stock   (85)   (85)
Repurchase of restricted stock for payment of taxes   (105)   (92)
Repurchase of shares issued in BCB acquisition   -    (36)
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   92,680    51,504 
           
NET INCREASE IN CASH   54,706    49,856 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   41,259    44,618 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $95,965   $94,474 
           
SUPPLEMENTAL DISCLOSURES:          
           
CASH PAYMENTS FOR INTEREST   932    892 
CASH PAYMENTS FOR INCOME TAXES   236    2,206 
LOANS TRANSFERRED TO OTHER REAL ESTATE   1,554    506 
ISSUANCE OF RESTRICTED STOCK GRANTS   61    67 

 

See Notes to Consolidated Financial Statements

 

 

 

 

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, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015.

 

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, 2016, the Company had approximately $1.2 billion in assets, $796.9 million in net loans, $1.0 billion in deposits, and $107.2 million in stockholders' equity. For the three months ended March 31, 2016, the Company reported net income of $2.6 million ($2.5 million applicable to common stockholders).

 

In the first quarter of 2016, the Company declared and paid a dividend of $.0375 per common share.

 

NOTE C – BUSINESS COMBINATION

 

The Mortgage Connection

 

On December 14, 2015, the Company completed the acquisition of The Mortgage Connection, a Mississippi corporation, which included two loan production offices located in Madison and Brandon, Mississippi.

 

In connection with the acquisition, the Company recorded $1.5 million of goodwill.

 

 

 

 

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

 

Purchase price:     
Cash  $844 
Payable   800 
Total purchase price   1,644 
Identifiable assets:     
Intangible   100 
Personal property   44 
Total assets   144 
Liabilities and equity:     
Net assets acquired  $144 
Goodwill resulting from acquisition  $1,500 

 

NOTE D – PREFERRED STOCK AND WARRANT

 

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

 

The Letter Agreement contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid in 2011-2015) and on the Company’s ability to repurchase its common stock in the event of a non-payment of our dividend, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as previously disclosed by the Company. The CDCI Preferred Shares entitle the holder to an annual dividend of 2% for 8 years of the liquidation value of the shares, payable quarterly in arrears.

 

Pursuant to the terms of the letter agreement between the Company and the United States Department of the Treasury, the Company redeemed the warrant to purchase up to 54,705 shares of the Company’s common stock. In connection with this redemption, on May 13, 2015, the Company paid Treasury an aggregate redemption price of $302,410.

 

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, 2016 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $2,519,000    5,415,339   $0.47 
                
Effect of dilutive shares:               
Restricted stock grants        63,364      
                
Diluted per share  $2,519,000    5,478,703   $0.46 

 

 

 

 

   For the Three Months Ended 
   March 31, 2015 
   Net Income   Shares   Per 
   (Numerator)   (Denominator)   Share Data 
             
Basic per share  $1,944,000    5,358,576   $0.36 
                
Effect of dilutive shares:               
Restricted stock grants        56,524      
                
Diluted per share  $1,944,000    5,415,100   $0.36 

 

The Company granted 61,247 shares of restricted stock in the first quarter of 2016.

 

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, 2016 and December 31, 2015 (in thousands):

 

March 31, 2016

(Dollars in thousands)  Fair Value Measurements Using 
       Quoted Prices
in
Active
Markets
For
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Obligations of U. S. Government Agencies  $16,642   $-   $16,642   $- 
Municipal securities   97,594    -    97,594    - 
Mortgage-backed securities   115,733    -    115,733    - 
Corporate obligations   22,203    -    19,729    2,474 
Other   954    954    -    - 
Total  $253,126   $954   $249,698   $2,474 

 

December 31, 2015

(Dollars in thousands)  Fair Value Measurements Using 
       Quoted Prices
in
Active
Markets
For
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Obligations of U. S. Government Agencies  $19,611   $-   $19,611   $- 
Municipal securities   97,889    -    97,889    - 
Mortgage-backed securities   98,925    -    98,925    - 
Corporate obligations   22,346    -    19,789    2,557 
Other   961    961    -    - 
Total  $239,732   $961   $236,214   $2,557 

 

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
 
   2016   2015 
Balance, January 1  $2,557   $2,801 
Transfers into Level 3   -    - 
Transfers out of Level 3   -    - 
Other-than-temporary impairment loss included in earnings (loss)   -    - 
Unrealized loss included in comprehensive income   (83)   (244)
Balance at March 31, 2016 and December 31, 2015  $2,474   $2,557 

 

 

 

 

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, 2016  $2,474   Discounted cash flow  Probability of default   1.18% - 2.96 
December 31, 2015  $2,557   Discounted cash flow  Probability of default   1.08% - 2.77 

 

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, 2016, amounted to $4.4 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, 2016 and December 31, 2015.

 

($ in thousands)

 

March 31, 2016

       Fair Value Measurements Using 
       Quoted
Prices in
Active
Markets
For
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
                 
Impaired loans  $8,866   $-   $8,866   $- 
                     
Other real estate owned   4,363                      -    4,363    - 

 

December 31, 2015

       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  $10,127   $-   $10,127   $- 
                     
Other real estate owned   3,083                      -    3,083    - 

 

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

 

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

 

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

 

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

 

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

 

 

 

 

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

 

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

 

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

 

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

 

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

 

As of March 31, 2016      Fair Value Measurements 
($ in thousands)  Carrying
Amount
   Estimated
Fair
Value
   Quoted
Prices
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
                     
Financial Instruments:                         
Assets:                         
Cash and cash equivalents  $95,965   $95,965   $95,965   $-   $- 
Securities available-for-sale   253,126    253,126    954    249,698    2,474 
Securities held-to-maturity   6,851    8,741    -    8,741    - 
Other securities   9,570    9,570    -    9,570    - 
Loans, net   796,877    814,936    -    -    814,936 
Bank-owned life insurance   14,971    14,971    -    14,971    - 
                          
Liabilities:                         
Noninterest-bearing deposits  $194,433   $194,433   $-   $194,433   $- 
Interest-bearing deposits   846,672    846,231    -    846,231    - 
Subordinated debentures   10,310    10,310    -    -    10,310 
FHLB and other borrowings   78,976    78,976    -    78,976    - 

 

 

 

 

As of December 31, 2015      Fair Value Measurements 
($ in thousands)  Carrying
Amount
   Estimated
Fair
Value
   Quoted
Prices
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
                     
Financial Instruments:                         
Assets:                         
Cash and cash equivalents  $41,259   $41,259   $41,259   $-   $- 
Securities available-for-sale   239,732    239,732    961    236,214    2,557 
Securities held-to-maturity   7,092    8,548    -    8,548    - 
Other securities   8,135    8,135    -    8,135    - 
Loans, net   769,742    784,113    -    -    784,113 
Bank-owned life insurance   14,872    14,872    -    14,872    - 
                          
Liabilities:                         
Noninterest-bearing deposits  $189,445   $189,445   $-   $189,445   $- 
Interest-bearing deposits   727,250    726,441    -    726,441    - 
Subordinated debentures   10,310    10,310    -    -    10,310 
FHLB and other borrowings   110,321    110,321    -    110,321    - 

 

NOTE G — LOANS

 

Loans typically provide higher yields than the other types of earning assets, and, thus, one of the Company's goals is for loans to be the largest category of the Company's earning assets. For the quarters ended March 31, 2016 and December 31, 2015, average loans accounted for 72.3% and 73.3% of average earning assets, respectively. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

 

 

 

 

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

 

Composition of Loan Portfolio

 

   March 31, 2016   December 31, 2015 
   Amount   Percent
of
Total
   Amount   Percent
of
Total
 
   (Dollars in thousands) 
                 
Mortgage loans held for sale  $6,095    0.8%  $3,974    0.5%
Commercial, financial and agricultural   126,381    15.7    129,197    16.6 
Real Estate:                    
Mortgage-commercial   270,085    33.6    253,309    32.6 
Mortgage-residential   276,272    34.3    272,180    35.1 
Construction   100,386    12.5    99,161    12.8 
Lease financing receivable   2,645    0.3    2,650    0.3 
Obligations of states and subdivisions   7,034    0.9    969    0.1 
Consumer and other   14,961    1.9    15,049    2.0 
Total loans   803,859    100%   776,489    100%
Allowance for loan losses   (6,982)        (6,747)     
Net loans  $796,877        $769,742      

 

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

 

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

 

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

 

(In thousands)

 

   Three Months 
   Ended 
   March 31, 2016 
     
Balance at beginning of period  $6,747 
Loans charged-off:     
Real Estate   (78)
Installment and Other   (9)
Commercial, Financial and Agriculture   (6)
Total   (93)
Recoveries on loans previously charged-off:     
Real Estate   44 
Installment and Other   18 
Commercial, Financial and Agriculture   76 
Total   138 
Net recoveries   45 
Provision for Loan Losses   190 
Balance at end of period  $6,982 

 

 

 

 

The following tables represent how the allowance for loan losses is allocated to a particular loan type, as well as the percentage of the category to total loans at March 31, 2016 and December 31, 2015.

 

Allocation of the Allowance for Loan Losses

 

   March 31, 2016 
   (Dollars in thousands) 
   Amount   % of loans
in each category
to total loans
 
         
Commercial Non Real Estate  $1,020    17.3%
Commercial Real Estate   3,410    58.7 
Consumer Real Estate   1,584    21.6 
Consumer   144    2.3 
Unallocated   824    .1 
Total  $6,982    100%

 

   December 31, 2015 
   (Dollars in thousands) 
   Amount   % of loans
in each category
to total loans
 
         
Commercial Non Real Estate  $895    17.1%
Commercial Real Estate   3,018    58.4 
Consumer Real Estate   1,477    21.9 
Consumer   141    2.5 
Unallocated   1,216    .1 
Total  $6,747    100%

 

The following table represents the Company’s impaired loans at March 31, 2016, and December 31, 2015.

 

   March 31,   December 31, 
   2016   2015 
   (In thousands) 
Impaired Loans:          
Impaired loans without a valuation allowance  $4,776   $6,020 
Impaired loans with a valuation allowance   4,090    4,107 
Total impaired loans  $8,866   $10,127 
Allowance for loan losses on impaired loans at period end   967    957 
           
Total nonaccrual loans   5,851    7,368 
           
Past due 90 days or more and still accruing   628    29 
Average investment in impaired loans   9,496    9,652 

 

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

 

   Three Months
Ended
March 31, 2016
   Three Months
Ended
March 31, 2015
 
         
Interest income recognized during impairment  $45   $34 
Cash-basis interest income recognized   45    34 

 

 

 

 

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the three months ended March 31, 2016 and March 31, 2015, was $98,000 and $94,000, respectively, The Company had no loan commitments to borrowers in non-accrual status at March 31, 2016 and December 31, 2015.

 

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of March 31, 2016 and December 31, 2015. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.

 

March 31, 2016

 

           Commercial,     
       Installment   Financial     
   Real
Estate
   and
Other
   and
Agriculture
   Total 
   (In thousands) 
Loans                    
Individually evaluated  $8,556   $37   $273   $8,866 
Collectively evaluated   637,661    15,257    135,980    788,898 
Total  $646,217   $15,294   $136,253   $797,764 
                     
Allowance for Loan Losses                    
Individually evaluated  $880   $25   $62   $967 
Collectively evaluated   4,114    943    958    6,015 
Total  $4,994   $968   $1,020   $6,982 

 

December 31, 2015

 

           Commercial,     
       Installment   Financial     
   Real
Estate
   and
Other
   and
Agriculture
   Total 
   (In thousands) 
Loans                    
Individually evaluated  $9,782   $39   $306   $10,127 
Collectively evaluated   610,996    19,591    131,801    762,388 
Total  $620,778   $19,630   $132,107   $772,515 
                     
Allowance for Loan Losses                    
Individually evaluated  $882   $25   $50   $957 
Collectively evaluated   3,613    1,332    845    5,790 
Total  $4,495   $1,357   $895   $6,747 

 

 

 

 

The following tables provide additional detail of impaired loans broken out according to class as of March 31, 2016 and December 31, 2015. The recorded investment included in the following tables represent customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at March 31, 2016, are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

 

March 31, 2016

 

               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
   (In thousands) 
Impaired loans with no related allowance:                         
Commercial installment  $-   $-   $-   $-   $- 
Commercial real estate   4,558    4,597    -    5,174    7 
Consumer real estate   212    212    -    218    - 
Consumer installment   6    6    -    6    - 
Total  $4,776   $4,815   $-   $5,398   $7 
                          
Impaired loans with a related allowance:                         
Commercial installment  $273   $273   $62   $290   $3 
Commercial real estate   2,957    2,957    452    2,942    31 
Consumer real estate   829    829    428    835    4 
Consumer installment   31    31    25    31    - 
Total  $4,090   $4,090   $967   $4,098   $38 
                          
Total Impaired Loans:                         
Commercial installment  $273   $273   $62   $290   $3 
Commercial real estate   7,515    7,554    452    8,116    38 
Consumer real estate   1,041    1,041    428    1,053    4 
Consumer installment   37    37    25    37    - 
Total Impaired Loans  $8,866   $8,905   $967   $9,496   $45 

 

On January 1, 2015, the Company adopted Accounting Standards Update (ASU) 2014-4, Receivables – Troubled Debt Restructuring by Creditors. As of March 31, 2016, the Company had $1.0 million of foreclosed residential real estate property obtained by physical possession and $.5 million of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

 

 

 

 

December 31, 2015

 

               Average   Interest 
               Recorded   Income 
   Recorded   Unpaid   Related   Investment   Recognized 
   Investment   Balance   Allowance   YTD   YTD 
   (In thousands) 
Impaired loans with no related allowance:                         
Commercial installment  $-   $-   $-   $2   $- 
Commercial real estate   5,790    5,828    -    5,099    50 
Consumer real estate   223    223    -    205    - 
Consumer installment   7    7    -    8    - 
Total  $6,020   $6,058   $-   $5,314   $50 
                          
Impaired loans with a related allowance:                         
Commercial installment  $306   $306   $50   $264   $14 
Commercial real estate   2,927    2,927    444    2,891    132 
Consumer real estate   842    842    438    1,152    15 
Consumer installment   32    32    25    31    - 
Total  $4,107   $4,107   $957   $4,338   $161 
                          
Total Impaired Loans:                         
Commercial installment  $306   $306   $50   $266   $14 
Commercial real estate   8,717    8,755    444    7,990    182 
Consumer real estate   1,065    1,065    438    1,357    15 
Consumer installment   39    39    25    39    - 
Total Impaired Loans  $10,127   $10,165   $957   $9,652   $211 

 

Loans acquired with deteriorated credit quality are those purchased in the BCB Holding Company, Inc. acquisition. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected.

 

 

 

 

The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the BCB acquisition as of July 1, 2014, the closing date of the transaction: 

 

   (In thousands) 
   Commercial,
financial
and
agricultural
   Mortgage-
Commercial
   Mortgage-
Residential
   Commercial
and other
   Total 
Contractually required payments  $1,519   $29,648   $7,933   $976   $40,076 
Cash flows expected to be collected   1,570    37,869    9,697    1,032    50,168 
Fair value of loans acquired   1,513    28,875    7,048    957    38,393 

 

Total outstanding acquired impaired loans were $2,981,011 as of March 31, 2016 and $3,039,840 as of December 31, 2015. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.

 

Changes in the carrying amount and accretable yield for acquired impaired loans were as follows at March 31, 2016 and December 31, 2015: (in thousands)

 

   March 31, 2016   December 31, 2015 
   Accretable
Yield
   Carrying
Amount of
Loans
   Accretable
Yield
   Carrying
Amount of
Loans
 
Balance at beginning of period  $1,219   $1,821   $1,417   $2,063 
Accretion   (21)   21    (198)   198 
Payments received, net   -    (59)   -    (440)
Balance at end of period  $1,198   $1,783   $1,219   $1,821 

 

The following tables provide detail of troubled debt restructurings (TDRs) at March 31, 2016.

 

For the Three Months Ending March 31, 2016

 

       Outstanding         
   Outstanding   Recorded         
   Recorded   Investment       Interest 
   Investment   Post-   Number of   Income 
   Pre-Modification   Modification   Loans   Recognized 
                           
Commercial installment  $-   $-    -   $- 
Commercial real estate   296    289    1    4 
Consumer real estate   -    -    -    - 
Consumer installment   -    -    -    - 
Total  $296   $289    1   $4 

 

 

 

 

There was one TDR that was modified during the three month period ended March 31, 2016.

 

The balance of troubled debt restructurings (TDRs)was $6.8 million at March 31, 2016 and $6.9 million at December 31, 2015, respectively, calculated for regulatory reporting purposes. As of March 31, 2016, the company had no additional amount committed on any loan classified as troubled debt restructuring.

 

The following tables set forth the amounts and past due status for the Bank TDRs at March 31, 2016 and December 31, 2015:

 

(in thousands)

 

   March 31, 2016 
   Current
Loans
   Past Due
30-89
   Past Due
90 days
and still
accruing
   Non-
accrual
   Total 
                     
Commercial installment  $199   $-   $-   $50   $249 
Commercial real estate   2,555    -    -    3,598    6,153 
Consumer real estate   254    -    -    133    387 
Consumer installment   7    -    -    28    35 
Total  $3,015   $-   $-   $3,809   $6,824 
Allowance for loan losses  $119   $-   $-   $132   $251 

 

(in thousands)

 

   December 31, 2015 
   Current
Loans
   Past Due
30-89
   Past Due
90 days
and still
accruing
   Non-
accrual
   Total 
                     
Commercial installment  $206   $-   $-   $50   $256 
Commercial real estate   1,823    -    -    2,934    4,757 
Consumer real estate   721    -    -    1,135    1,856 
Consumer installment   8    -    -    29    37 
Total  $2,758   $-   $-   $4,148   $6,906 
Allowance for loan losses  $106   $-   $-   $197   $303 

 

 

 

 

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

 

   March 31, 2016 
   (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  $742   $7   $2,630   $3,379   $100,386 
Real Estate-mortgage   3,215    523    2,144    5,882    276,272 
Real Estate-non farm non residential   608    98    973    1,679    270,085 
Commercial   50    -    74    124    126,381 
Lease Financing Rec.   -    -    -    -    2,645 
Obligations of states and subdivisions   -    -    -    -    7,034 
Consumer   48    -    30    78    14,961 
Total  $4,663   $628   $5,851   $11,142   $797,764 

 

   December 31, 2015 
   (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  $311   $-   $2,956   $3,267   $99,161 
Real Estate-mortgage   3,339    29    2,055    5,423    272,180 
Real Estate-non farm non residential   736    -    2,225    2,961    253,309 
Commercial   97    -    100    197    129,197 
Lease Financing Rec.   -    -    -    -    2,650 
Obligations of states and subdivisions   -    -    -    -    969 
Consumer   70    -    32    102    15,049 
Total  $4,553   $29   $7,368   $11,950   $772,515 

 

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

 

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

 

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

 

 

 

 

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

 

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

 

As of March 31, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk categories of loans by class of loans (excluding mortgage loans held for sale) were as follows:

 

($ in thousands)

March 31, 2016

 

               Commercial,     
   Real Estate
Commercial
   Real
Estate
Mortgage
   Installment
and
Other
   Financial
and
Agriculture
   Total 
                     
Pass  $453,767   $170,711   $18,078   $137,949   $780,505 
Special Mention   794    151    -    248    1,193 
Substandard   14,777    1,493    105    147    16,522 
Doubtful   -    324    -    44    368 
Subtotal   469,338    172,679    18,183    138,388    798,588 
Less:                         
Unearned discount   410    64    -    350    824 
Loans, net of unearned discount  $468,928   $172,615   $18,183   $138,038   $797,764 

 

December 31, 2015

 

               Commercial,     
   Real Estate
Commercial
   Real
Estate
Mortgage
   Installment
and
Other
   Financial
and
Agriculture
   Total 
                     
Pass  $434,638   $167,394   $19,556   $132,101   $753,689 
Special Mention   681    153    -    168    1,002 
Substandard   16,655    1,453    75    178    18,361 
Doubtful   -    327    -    -    327 
Subtotal   451,974    169,327    19,631    132,447    773,379 
Less:                         
Unearned discount   448    76    -    340    864 
Loans, net of  unearned discount  $451,526   $169,251   $19,631   $132,107   $772,515 

 

 

 

 

NOTE H — SECURITIES

 

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

 

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at March 31, 2016, follows:

 

($ in thousands)

 

   March 31, 2016 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
Available-for-sale securities:                    
Obligations of U.S. Government Agencies  $16,442   $200   $-   $16,642 
Tax-exempt and taxable obligations of states and municipal subdivisions   94,487    3,118    11    97,594 
Mortgage-backed securities   113,877    1,914    58    115,733 
Corporate obligations   23,345    85    1,227    22,203 
Other   1,255    -    301    954 
Total  $249,406   $5,317   $1,597   $253,126 
Held-to-maturity securities:                    
Mortgage-backed securities  $851   $26   $-   $877 
Taxable obligations of states and municipal subdivisions   6,000    1,864    -    7,864 
Total  $6,851   $1,890   $-   $8,741 

 

NOTE I — ALLOWANCE FOR LOAN LOSSES

 

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

 

 

 

 

The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance regarding contingencies. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the most recent 72 months loss history is utilized in determining the appropriate allowance. Historical loss factors are determined by risk rated 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 management.

 

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

 

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

 

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

 

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

 

NOTE J – SUBSEQUENT EVENTS

 

Subsequent events have been evaluated by management through the date the financial statements were issued. The Company has experienced recoveries on a previously charged-off loan of $941,000. In 2015, $722,000 was recovered and a third and final installment of $219,000 is expected during 2016.

 

NOTE K – RECLASSIFICATION

 

Certain amounts in the 2015 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

 

 

 

  

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

 

FINANCIAL CONDITION

 

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

 

The First represents the primary asset of the Company. The First reported total assets of $1.2 billion at March 31, 2016, compared to $1.1 billion at December 31, 2015, an increase of $0.1 billion. Loans increased $25.2 million, or 3.3%, during the first three months of 2016. Deposits at March 31, 2016, totaled $1.0 billion compared to $916.7 million at December 31, 2015. For the three month period ended March 31, 2016, The First reported net income of $2.9 million compared to $2.2 million for the three months ended March 31, 2015.

 

NONPERFORMING ASSETS AND RISK ELEMENTS. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At March 31, 2016, The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas.

 

At March 31, 2016, The First had loans past due as follows:

 

   ($ In Thousands) 
     
Past due 30 through 89 days  $4,663 
Past due 90 days or more and still accruing   628 

 

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 $5.9 million at March 31, 2016, a decrease of $1.5 million from December 31, 2015. Any other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $4.4 million at March 31, 2016. A loan is classified as a restructured loan when the following two conditions are present: First, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower’s financial difficulties. At March 31, 2016, the Bank had $6.8 million in loans that were modified as troubled debt restructurings, of which $3.0 million were performing as agreed with modified terms.

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is adequate with cash and cash equivalents of $96.0 million as of March 31, 2016. In addition, loans and investment securities repricing or maturing within one year or less exceeded $218.7 million at March 31, 2016. Approximately $156.0 million in loan commitments could fund within the next three months and other commitments, primarily standby letters of credit, totaled $1.1 million at March 31, 2016.

 

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

 

Total consolidated equity capital at March 31, 2016, was $107.2 million, or approximately 8.6% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies. The Company’s capital ratios as of March 31, 2016, were as follows:

 

Tier 1 leverage   8.4%
Tier 1 risk-based   10.7%
Total risk-based   11.4%
Common equity Tier 1   7.8%

 

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

 

RESULTS OF OPERATIONS

 

The Company had a consolidated net income of $2,604,000 for the three months ended March 31, 2016, compared with consolidated net income of $2,029,000 for the same period last year.

 

Net interest income increased to $9.7 million from $8.9 million for the three months ended March 31, 2016, or an increase of 9.0% as compared to the same period in 2015. Quarterly average earning assets at March 31, 2016, increased $63.2 million, or 6.2% and quarterly average interest-bearing liabilities also increased $69.6 million or 8.4% when compared to March 31, 2015.

 

 

 

 

Noninterest income for the three months ended March 31, 2016, was $2,483,000 compared to $1,850,000 for the same period in 2015, reflecting an increase of $633,000 or 34.2%. This increase consisted mainly of increased mortgage income and gain on conversion of our debit card provider.

 

The provision for loan losses was $190,000 for the three months ended March 31, 2016 compared with $150,000 for the same period in 2015. The allowance for loan losses of $7.0 million at March 31, 2016 (approximately .88% of total loans and 1.10% of loans including valuation accounting adjustments on acquired 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 $0.6 million or 7.4% for the three months ended March 31, 2016, when compared with the same period in 2015. The largest increase was related to salaries and benefits of $523,000 of which $319,000 can be attributed to acquisition of The Mortgage Connection, LLC.

 

ITEM NO. 3. CONTROLS AND PROCEDURES

 

As of March 31, 2016, (the “Evaluation Date”), we carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

 

There have been no changes, significant or otherwise, in our internal controls over financial reporting that occurred during the quarter ended March 31, 2016, that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

ITEM NO. 4. RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) NO. 2016-09 “Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is assessing the impact of ASU 2016-09 on its accounting and disclosures.

 

 

 

 

In February 2016 the FASB issued ASU NO. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures.

 

  PART II — OTHER INFORMATION
   
ITEM 1. LEGAL PROCEEDINGS
   
  None
   
ITEM 1A. RISK FACTORS
   
  There are no material changes in the Company’s risk factors since December 31, 2015.  Please refer to the Annual Report on Form 10-K of The First Bancshares, Inc., filed with the Securities and Exchange Commission on March 30, 2016.
   
ITEM 2. DEFAULTS UPON SENIOR SECURITIES
   
  Not Applicable
   
ITEM 3. REMOVED AND RESERVED
   
ITEM 4. OTHER INFORMATION
   
  Not Applicable
   
ITEM 5. EXHIBITS
   
  (a)  Exhibits

 

  Exhibit No.    
       
  2.1   Agreement and Plan of merger, dated as of March 2, 2014, between The First Bancshares, Inc. and BCB Holding Company, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 3-7-2014)
       
  2.1   Acquisition Agreement, dated as of January 31, 2013, between The First Bancshares, Inc. and First Baldwin Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 2-1-13) and First Amendment to Acquisition Agreement, dated as of March 15, 2013, between First Bancshares, Inc. and First Baldwin Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 3-20-13)

 

 

 

 

  3.1   Articles of Amendment and Certificate of Designation, Preferences and Rights of Series D Nonvoting Convertible Preferred Stock dated as of March 18, 2013 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on 3-21-13).
       
  3.2   Restated Articles of Incorporation dated as of March 21, 2013 (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on 3-21-13).
       
  4.1   Certificate of Designation of Series D Nonvoting Convertible Preferred Stock, as filed with the Mississippi Secretary of State on March 20, 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on March 25, 2013).
       
  10.1   Form of Securities Purchase Agreement between the Company and each of the Purchasers, dated as of March 20, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 25, 2013)
       
  10.2   Form of Registration Rights Agreement between the Company and each of the Purchasers, dated as of March 20, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 25, 2013)
       
  31.1   Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  31.2   Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  32.1   Certification of principal executive officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
  32.2   Certification of principal financial officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
  101.INS   XBRL Instance Document
       
  101.SCH   XBRL Taxonomy Extension Schema
       
  101.CAL   XBRL Taxonomy Extension Calculation Linkbase
       
  101.DEF   XBRL Taxonomy Extension Definition Linkbase
       
  101.LAB   XBRL Taxonomy Extension Label Linkbase
       
  101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

 

 

(b)The Company filed two reports on Form 8-K during the quarter ended March 31, 2016.

 

 

 

 

SIGNATURES

 

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

 

    THE FIRST BANCSHARES, INC.
    (Registrant)
     
    /s/ M. RAY (HOPPY)COLE, JR.
May 16, 2016   M. Ray (Hoppy) Cole, Jr.
(Date)   Chief Executive Officer
     
    /s/  DEEDEE LOWERY
May 16, 2016   DeeDee Lowery
(Date)  

Executive Vice President and Chief Financial Officer