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The First Bancshares
FBMS
#5891
Rank
$1.05 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$33.81
Share price
0.48%
Change (1 day)
36.66%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. The First Bancshares
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q2

The First Bancshares - 10-Q quarterly report FY2023 Q2


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Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number: 000-22507
Logo Holding (002).jpg
THE FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Mississippi64-0862173
(State of Incorporation)(IRS Employer Identification No)
6480 U.S. Highway 98 West, Suite A, Hattiesburg, Mississippi
39402
(Address of principal executive offices)(Zip Code)
(601) 268-8998
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00
FBMSThe Nasdaq Stock Market
Indicate by check mark whether the registrant (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 þ    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☑
Non-accelerated filer
☐
Smaller Reporting Company
☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, $1.00 par value, 32,345,400 shares issued and 31,095,793 outstanding as of August 3, 2023.
Auditor Firm PCAOB ID: 686Auditor Name: FORVIS, LLPAuditor Location: Jackson, MS

Table of Contents
The First Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2023
Index
Item 1.
3
3
4
5
6
8
10
Item 2.
40
Item 3.
62
Item 4.
64
Item 1.
65
Item 1A.
65
Item 2.
65
Item 3.
65
Item 4.
65
Item 5.
65
Item 6.
66
67
2
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)
June 30,
2023		December 31,
2022
ASSETS
Cash and due from banks$105,788 $67,176 
Interest-bearing deposits with banks88,262 78,139 
Total cash and cash equivalents194,050 145,315 
Securities available-for-sale, at fair value (amortized cost: $1,356,696 - 2023; $1,418,337 - 2022; allowance for credit losses: $0)
1,199,103 1,257,101 
Securities held to maturity, net of allowance for credit losses of $0 (fair value: $613,831 - 2023; $642,097 - 2022)
663,473 691,484 
Other securities35,725 33,944 
Total securities1,898,301 1,982,529 
Loans held for sale6,602 4,443 
Loans held for investment5,010,925 3,774,157 
Allowance for credit losses(52,614)(38,917)
Net loans held for investment4,958,311 3,735,240 
Interest receivable30,837 27,723 
Premises and equipment178,489 143,518 
Operating lease right-of-use assets6,194 7,620 
Finance lease right-of-use assets1,698 1,930 
Cash surrender value of bank-owned life insurance132,737 95,571 
Goodwill272,522 180,254 
Other real estate owned5,588 4,832 
Other assets176,779 132,742 
Total assets$7,862,108 $6,461,717 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Liabilities:
Deposits:  
Noninterest-bearing$2,086,666 $1,630,203 
Interest-bearing4,405,601 3,864,201 
Total deposits6,492,267 5,494,404 
Interest payable7,968 3,324 
Borrowed funds280,000 130,100 
Subordinated debentures128,214 145,027 
Operating lease liabilities6,353 7,810 
Finance lease liabilities1,829 1,918 
Allowance for credit losses on off-balance sheet credit exposures2,075 1,325 
Other liabilities43,956 31,146 
Total liabilities6,962,662 5,815,054 
Shareholders’ equity:  
Common stock, par value $1 per share, 80,000,000 shares authorized shares authorized; 32,345,400 shares issued at June 30, 2023, and par value $1 per share, 40,000,000 shares authorized; 25,275,369 shares issued at December 31, 2022
32,345 25,275 
Additional paid-in capital774,101 558,833 
Retained earnings279,350 252,623 
Accumulated other comprehensive (loss) income (145,239)(148,957)
Treasury stock, at cost, 1,249,607 shares at June 30, 2023 and at December 31, 2022
(41,111)(41,111)
Total shareholders’ equity899,446 646,663 
Total liabilities and shareholders’ equity$7,862,108 $6,461,717 
See Notes to Consolidated Financial Statements
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except earnings and dividends per share)
(Unaudited)(Unaudited)
Three Months Ended
June 30,		Six Months Ended
June 30,
2023202220232022
Interest and dividend income:
Interest and fees on loans$74,590 $34,663 $142,324 $68,817 
Interest and dividends on securities:
Taxable interest and dividends7,867 8,372 16,626 14,524 
Tax exempt interest2,948 2,780 5,896 5,202 
Interest on federal funds sold and interest-bearing deposits in other banks 789 32 1,686 45 
Total interest income86,194 45,847 166,532 88,588 
Interest expense:
Interest on deposits14,762 1,905 27,039 4,188 
Interest on borrowed funds5,402 1,841 8,537 3,660 
Total interest expense20,164 3,746 35,576 7,848 
Net interest income66,030 42,101 130,956 80,740 
Provision for credit losses, LHFI1,000 450 11,500 450 
Provision for credit losses, OBSC exposures250 150 750 150 
Net interest income after provision for credit losses64,780 41,501 118,706 80,140 
Non-interest income:
Service charges on deposit accounts3,425 2,038 7,082 4,078 
(Loss) on securities(48)(80)(48)(83)
Gain on acquisition— 281 — 281 
Government awards/grants — 171 — 873 
BOLI death proceeds— — — 1,630 
(Loss) gain on sale of premises and equipment— (115)663 (113)
Other9,046 6,369 17,338 13,155 
Total non-interest income12,423 8,664 25,035 19,821 
Non-interest expense:
Salaries and employee benefits23,315 17,237 46,888 34,036 
Occupancy and equipment5,041 3,828 10,337 7,704 
Acquisition expense/charter conversion4,101 1,172 7,894 1,580 
Other14,442 8,718 27,450 16,225 
Total non-interest expense46,899 30,955 92,569 59,545 
Income before income taxes 30,304 19,210 51,172 40,416 
Income tax expense6,525 3,457 11,122 7,834 
Net income$23,779 $15,753 $40,050 $32,582 
Basic earnings per share$0.76 $0.77 $1.28 $1.58 
Diluted earnings per share0.75 0.76 1.27 1.57 
See Notes to Consolidated Financial Statements
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THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in thousands)
(Unaudited)(Unaudited)
Three Months Ended
June 30,		Six Months Ended
June 30,
2023202220232022
Net income$23,779 $15,753 $40,050 $32,582 
Other comprehensive (loss) income:  
Unrealized holding (losses) gains arising during the period on available-for-sale securities(19,504)(57,007)4,745 (159,856)
Reclassification adjustment for (accretion) amortization of unrealized holdings gain/(loss) included in accumulated other comprehensive income from the transfer of securities available-for-sale to held-to-maturity92 — 184 — 
Reclassification adjustment for losses (gains) included in net income48 80 48 83 
Unrealized holding (losses) gains arising during the period on available-for-sale securities(19,364)(56,927)4,977 (159,773)
Income tax (expense) benefit4,899 14,401 (1,259)40,422 
Other comprehensive (loss) income(14,465)(42,526)3,718 (119,351)
Comprehensive income (loss)$9,314 $(26,773)$43,768 $(86,769)
See Notes to Consolidated Financial Statements
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Table of Contents
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($ in thousands except per share data, unaudited)

Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury StockTotal
SharesAmountSharesAmount
Balance, January 1, 202221,668,644 $21,669 $459,228 $206,228 $7,978 (649,607)$(18,931)$676,172 
Net income— — — 16,829 — — — 16,829 
Common stock repurchased— — — — — (600,000)(22,180)(22,180)
Other comprehensive loss— — — — (76,825)— — (76,825)
Dividends on common stock, $0.17 per share
— — — (3,468)— — — (3,468)
Issuance of restricted stock grants 82,123 82 (82)— — — — — 
Restricted stock grants forfeited(1,000)(1)1 — — — — — 
Repurchase of restricted stock for payment of taxes(15,330)(16)(538)— — — — (554)
    Compensation expense — — 466 — — — — 466 
Balance, March 31, 202221,734,437 21,734 459,075 219,589 (68,847)(1,249,607)(41,111)590,440 
Net income— — — 15,753 — — — 15,753 
Other comprehensive loss— — — — (42,526)— — (42,526)
Dividends on common stock, $0.18 per share
— — — (3,688)— — — (3,688)
Issuance of restricted stock grants47,767 48 (48)— — — — — 
Restricted stock grants forfeited(1,000)(1)1 — — — — — 
Repurchase of restricted stock for payment of taxes(2,473)(2)(71)— — — — (73)
    Compensation expense— — 546 — — — — 546 
Balance, June 30, 202221,778,731 $21,779 $459,503 $231,654 $(111,373)(1,249,607)$(41,111)$560,452 
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Table of Contents
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY CONTINUED
($ in thousands except per share data, unaudited)
Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury StockTotal
SharesAmountSharesAmount
Balance, January 1, 202325,275,369 $25,275 $558,833 $252,623 $(148,957)(1,249,607)$(41,111)$646,663 
Net income— — — 16,271 — — — 16,271 
Other comprehensive income— — — — 18,183 — — 18,183 
Dividends on common stock, $0.21 per share
— — — (6,498)— — — (6,498)
Issuance of common shares for HSBI acquisition6,920,422 6,920 214,602 — — — — 221,522 
Issuance of restricted stock grants118,689 119 (119)— — — — — 
Restricted stock grants forfeited(500)(1)1 — — — — — 
Repurchase of restricted stock for payment of taxes(9,827)(9)(298)— — — — (307)
    Compensation expense— — 593 — — — — 593 
Balance, March 31, 202332,304,153 32,304 773,612 262,396 (130,774)(1,249,607)(41,111)896,427 
Net income— — — 23,779 — — — 23,779 
Other comprehensive loss— — — — (14,465)— — (14,465)
Dividends on common stock, $0.22 per share
— — — (6,825)— — — (6,825)
Issuance of restricted stock grants45,773 46 (46)— — — — — 
Restricted stock grants forfeited(4,526)(5)5 — — — — — 
Compensation expense— — 530 — — — — 530 
Balance, June 30, 202332,345,400 $32,345 $774,101 $279,350 $(145,239)(1,249,607)$(41,111)$899,446 
See Notes to Consolidated Financial Statements
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Table of Contents
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
Six Months Ended
June 30,
20232022
Cash flows from operating activities:
Net income$40,050 $32,582 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion2,321 6,520 
Provision for credit loss12,250 600 
Loss (gain) on sale or writedown of ORE533 235 
Securities loss (gain)48 83 
Acquisition gain— (281)
(Gain) loss on disposal of premises and equipment(663)113 
Restricted stock expense1,123 1,012 
Increase in cash value of life insurance(1,587)(1,080)
Federal Home Loan Bank stock dividends(222)(1)
Residential loans originated and held for sale(50,376)(79,176)
Proceeds from sale of residential loans held for sale48,217 80,151 
Changes in:
Interest receivable1,235 (1,287)
Interest payable4,644 (104)
Operating lease liability(1,457)(47)
Other, net(17,370)6,029 
Net cash provided by operating activities38,746 45,349 
Cash flows from investing activities:  
Available-for-sale securities:
Sales171,150 — 
Maturities, prepayments, and calls59,142 106,960 
Purchases— (7,000)
Held-to-maturity securities:
Maturities, prepayments, and calls30,155 4,666 
Purchases— (597,673)
Purchases of other securities(9,473)(361)
Proceeds from other securities8,741 — 
Net (increase) decrease in loans(70,124)(163,403)
Net changes in premises and equipment(2,916)(4,125)
Proceeds from sale of other real estate owned587 836 
Proceeds from the sale of premises and equipment731 712 
Bank-owned life insurance – death proceeds— 1,630 
Cash received in excess of cash paid for acquisitions106,973 — 
Net cash provided by (used in) investing activities294,966 (657,758)
Cash flows from financing activities:  
(Decrease) increase in deposits(395,323)79,413 
Net change in borrowed funds149,900 — 
Principal payments on finance lease liabilities(89)(88)
Dividends paid on common stock(13,158)(7,050)
Cash paid to repurchase common stock— (22,180)
Payment of subordinated debt issuance costs— (1)
Called/repayment of subordinated debt(26,000)— 
Repurchase of restricted stock for payment of taxes(307)(627)
Net cash (used in) provided by financing activities(284,977)49,467 
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Table of Contents             
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
($ in thousands)


(Unaudited)
Six Months Ended
June 30,
20232022
Net change in cash and cash equivalents48,735 (562,942)
Beginning cash and cash equivalents145,315 919,713 
Ending cash and cash equivalents$194,050 $356,771 
Supplemental disclosures:  
Loans transferred to other real estate$1,267 $495 
Issuance of restricted stock grants$165 $130 
Dividends on restricted stock grants$165 $105 
Stock issued in connection with HSBI acquisition6,920,422 — 
Lease liabilities arising from obtaining right-of-use assets$— $600 
Lease liabilities arising from HSBI acquisition$184 $— 
See Notes to Consolidated Financial Statements
9
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2023
NOTE 1 – BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and 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, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2022.
NOTE 2 – 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 Bank (the “Bank” or “The First”).
At June 30, 2023, the Company had approximately $7.862 billion in assets, $4.958 billion in net loans held for investment (“LHFI”), $6.492 billion in deposits, and $899.4 million in shareholders' equity. For the six months ended June 30, 2023, the Company reported net income of $40.1 million.
On February 24, 2023, the Company paid a cash dividend in the amount of $0.21 per share to shareholders of record as of the close of business on February 8, 2023. On May 24, 2023, the Company paid a cash dividend of $0.22 per share to shareholders of record as of the close of business on May 8, 2023.
NOTE 3 – ACCOUNTING STANDARDS
Effect of Recently Adopted Accounting Standards
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (ASC 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offer Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The Company adopted ASU 2020-04 effective January 1, 2023. Adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combination (Topic 805): “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendment improves comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The Company adopted ASU 2021-08 effective January 1, 2023. Adoption of ASU 2022-02 did not have a material impact on the Company's consolidated financial statements.
In March 2022, FASB issued ASU No. 2022-02, "Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” These amendments eliminate the TDR recognition and measurement guidance and instead require that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that an entity disclose current period gross write-offs by year of origination for financing receivables
10
and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The Company adopted ASU 2022-02 effective January 1, 2023. Adoption of ASU 2022-02 did not have a material impact on the Company's consolidated financial statements.
New Accounting Standards That Have Not Yet Been Adopted
In March 2023, FASB issued ASU No. 2023-01, Leases (Topic 842) - "Common Control Arrangements." This ASU requires entities to determine whether a related party arrangement between entities under common control is a lease. If the arrangement is determined to be a lease, an entity must classify and account for the lease on the same basis as an arrangement with a related party. The ASU requires all entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. This guidance is effective for the Company January 1, 2024, and is not expected to have a material impact on the Company's consolidated financial statements.
In March 2023, FASB issued ASU No. 2023-02, Investments - Equity Method and Joint Venture (Topic 323): "Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This guidance is effective for the Company January 1, 2024, and is not expected to have a material impact on the Company's consolidated financial statements.
NOTE 4 – BUSINESS COMBINATIONS
Acquisitions
Heritage Southeast Bank
On January 1, 2023, the Company completed its acquisition of Heritage Southeast Bancorporation, Inc. ("HSBI"), pursuant to an Agreement and Plan of Merger dated July 27, 2022, by and between the Company and HSBI (the "HSBI Merger Agreement"). Upon the completion of the merger of HSBI with and into the Company, Heritage Southeast Bank, HSBI's wholly-owned subsidiary, was merged with and into The First Bank. Under the terms of the HSBI Merger Agreement, each share of HSBI common stock was converted into the right to receive 0.965 of a share of Company common stock. The Company paid a total consideration of $221.5 million to the former HSBI shareholders as consideration in the acquisition, which included 6,920,422 shares of the Company's common stock, and $16 thousand in cash in lieu of fractional shares. The HSBI acquisition provides the opportunity for the Company to expand its operations in Georgia and the Florida panhandle.
In connection with the acquisition of HSBI, the Company recorded approximately $92.1 million of goodwill, of which $3.2 million funded the ACL for estimated losses on the acquired PCD loans, and $43.7 million core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.
Expenses associated with the HSBI acquisition were $3.0 million and $4.2 million for the three months and six months period ended June 30, 2023, respectively. These costs included charges associated with legal and consulting expenses, which have been expensed as incurred.
The assets acquired and liabilities assumed, and consideration paid in the acquisition were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which will run through January 1, 2024, in respect of the acquisition, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
11
The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed, and the goodwill generated from the transaction.
($ in thousands)
Purchase price:
Cash and stock$221,538 
Total purchase price221,538 
Identifiable assets: 
Cash$106,973 
Investments172,775 
Loans1,155,712 
Core deposit intangible43,739 
Personal and real property35,963 
Other real estate owned857 
Bank owned life insurance35,579 
Deferred taxes6,129 
Interest receivable4,349 
Other assets3,103 
Total assets1,565,179 
Liabilities and equity:
Deposits1,392,432 
Trust Preferred9,015 
Other liabilities34,271 
Total liabilities1,435,718 
Net assets acquired129,461 
Goodwill$92,077 
Beach Bancorp, Inc.
On August 1, 2022, the Company completed its acquisition of Beach Bancorp, Inc. ("BBI"), pursuant to an Agreement and Plan of Merger dated April 26, 2022, by and between the Company and BBI (the "BBI Merger Agreement"). Upon the completion of the merger of BBI with and into the Company, Beach Bank, BBI's wholly-owned subsidiary, was merged with and into The First Bank. Under the terms of the BBI Merger Agreement, each share of BBI common stock and each share of BBI preferred stock was converted into the right to receive 0.1711 of a share of Company common stock (the "BBI Exchange Ratio"), and all stock options awarded under the BBI equity plans were converted automatically into an option to purchase shares of Company common stock on the same terms and conditions as applicable to each such BBI option as in effect immediately prior to the effective time, with the number of shares underlying each such option and the applicable exercise price adjusted based on the BBI Exchange Ratio. The BBI merger provides the opportunity for the Company to expand its operations in the Florida panhandle and enter the Tampa market. The Company paid consideration of $101.5 million to the former BBI shareholders including 3,498,936 shares of the Company's common stock and $1 thousand in cash in lieu of fractional shares, and also assumed options entitling the owners thereof to purchase an additional 310,427 shares of the Company's common stock.
In connection with the acquisition of BBI, the Company recorded approximately $23.5 million of goodwill, of which $1.3 million funded the ACL for estimated losses on the acquired PCD loans, and $9.8 million core deposit
12
intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.
Expenses associated with the BBI acquisition were $471 thousand and $1.3 million for the three months and six months period ended June 30, 2023, respectively. These costs included charges associated with legal and consulting expenses, which have been expensed as incurred.
The assets acquired and liabilities assumed, and consideration paid in the acquisition were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which will run through August 1, 2023, in respect of the acquisition, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed, and the goodwill generated from the transaction.
($ in thousands)
Purchase price:
Cash and stock$101,470 
Total purchase price101,470 
Identifiable assets:
Cash$23,939 
Investments22,643 
Loans485,171 
Other real estate8,429 
Bank owned life insurance10,092 
Core deposit intangible9,791 
Personal and real property11,895 
Deferred tax asset27,135 
Other assets9,235 
Total assets608,330 
Liabilities and equity:
Deposits490,591 
Borrowings25,000 
Other liabilities14,772 
Total liabilities530,363 
Net assets acquired77,967 
Goodwill$23,503 
Supplemental Pro Forma Information
The following table presents certain supplemental pro forma information, for illustrative purposes only, for the six months ended June 30, 2023 and 2022 as if the BBI and HSBI acquisitions had occurred on January 1, 2022. The pro forma
13
financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of this date.
($ in thousands)(unaudited)(unaudited)
Six Months Ended
June 30, 2023		Six Months Ended
June 30, 2022
Net interest income$130,956 $90,701 
Non-interest income25,035 32,240 
Total revenue155,991 122,941 
Income before income taxes59,066 61,621 
Supplemental pro-forma earnings were adjusted to exclude acquisition costs incurred. The Company’s operating results for the six months ended June 30, 2023, include the operating results of the acquired assets and assumed liabilities of the above mentioned acquisitions subsequent to the acquisition date.
NOTE 5 – EARNINGS APPLICABLE TO COMMON SHAREHOLDERS
Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock outstanding, such as restricted stock grants. There were no anti-dilutive common stock equivalents excluded in the calculations.
The following tables disclose the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common shareholders.
($ in thousands, except per share amount)Three Months Ended
June 30, 2023		Three Months Ended
June 30, 2022
Net Income
(Numerator)		Shares
(Denominator)		Per
Share Data		Net Income
(Numerator)		Shares
(Denominator)		Per
Share Data
Basic earnings per share$23,779 31,378,364 $0.76 $15,753 20,507,451 $0.77 
Effect of dilutive shares:
Restricted stock grants 213,301 108,477 
Diluted earnings per share$23,779 31,591,665 $0.75 $15,753 20,615,928 $0.76 
($ in thousands, except per share amount)For the Six Months Ended
June 30, 2023		For the Six Months Ended
June 30, 2022
Net Income
(Numerator)		Shares
(Denominator)		Per
Share Data		Net Income
(Numerator)		Shares
(Denominator)		Per
Share Data
Basic earnings per share$40,050 31,343,911 $1.28 $32,582 20,602,698 $1.58 
Effect of dilutive shares:
Restricted stock grants205,828 122,847 
Diluted earnings per share$40,050 31,549,739 $1.27 $32,582 20,725,545 $1.57 
The Company granted 118,689 shares and 82,123 shares of restricted stock in the first quarter of 2023 and 2022, respectively. The Company granted 45,773 shares and 47,827 shares of restricted stock in the second quarter of 2023 and 2022, respectively.
14
NOTE 6 – COMPREHENSIVE INCOME
As presented in the Consolidated Statements of Comprehensive Income (Loss), comprehensive income includes net income and other comprehensive income. The Company’s sources of other comprehensive income are unrealized gains and losses on available-for-sale securities, which are also recognized as separate components of equity.
NOTE 7 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. At June 30, 2023, and December 31, 2022, these financial instruments consisted of the following:
($ in thousands)June 30, 2023December 31, 2022
Fixed Rate
Variable RateFixed RateVariable Rate
Commitments to make loans$74,312 $53,495 $43,227 $15,758 
Unused lines of credit302,087 691,746 243,043 404,025 
Standby letters of credit16,584 11,122 4,260 9,909 
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 1.0% to 18.0% and maturities ranging from approximately 1 year to 30 years.
ALLOWANCE FOR CREDIT LOSSES (“ACL”) ON OFF BALANCE SHEET CREDIT (“OBSC”) Exposures
The Company maintains a separate ACL on OBSC exposures, including unfunded commitments and letters of credit, which is included on the accompanying consolidated balance sheet as of June 30, 2023 and December 31, 2022. The ACL on OBSC exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Changes in the ACL on OBSC exposures were as follows for the presented periods:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Balance at beginning of period$1,825$1,070$1,325 $1,070 
Credit loss expense related to OBSC exposures250150750 150 
Balance at end of period$2,075$1,220$2,075 $1,220 
Adjustments to the ACL on OBSC exposures are recorded to provision for credit losses related to OBSC exposures. The Company recorded $250 thousand and $150 thousand provision for the three months period ended June 30, 2023 and 2022, respectively. For the six months period ended June 30, 2023 and 2022, the Company recorded $750 thousand and $150 thousand provision to the ACL on OBSC exposures, respectively. The increase in the ACL on OBSC exposures for the six months ended June 30, 2023 compared to the same period in 2022 was due to the day one provision for unfunded commitments related to the HSBI acquisition and an increase in unfunded commitments.
No credit loss estimate is reported for OBSC exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation on the arrangement.
NOTE 8 – FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the assets or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
15
Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.
The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at June 30, 2023 and December 31, 2022:
•Investment Securities: The fair value for investment securities is determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, valuing debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
•Loans Held for Sale - Loans held for sale are carried at fair value in the aggregate as determined by the outstanding commitments from investors. As, such we classify those loans subjected to recurring fair value adjustments as Level 2 of the fair value hierarchy.
•Collateral Dependent 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. 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. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. The Company generally adjusts the appraisal down by approximately 10 percent to account for cost associated with litigation and collection. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment.
•Other Real Estate Owned: Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Fair value of other real estate owned is based on current independent appraisals of the collateral less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. The Company generally adjusts the appraisal down by approximately 10 percent to account for carrying costs. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Due to the subjective nature of establishing the fair value when the asset is acquired, 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 other non-interest income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recorded in other non-interest income. Other real estate owned is classified within Level 3 of the fair value hierarchy.
16
•Interest Rate Swaps: The Company offers interest rate swaps to certain commercial loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable to fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing the contract or fixed interest payments for the customer. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rates swaps is classified within Level 2 of the fair value hierarchy.
Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:
June 30, 2023Carrying
Amount		Estimated
Fair Value		Fair Value Measurements
($ in thousands)
Quoted Prices
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents$194,050 $194,050 $194,050 $— $— 
Securities available-for-sale1,199,103 1,199,103 124,616 1,053,435 21,052 
Securities held-to-maturity663,473 613,831 — 613,831 — 
Loans held for sale6,602 6,602 — 6,602 — 
Loans, net4,958,311 4,795,956 — — 4,795,956 
Accrued interest receivable30,837 30,837 — 8,957 21,880 
  Interest rate swaps12,469 12,469 — 12,469 — 
Liabilities:
Noninterest-bearing deposits$2,086,666 $2,086,666 $— $2,086,666 $— 
Interest-bearing deposits4,405,601 4,151,398 — 4,151,398 — 
Subordinated debentures128,214 106,361 — — 106,361 
FHLB and other borrowings280,000 280,000 — 280,000 — 
Accrued interest payable7,968 7,968 — 7,968 — 
  Interest rate swaps12,469 12,469 — 12,469 — 
17
December 31, 2022Carrying
Amount		Estimated
Fair Value		Fair Value Measurements
($ in thousands)
Quoted
Prices
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents$145,315 $145,315 $145,315 $— $— 
Securities available-for-sale1,257,101 1,257,101 123,854 1,118,099 15,148 
Securities held-to-maturity691,484 642,097 — 642,097 — 
Loans held for sale4,443 4,443 — 4,443 — 
Loans, net3,735,240 3,681,313 — — 3,681,313 
Accrued interest receivable27,723 27,723 — 9,757 17,966 
Interest rate swaps12,825 12,825 — 12,825 — 
Liabilities:
Non-interest-bearing deposits$1,630,203 $1,630,203 $— $1,630,203 $— 
Interest-bearing deposits3,864,201 3,505,990 — 3,505,990 — 
Subordinated debentures145,027 133,816 — — 133,816 
FHLB and other borrowings130,100 130,100 — 130,100 — 
Accrued interest payable3,324 3,324 — 3,324 — 
Interest rate swaps12,825 12,825 — 12,825 — 
Assets measured at fair value on a recurring basis are summarized below:
June 30, 2023
($ in thousands)Fair ValueFair Value Measurements Using
Quoted Prices in
Active Markets
For
Identical Assets
(Level 1)		Significant Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Assets:
Available-for-sale
U.S. Treasury$124,616 $124,616 $— $— 
Obligations of U.S. Government agencies and sponsored entities132,738 — 132,738 — 
Municipal securities447,901 — 426,880 21,021 
Mortgage-backed securities455,979 — 455,979 — 
Corporate obligations37,869 — 37,838 31 
Total available-for-sale$1,199,103 $124,616 $1,053,435 $21,052 
Loans held for sale$6,602 $— $6,602 $— 
Interest rate swaps$12,469 $— $12,469 $— 
Liabilities
Interest rate swaps$12,469 $— $12,469 $— 
18
December 31, 2022
($ in thousands)
Fair ValueFair Value Measurements Using
Quoted Prices in
Active Markets
For
Identical Assets
(Level 1)		Significant Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Available-for-sale
U.S. Treasury$123,854 $123,854 $— $— 
Obligations of U.S. Government agencies and sponsored entities144,369 — 144,369 — 
Municipal securities457,857 — 442,740 15,117 
Mortgage-backed securities490,139 — 490,139 — 
Corporate obligations40,882 — 40,851 31 
Total available-for-sale$1,257,101 $123,854 $1,118,099 $15,148 
Loans held for sale$4,443 $— $4,443 $— 
Interest rate swaps$12,825 $— $12,825 $— 
Liabilities:
Interest rate swaps$12,825 $— $12,825 $— 
The following is a reconciliation of activity for assets measured at fair value based on significant unobservable inputs (Level 3) information.
Bank-Issued Trust
Preferred Securities
($ in thousands)20232022
Balance, January 1 $31 $43 
Paydowns— (11)
Balance at June 30$31 $32 
Municipal Securities
($ in thousands)2023 2022
Balance, January 1 $15,117 $20,123 
Purchases— — 
Maturities, calls and paydowns(236)(236)
Transfer from level 2 to level 36,085 — 
Unrealized gain (loss) included in comprehensive income 55 (1,630)
Balance at June 30$21,021 $18,257 
The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at June 30, 2023 and December 31, 2022. The following tables present quantitative information about recurring Level 3 fair value measurements ($ in thousands):
Trust Preferred SecuritiesFair ValueValuation TechniqueSignificant Unobservable
Inputs		Range of Inputs
June 30, 2023$31 Discounted cash flowProbability of default
7.69% - 7.76%
December 31, 2022$31 Discounted cash flowProbability of default
6.98% - 7.19%
19
Municipal SecuritiesFair ValueValuation TechniqueSignificant
Unobservable Inputs		Range of Inputs
June 30, 2023$21,021 Discounted cash flowDiscount Rate
3.65% - 5.61%
December 31, 2022$15,117 Discounted cash flowDiscount Rate
3.00% - 4.00%
The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements were classified at June 30, 2023 and December 31, 2022.
June 30, 2023
($ in thousands)Fair Value Measurements Using
Fair ValueQuoted Prices in
Active Markets
For
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Collateral dependent loans$6,740 $— $— $6,740 
Other real estate owned 5,588 — — 5,588 
December 31, 2022
($ in thousands)Fair Value Measurements Using
Fair ValueQuoted Prices in
Active Markets
For
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Collateral dependent loans$5,552 $— $— $5,552 
Other real estate owned4,832 — — 4,832 
20
NOTE 9 - SECURITIES
The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities available-for-sale (“AFS”) and securities held-to-maturity at June 30, 2023 and December 31, 2022.
($ in thousands)June 30, 2023
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
Available-for-sale securities:
U.S. Treasury$135,683 $— $11,067 $124,616 
Obligations of U.S. government agencies and sponsored entities152,520 1 19,783 132,738 
Tax-exempt and taxable obligations of states and municipal subdivisions505,231 430 57,760 447,901 
Mortgage-backed securities - residential319,417 3 40,622 278,798 
Mortgage-backed securities - commercial201,601 51 24,471 177,181 
Corporate obligations42,244 — 4,375 37,869 
Total available-for-sale$1,356,696 $485 $158,078 $1,199,103 
Held-to-maturity:
U.S. Treasury$89,687 $— $4,648 $85,039 
Obligations of U.S. government agencies and sponsored entities33,681 — 2,383 31,298 
Tax-exempt and taxable obligations of states and municipal subdivisions247,126 6,330 15,968 237,488 
Mortgage-backed securities - residential148,859 — 16,902 131,957 
Mortgage-backed securities - commercial134,120 — 14,016 120,104 
Corporate obligations10,000 — 2,055 7,945 
Total held-to-maturity$663,473 $6,330 $55,972 $613,831 
21
($ in thousands)December 31, 2022
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
Available-for-sale securities:
U.S. Treasury$135,752 $— $11,898 $123,854 
Obligations of U.S. government agencies sponsored entities163,054 3 18,688 144,369 
Tax-exempt and taxable obligations of states and municipal subdivisions519,190 598 61,931 457,857 
Mortgage-backed securities - residential341,272 11 42,041 299,242 
Mortgage-backed securities - commercial215,200 60 24,363 190,897 
Corporate obligations43,869 — 2,987 40,882 
Total available-for-sale$1,418,337 $672 $161,908 $1,257,101 
Held-to-maturity:
U.S. Treasury$109,631 $— $5,175 $104,456 
Obligations of U.S. government agencies and sponsored entities33,789 — 2,153 31,636 
Tax-exempt and taxable obligations of states and municipal subdivisions247,467 4,525 13,699 238,293 
Mortgage-backed securities - residential156,119 — 17,479 138,640 
Mortgage-backed securities - commercial134,478 7 13,798 120,687 
Corporate obligations10,000 — 1,615 8,385 
Total held-to-maturity$691,484 $4,532 $53,919 $642,097 
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
The Company reassessed classification of certain investments and effective October 2022, the Company transferred $863 thousand of obligations of U.S. government agencies and sponsored entities, $1.2 million of mortgage-backed securities - commercial, and $137.5 million of tax-exempt and taxable obligations of state and municipal subdivisions from AFS to HTM securities. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss of $36.8 million included in other comprehensive income remained in other comprehensive income, to be amortized out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. There was no allowance for credit loss associated with the AFS securities that were transferred to HTM.
ACL on Securities
Securities Available for Sale
Quarterly, the Company evaluates if a security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, the Company performs further analysis as outlined below:
•Review the extent to which the fair value is less than the amortized cost and determine if the decline is indicative of credit loss or other factors.
•The securities that violate the credit loss trigger above would be subjected to additional analysis.
•If the Company determines that a credit loss exists, the credit portion of the allowance will be measured using the discounted cash flow (“DCF”) analysis using the effective interest rate. The amount of credit loss the Company
22
records will be limited to the amount by which the amortized cost exceeds the fair value. The allowance for the calculated credit loss will be monitored going forward for further credit deterioration or improvement.
At both June 30, 2023 and December 31, 2022, the results of the analysis did not identify any securities where the decline was indicative of credit loss factors; therefore, no credit loss was recognized on any of the securities AFS.
Accrued interest receivable is excluded from the estimate of credit losses for securities AFS. Accrued interest receivable totaled $5.7 million and $6.2 million at June 30, 2023 and December 31, 2022, respectively and was reported in interest receivable on the accompanying Consolidated Balance Sheet.
All AFS securities were current with no securities past due or on nonaccrual as of June 30, 2023 and December 31, 2022.
Securities Held to Maturity
At June 30, 2023 and December 31, 2022, the potential credit loss exposure was $201 thousand and $242 thousand, respectively and consisted of tax-exempt and taxable obligations of states and municipal subdivisions and corporate obligations securities. After applying appropriate probability of default (“PD”) and loss given default (“LGD”) assumptions, the total amount of current expected credit losses was deemed immaterial. Therefore, no reserve was recorded at June 30, 2023.
Accrued interest receivable is excluded from the estimate of credit losses for securities held-to-maturity. Accrued interest receivable totaled $3.4 million and $3.6 million at June 30, 2023 and December 31, 2022, respectively and was reported in interest receivable on the accompanying Consolidated Balance Sheet.
At both June 30, 2023 and December 31, 2022, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual at both June 30, 2023 and December 31, 2022.
The Company monitors the credit quality of the debt securities held-to-maturity through the use of credit ratings. The Company monitors the credit ratings on a quarterly basis. The following table summarizes the amortized cost of debt securities held-to-maturity at June 30, 2023 and December 31, 2022, aggregated by credit quality indicators.
($ in thousands)June 30, 2023December 31, 2022
Aaa$440,152 $467,736 
Aa1/Aa2/Aa3137,533 110,854 
A1/A233,349 13,757 
BBB10,000 10,000 
Not rated42,439 89,137 
Total$663,473 $691,484 
23
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)June 30, 2023
Amortized
Cost		Fair
Value
Available-for-sale:
Due less than one year$62,185 $61,053 
Due after one year through five years265,117 246,185 
Due after five years through ten years334,035 289,647 
Due greater than ten years174,341 146,239 
Mortgage-backed securities - residential319,417 278,798 
Mortgage-backed securities - commercial201,601 177,181 
Total$1,356,696 $1,199,103 
Held-to-maturity:
Due less than one year$38,491 $37,396 
Due after one year through five years72,423 68,056 
Due after five years through ten years52,315 47,359 
Due greater than ten years217,265 208,959 
Mortgage-backed securities - residential148,859 131,957 
Mortgage-backed securities - commercial134,120 120,104 
Total$663,473 $613,831 
The amortized costs of securities pledged as collateral, to secure public deposits and for other purposes, was $1.186 billion at June 30, 2023 and $1.031 billion at December 31, 2022, respectively.

24
The following table summarizes securities in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2023 and December 31, 2022. The securities are aggregated by major security type and length of time in a continuous unrealized loss position:
($ in thousands)June 30, 2023
Losses < 12 MonthsLosses 12 Months or >Total
Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses
Available-for-sale:
U.S. Treasury$— $— $124,616 $11,067 $124,616 $11,067 
Obligations of U.S. government agencies and sponsored entities1,031 38 131,338 19,745 132,369 19,783 
Tax-exempt and taxable obligations of state and municipal subdivisions47,332 2,055 378,121 55,705 425,453 57,760 
Mortgage-backed securities - residential9,805 423 268,497 40,199 278,302 40,622 
Mortgage-backed securities - commercial5,067 333 167,716 24,138 172,783 24,471 
Corporate obligations8,323 1,177 29,547 3,198 37,870 4,375 
Total$71,558 $4,026 $1,099,835 $154,052 $1,171,393 $158,078 
Held-to-maturity:
U.S. Treasury$— $— $85,039 $4,648 $85,039 $4,648 
Obligations of U.S. government agencies and sponsored entities736 — 30,561 2,383 31,297 2,383 
Tax-exempt and taxable obligations of state and municipal subdivisions 44,551 4,276 67,739 11,692 112,290 15,968 
Mortgage-backed securities - residential— — 131,957 16,902 131,957 16,902 
Mortgage-backed securities - commercial25,217 1,829 94,887 12,187 120,104 14,016 
Corporate obligations— — 7,945 2,055 7,945 2,055 
Total$70,504 $6,105 $418,128 $49,867 $488,632 $55,972 
25
($ in thousands)December 31, 2022
Losses < 12 MonthsLosses 12 Months or >Total
Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses
Available-for-sale:
U.S. Treasury$4,563 $419 $119,292 $11,479 $123,855 $11,898 
Obligations of U.S. government agencies and sponsored entities34,254 2,293 109,431 16,395 143,685 18,688 
Tax-exempt and taxable obligations of state and municipal subdivisions275,202 31,152 159,508 30,779 434,710 61,931 
Mortgage-backed securities - residential76,125 4,970 222,274 37,071 298,399 42,041 
Mortgage-backed securities - commercial50,193 3,025 136,062 21,338 186,255 24,363 
Corporate obligations35,142 1,995 5,739 992 40,881 2,987 
Total$475,479 $43,854 $752,306 $118,054 $1,227,785 $161,908 
Held-to-maturity:
U.S. Treasury$104,457 $5,175 $— $— $104,457 $5,175 
Obligations of U.S. government agencies and sponsored entities31,636 2,153 — — 31,636 2,153 
Tax-exempt and taxable obligations of state and municipal subdivisions127,628 13,583 15,303 116 142,931 13,699 
Mortgage-backed securities - residential138,639 17,479 — — 138,639 17,479 
Mortgage-backed securities - commercial119,758 13,798 — — 119,758 13,798 
Corporate obligations8,385 1,615 — — 8,385 1,615 
Total$530,503 $53,803 $15,303 $116 $545,806 $53,919 
At June 30, 2023 and December 31, 2022, the Company’s securities portfolio consisted of 1,208 and 1,265 securities, respectively, which were in an unrealized loss position. Securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis. No allowance for credit losses was needed at June 30, 2023 and December 31, 2022.
NOTE 10 – LOANS
The Company uses four different categories to classify loans in its portfolio based on the underlying collateral securing each loan. The loans grouped together in each category have been determined to share similar risk characteristics with respect to credit quality. Those four categories are commercial, financial and agriculture, commercial real estate, consumer real estate, consumer installment;
Commercial, financial and agriculture – Commercial, financial and agriculture loans include loans to business entities issued for commercial, industrial, or other business purposes. This type of commercial loan shares a similar risk characteristic in that unlike commercial real estate loans, repayment is largely dependent on cash flow generated from the operation of the business.
Commercial real estate – Commercial real estate loans are grouped as such because repayment is mainly dependent upon either the sale of the real estate, operation of the business occupying the real estate, or refinance
26
of the debt obligation. This includes both owner-occupied and non-owner occupied CRE secured loans, because they share similar risk characteristics related to these variables.
Consumer real estate – Consumer real estate loans consist primarily of loans secured by 1-4 family residential properties and/or residential lots. This includes loans for the purpose of constructing improvements on the residential property, as well as home equity lines of credit.
Consumer installment – Installment and other loans are all loans issued to individuals that are not for any purpose related to operation of a business, and not secured by real estate. Repayment on these loans is mostly dependent on personal income, which may be impacted by general economic conditions.
The following table shows the composition of the loan portfolio:
($ in thousands)June 30, 2023December 31, 2022
Loans held for sale
Mortgage loans held for sale$6,602 $4,443 
Total LHFS$6,602 $4,443 
Loans held for investment
Commercial, financial and agriculture (1)$790,295 $536,192 
Commercial real estate2,915,886 2,135,263 
Consumer real estate1,249,295 1,058,999 
Consumer installment55,449 43,703 
Total loans5,010,925 3,774,157 
Less allowance for credit losses(52,614)(38,917)
Net LHFI$4,958,311 $3,735,240 
____________________________________________________________
(1)
Loan balance includes $514 thousand and $710 thousand in Paycheck Protection Program (“PPP”) loans as of June 30, 2023 and December 31, 2022, respectively.
Accrued interest receivable is not included in the amortized cost basis of the Company’s LHFI. At June 30, 2023 and December 31, 2022, accrued interest receivable for LHFI totaled $21.9 million and $18.0 million, respectively, with no related ACL and was reported in interest receivable on the accompanying consolidated balance sheet.
Nonaccrual and Past Due LHFI
Past due LHFI are loans contractually past due 30 days or more as to principal or interest payments. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.
27
The following tables present the aging of the amortized cost basis in past due loans in addition to those loans classified as nonaccrual including purchase credit deteriorated (“PCD”) loans:
($ in thousands)June 30, 2023
Past Due
30 to 89
Days		Past Due
90 Days
or More and
Still Accruing		NonaccrualPCDTotal
Past Due,
Nonaccrual
and PCD		Total
LHFI		Nonaccrual
and PCD
with No ACL
Commercial, financial and agriculture (1)$1,549 $— $221 $1,066 $2,836 $790,295 $172 
Commercial real estate1,278 — 9,196 793 11,267 2,915,886 5,030 
Consumer real estate1,899 — 3,324 1,419 6,642 1,249,295 1,456 
Consumer installment177 — 18 — 195 55,449 — 
Total$4,903 $— $12,759 $3,278 $20,940 $5,010,925 $6,658 
___________________________________________________________
(1)
Total loan balance includes $514 thousand in PPP loans as of June 30, 2023.
December 31, 2022
($ in thousands)Past Due
30 to 89
Days		Past Due 90
Days or
More and
Still Accruing		NonaccrualPCDTotal
Past Due,
Nonaccrual
and PCD		Total
LHFI		Nonaccrual
and PCD
with No ACL
Commercial, financial and agriculture (1)$220 $— $19 $— $239 $536,192 $— 
Commercial real estate1,984 — 7,445 1,129 10,558 2,135,263 4,560 
Consumer real estate3,386 289 2,965 1,032 7,672 1,058,999 791 
Consumer installment173 — 1 — 174 43,703 — 
Total$5,763 $289 $10,430 $2,161 $18,643 $3,774,157 $5,351 
___________________________________________________________
(1)
Total loan balance includes $710 thousand in PPP loans as of December 31, 2022.
Acquired Loans
In connection with the acquisitions of HSBI and BBI, the Company acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution's previously recorded allowance for credit losses. Acquired loans are accounted for under the following accounting pronouncements: ASC 326, Financial Instruments - Credit Losses.
The fair value for acquired loans recorded at the time of acquisition is based upon several factors including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of premium or discount to the unpaid principal balance of each acquired loan. As it relates to acquired PCD loans, the net premium or net discount is adjusted to reflect the Company's allowance for credit losses ("ACL") recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the loan. As it relates to acquired loans not classified as PCD ("non-PCD") loans, the credit loss and yield components of the fair value adjustments are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the average remaining life of those loans. The Company records an ACL for non-PCD loans at the time of acquisition through provision expense, and therefore, no further adjustments are made to the net premium or net discount for non-PCD loans.
The estimated fair value of the non-PCD loans acquired in the BBI acquisition was $460.0 million, which is net of a $8.8 million discount. The gross contractual amounts receivable of the acquired non-PCD loans at acquisition was approximately $468.8 million, of which $6.4 million is the amount of contractual cash flows not expected to be collected.
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The estimated fair value of the non-PCD acquired in the HSBI acquisition was $1.091 billion, which is net of a $33.7 million discount. The gross contractual amounts receivable of the acquired non-PCD loans at acquisition was approximately $1.125 billion, of which $16.5 million is the amount of contractual cash flows not expected to be collected.
The following table shows the carrying amount of loans acquired in the BBI and HSBI acquisitions for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination:
($ in thousands)BBIHSBI
Purchase price of loans at acquisition$27,669 $52,356 
Allowance for credit losses at acquisition1,303 3,176 
Non-credit discount (premium) at acquisition530 2,325 
Par value of acquired loans at acquisition$29,502 $57,857 
As of June 30, 2023, and December 31, 2022 the amortized cost of the Company’s PCD loans totaled $65.9 million and $24.0 million, respectively, which had an estimated ACL of $3.5 million and $1.7 million, respectively.
Loan Modifications
The Company adopted ASU No. 2022-02 effective January 1, 2023. These amendments eliminate the TDR recognition and measurement guidance and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.
Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, and other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.
In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For loans included in the "combination" columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, an other-than-insignificant payment delay and/or an interest rate reduction.
The following table presents the amortized cost basis of loans at June 30, 2023 that were both experiencing financial difficulty and modified during 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:
($ in thousands)Payment ModificationPercentage of Total Loans Held for Investment
Consumer real estate$60 — %
Total$60 — %
The Company has not committed to lend additional amounts to the borrowers included in the previous table.
Troubled Debt Restructurings Prior to the Adoption of ASU 2022-02
If the Company grants a concession to a borrower for economic or legal reasons related to a borrower’s financial difficulties that it would not otherwise consider, the loan is classified as a TDR.
As of December 31, 2022, the Company had TDRs totaling $21.8 million. The Company acquired three TDRs totaling $1.5 million as part of the BBI acquisition. As of December 31, 2022, the Company had no additional amount committed on any loan classified as TDR. As of December 31, 2022, TDRs had a related ACL of $841 thousand.
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The following table presents LHFI by class modified as TDRs that occurred during the three and six months ended June 30, 2022.
($ in thousands, except for number of loans)Three Months Ended June 30,
2022Number of
Loans		Outstanding
Recorded
Investment
Pre-Modification		Outstanding
Recorded
Investment
Post-Modification
Commercial, financial and agriculture1$15$15
Total1$15$15
The TDRs presented above increased the ACL $0 and resulted in no charge-offs for the three months period ended June 30, 2022.
($ in thousands, except for number of loans)Six Months Ended June 30,
2022Number of
Loans		Outstanding
Recorded
Investment
Pre-Modification		Outstanding
Recorded
Investment
Post-Modification
Commercial, financial and agriculture1$15$15
Total1$15$15
The TDRs presented above increased the ACL $0 and resulted in no charge-offs for the six months period ended June 30, 2022.
The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification.
($ in thousands, except for number of loans)Six Months Ended June 30,
Troubled Debt Restructurings
That Subsequently Defaulted:
2022
Number of
Loans		Recorded
Investment
Commercial real estate3$4,562 
Consumer real estate3133 
Total6$4,695 
The modifications described above included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these loans nor were any of these loans written down. A loan is considered to be in a payment default once it is 30 days contractually past due under the modified terms. The TDRs presented above increased the ACL $1.5 million and resulted in no charge-offs for the six months period ended June 30, 2022.
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The following tables represents the Company’s TDRs at December 31, 2022:
December 31, 2022Current
Loans		Past Due
30-89		Past Due 90
days and still
accruing		NonaccrualTotal
($ in thousands)
Commercial, financial and agriculture$49$—$—$—$49
Commercial real estate13,561——6,12119,682
Consumer real estate1,077——9292,006
Consumer installment14———14
Total$14,701$—$—$7,050$21,751
Allowance for credit losses$350$—$—$491$841
Collateral Dependent Loans
The following table presents the amortized cost basis of collateral dependent individually evaluated loans by class of loans as of June 30, 2023 and December 31, 2022:
June 30, 2023
($ in thousands)Real PropertyMiscellaneousTotal
Commercial, financial and agriculture$— $172 $172 
Commercial real estate5,030 — 5,030 
Consumer real estate1,574 — 1,574 
Total$6,604 $172 $6,776 
December 31, 2022
($ in thousands)Real PropertyTotal
Commercial real estate$4,560$4,560
Consumer real estate998998
Total$5,558$5,558
A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The following provides a qualitative description by class of loan of the collateral that secures the Company’s collateral dependent LHFI:
•Commercial, financial and agriculture – Loans within these loan classes are secured by equipment, inventory accounts, and other non-real estate collateral.
•Commercial real estate – Loans within these loan classes are secured by commercial real property.
•Consumer real estate - Loans within these loan classes are secured by consumer real property.
•Consumer installment - Loans within these loan classes are secured by consumer goods, equipment, and non-real estate collateral.
There have been no significant changes to the collateral that secures these financial assets during the period.
Loan Participations
The Company has loan participations, which qualify as participating interest, with other financial institutions. As of June 30, 2023, these loans totaled $273.0 million, of which $152.8 million had been sold to other financial institutions and $120.2 million was purchased by the Company. As of December 31, 2022, these loans totaled $202.6 million, of which $100.1 million had been sold to other financial institutions and $102.5 million was purchased by the Company. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involving no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.
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Credit Quality Indicators
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 analyzes loans individually to classify the loans as to credit risk. The Company uses the following definitions for risk ratings:
Pass: Loan classified as pass are deemed to possess average to superior credit quality, requiring no more than normal attention.
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.
These above classifications were the most current available as of June 30, 2023, and were generally updated within the prior year.

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The tables below present the amortized cost basis of loans by credit quality indicator and class of loans based on the most recent analysis performed at June 30, 2023 and December 31, 2022. Revolving loans converted to term as of the six months ended June 30, 2023 and December 31, 2022 were not material to the total loan portfolio.
As of June 30, 2023Term Loans Amortized Cost Basis by Origination YearRevolving
Loans		Total
($ in thousands)20232022202120202019Prior
Commercial, financial and
agriculture:
Risk Rating
Pass$63,198 $153,935 $119,982 $55,578 $42,981 $74,566 $274,501 $784,741 
Special mention— — — 179 1,199 1,473 127 2,978 
Substandard58 427 163 317 638 948 25 2,576 
Doubtful— — — — — — — — 
Total commercial, financial and agriculture$63,256 $154,362 $120,145 $56,074 $44,818 $76,987 $274,653 $790,295 
Current period gross write offs$— $11 $95 $2 $206 $110 $— $424 
Commercial real estate:
Risk Rating
Pass$115,044 $801,165 $591,882 $397,524 $278,946 $619,859 $3,546 $2,807,966 
Special mention— 681 10,427 3,263 10,434 18,817 — 43,622 
Substandard— 6,981 3,389 838 5,334 47,756 — 64,298 
Doubtful— — — — — — — — 
Total commercial real estate$115,044 $808,827 $605,698 $401,625 $294,714 $686,432 $3,546 $2,915,886 
Current period gross write offs$— $— $— $— $— $— $— $— 
Consumer real estate:
Risk Rating
Pass$87,387 $369,865 $236,851 $139,610 $64,194 $182,654 $149,200 $1,229,761 
Special mention— 76 — — 90 4,126 2,027 6,319 
Substandard— 119 527 1,647 763 8,902 1,257 13,215 
Doubtful— — — — — — — — 
Total consumer real estate$87,387 $370,060 $237,378 $141,257 $65,047 $195,682 $152,484 $1,249,295 
Current period gross write offs$— $21 $— $— $— $3 $— $24 
Consumer installment:
Risk Rating
Pass$13,765 $17,183 $9,991 $4,416 $1,940 $1,618 $6,444 $55,357 
Special mention— — — 1 — — — 1 
Substandard— 9 19 42 20 1 — 91 
Doubtful— — — — — — — — 
Total consumer installment$13,765 $17,192 $10,010 $4,459 $1,960 $1,619 $6,444 $55,449 
Current period gross write offs$47 $370 $131 $128 $66 $243 $33 $1,018 
Total
Pass$279,394 $1,342,148 $958,706 $597,128 $388,061 $878,697 $433,691 $4,877,825 
Special mention— 757 10,427 3,443 11,723 24,416 2,154 52,920 
Substandard58 7,536 4,098 2,844 6,755 57,607 1,282 80,180 
Doubtful— — — — — — — — 
Total$279,452 $1,350,441 $973,231 $603,415 $406,539 $960,720 $437,127 $5,010,925 
Current period gross write offs$47 $402 $226 $130 $272 $356 $33 $1,466 
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As of December 31, 2022Term Loans Amortized Cost Basis by Origination YearRevolving
Loans		Total
($ in thousands)20222021202020192018Prior
Commercial, financial and:
agriculture
Risk Rating
Pass$181,761 $141,174 $55,690 $53,954 $43,441 $52,038 $181 $528,239 
Special mention380 5,188 1,664 — — 412 — 7,644 
Substandard50 — — 34 33 192 — 309 
Doubtful— — — — — — — — 
Total commercial, financial and agriculture$182,191 $146,362 $57,354 $53,988 $43,474 $52,642 $181 $536,192 
Commercial real estate:        
Risk Rating
Pass$582,895 $436,661 $305,140 $217,626 $140,682 $368,185 $1,765 $2,052,954 
Special mention672 1,345 3,938 11,643 9,885 16,612 — 44,095 
Substandard50 2,830 908 1,694 4,797 27,935 — 38,214 
Doubtful— — — — — — — — 
Total commercial real estate$583,617 $440,836 $309,986 $230,963 $155,364 $412,732 $1,765 $2,135,263 
Consumer real estate:        
Risk Rating
Pass$325,853 $226,355 $136,052 $59,376 $51,515 $129,923 $112,278 $1,041,352 
Special mention— — — — 823 3,846 — 4,669 
Substandard519 554 1,481 648 1,706 6,894 1,176 12,978 
Doubtful— — — — — — — — 
Total consumer real estate$326,372 $226,909 $137,533 $60,024 $54,044 $140,663 $113,454 $1,058,999 
Consumer installment:
Risk Rating
Pass$18,925 $11,618 $5,031 $2,078 $832 $1,445 $3,725 $43,654 
Special mention— — — — — — — — 
Substandard4 13 24 — 3 5 — 49 
Doubtful— — — — — — — — 
Total consumer installment$18,929 $11,631 $5,055 $2,078 $835 $1,450 $3,725 $43,703 
Total
Pass$1,109,434 $815,808 $501,913 $333,034 $236,470 $551,591 $117,949 $3,666,199 
Special mention1,052 6,533 5,602 11,643 10,708 20,870 — 56,408 
Substandard623 3,397 2,413 2,376 6,539 35,026 1,176 51,550 
Doubtful— — — — — — — — 
Total $1,111,109 $825,738 $509,928 $347,053 $253,717 $607,487 $119,125 $3,774,157 
Allowance for Credit Losses
The ACL is a valuation account that is deducted from loans’ amortized cost basis to present the net amount expected to be collected on the loans. It is comprised of a general allowance for loans that are collectively assessed in pools with similar risk characteristics and a specific allowance for individually assessed loans. The allowance is continuously monitored by management to maintain a level adequate to absorb expected losses inherent in the loan portfolio.
The ACL represents the estimated losses for financial assets accounted for on an amortized cost basis. Expected losses are calculated using relevant information, from internal and external sources, about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in
34
underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environment conditions, such as changes in unemployment rates, property values, or other relevant factors. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Expected losses are estimated over the contractual term of the loans, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals, and modifications. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed and recoveries are credited to the allowance when received. Expected recovery amounts may not exceed the aggregate of amounts previously charged-off.
The ACL is measured on a collective basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by call code (segments). Segmenting loans by call code will group loans that contain similar types of collateral, purposes, and are usually structured with similar terms making each loan’s risk profile very similar to the rest in that segment. Each of these segments then flows up into one of the four bands (bands), Commercial, Financial, and Agriculture, Commercial Real Estate, Consumer Real Estate, and Consumer Installment. In accordance with the guidance in ASC 326, the Company redefined its LHFI portfolio segments and related loan classes based on the level at which risk is monitored within the ACL methodology. Construction loans for 1-4 family residential properties with a call code 1A1, and other construction, all land development and other land loans with a call code 1A2 were previously separated between the Commercial Real Estate or Consumer Real Estate bands based on loan type code. Under our ASC 326 methodology 1A1 loans are all defined as part of the Consumer Real Estate band and 1A2 loans are all defined as part of the Commercial Real Estate Band.
The PD calculation analyzes the historical loan portfolio over the given lookback period to identify, by segment, loans that have defaulted. A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period. The model observes loans over a 12-month window, detecting any events previously defined. This information is then used by the model to calculate annual iterative count-based PD rates for each segment. This process is then repeated for all dates within the historical data range. These averaged PD’s are used for an immediate reversion back to the historical mean. The historical data used to calculate this input was captured by the Company from 2009 through the most recent quarter end.
The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The model’s calculation also includes a 24-month forecasted PD based on a regression model that calculated a comparison of the Company’s historical loan data to various national economic metrics during the same periods. The results showed the Company’s past losses having a high rate of correlation to unemployment, both regionally and nationally. Using this information, along with the most recently published Wall Street Journal survey of sixty economists’ forecasts predicting unemployment rates out over the next eight quarters, a corresponding future PD can be calculated for the forward-looking 24-month period. This data can also be used to predict loan losses at different levels of stress, including a baseline, adverse and severely adverse economic condition. After the forecast period, PD rates revert to the historical mean of the entire data set.
The LGD calculation is based on actual losses (charge-offs, net recoveries) at a loan level experienced over the entire lookback period aggregated to get a total for each segment of loans. The aggregate loss amount is divided by the exposure at default to determine an LGD rate. Defaults occurring during the lookback period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event. If there is not a minimum of five past defaults in a loan segment, or less than 15.0% calculated LGD rate, or the total balance at default is less than 1% of the balance in the respective call code as of the model run date, a proxy index is used. This index is proprietary to the Company’s ACL modeling vendor derived from loss data of other client institutions similar in organization structure to the Company. The vendor also provides a “crisis” index derived from loss data between the post-recessionary years of 2008-2013 that the Company uses.
The model then uses these inputs in a non-discounted version of DCF methodology to calculate the quantitative portion of estimated losses. The model creates loan level amortization schedules that detail out the expected monthly payments for a loan including estimated prepayments and payoffs. These expected cash flows are discounted back to present value using the loan’s coupon rate instead of the effective interest rate. On a quarterly basis, the Company uses internal credit portfolio data, such as changes in portfolio volume and composition, underwriting practices, and levels of past due loans, nonaccruals and classified assets along with other external information not used in the quantitative calculation to determine if any subjective qualitative adjustments are required so that all significant risks are incorporated to form a sufficient basis to estimate credit losses.
35
The following table presents the activity in the allowance for credit losses by portfolio segment for the three months ended June 30, 2023 and 2022:
($ in thousands)Three Months Ended June 30, 2023
Commercial,
Financial and
Agriculture		Commercial
Real Estate		Consumer
Real Estate		Consumer
Installment		Total
Allowance for credit losses:
Beginning balance$9,443 $28,052 $14,201 $754 $52,450 
Provision for credit losses(64)603 (118)579 1,000 
Loans charged-off(421)— (24)(681)(1,126)
Recoveries 14 71 64 141 290 
Total ending allowance balance$8,972 $28,726 $14,123 $793 $52,614 
($ in thousands)Six Months Ended June 30, 2023
Commercial,
Financial and
Agriculture		Commercial
Real Estate		Consumer
Real Estate		Consumer
Installment		Total
Allowance for credit losses:
Beginning balance$6,349 $20,389 $11,599 $580 $38,917 
Initial allowance on PCD loans727 2,260 182 7 3,176 
Provision for credit losses2,263 5,991 2,284 962 11,500 
Loans charged-off(424)— (24)(1,018)(1,466)
Recoveries57 86 82 262 487 
Total ending allowance balance$8,972 $28,726 $14,123 $793 $52,614 
($ in thousands)Three Months Ended June 30, 2022
Commercial,
Financial and
Agriculture		Commercial
Real Estate		Consumer
Real Estate		Consumer
Installment		Total
Allowance for credit losses:
Beginning balance$4,874 $17,773 $8,492 $481 $31,620 
Provision for credit losses(313)629 62 72 450 
Loans charged-off(94)(24)(140)(168)(426)
Recoveries44 290 338 84 756 
Total ending allowance balance$4,511 $18,668 $8,752 $469 $32,400 
($ in thousands)Six Months Ended June 30, 2022
Commercial,
Financial and
Agriculture		Commercial
Real Estate		Consumer
Real Estate		Consumer
Installment		Total
Allowance for credit losses:
Beginning balance$4,873$17,552$7,889$428$30,742
Provision for credit losses(313)6296272450
Loans charged-off(146)(27)(147)(337)(657)
Recoveries975149483061,865
Total ending allowance balance$4,511$18,668$8,752$469$32,400
The Company recorded a $11.5 million provision for credit losses for the six months ended June 30, 2023, compared to $450 thousand provision for the same period in 2022. The initial ACL on PCD loans recorded in March 2023, of $3.2 million was related to the HSBI acquisition. The 2023 provision for credit losses includes $10.7 million associated
36
with day one post-merger accounting provision recorded for non-PCD loans and unfunded commitments acquired in the HSBI merger.
The Company recorded a $1.0 million provision for credit losses for the three months ended June 30, 2023, compared to $450 thousand provision for the same periods in 2022. The increase in the provision for the three months ended June 30, 2023 is attributed to loan growth.
The following table provides the ending balance in the Company’s LHFI and the ACL, broken down by portfolio segment as of June 30, 2023 and December 31, 2022.
($ in thousands)
June 30, 2023Commercial,
Financial and
Agriculture		Commercial
Real Estate		Consumer
Real Estate		Consumer
Installment		Total
LHFI
Individually evaluated$172 $5,030 $1,574 $— $6,776 
Collectively evaluated790,123 2,910,856 1,247,721 55,449 5,004,149 
Total$790,295 $2,915,886 $1,249,295 $55,449 $5,010,925 
Allowance for Credit Losses     
Individually evaluated$— $— $36 $— $36 
Collectively evaluated8,972 28,726 14,087 793 52,578 
Total$8,972 $28,726 $14,123 $793 $52,614 
($ in thousands)
December 31, 2022Commercial,
Financial and
Agriculture		Commercial
Real Estate		Consumer
Real Estate		Consumer
Installment		Total
LHFI
Individually evaluated$— $4,560 $998 $— $5,558 
Collectively evaluated536,192 2,130,703 1,058,001 43,703 3,768,599 
Total$536,192 $2,135,263 $1,058,999 $43,703 $3,774,157 
Allowance for Credit Losses     
Individually evaluated$— $— $5 $— $5 
Collectively evaluated6,349 20,389 11,594 580 38,912 
Total$6,349 $20,389 $11,599 $580 $38,917 
NOTE 11 - DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
The Company enters into interest rate swap agreements primarily to facilitate the risk management strategies of certain commercial customers. The interest rate swap agreements entered into by the Company are all entered into under what is referred to as a back-to-back interest rate swap, as such, the net positions are offsetting assets and liabilities, as well as income and expenses. All derivative instruments are recorded in the consolidated statement of financial condition at their respective fair values, as components of other assets and other liabilities. Under a back-to-back interest rate swap program, the Company enters into an interest rate swap with the customer and another offsetting swap with a counterparty. The result is two mirrored interest rate swaps, absent a credit event, which will offset in the financial statements. These swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. The change in fair value is recognized in the income statement as other income and fees.


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The following table provides outstanding interest rate swaps as of June 30, 2023 and December 31, 2022.

($ in thousands)
June 30, 2023December 31, 2022
Notional amount$361,749 $328,756 
Weighted average pay rate4.5 %4.6 %
Weighted average receive rate4.5 %4.3 %
Weighted average maturity in years5.776.11

The following table provides the fair value of interest rate swap contracts at June 30, 2023 and December 31, 2022 included in other assets and other liabilities.

($ in thousands)
June 30, 2023December 31, 2022
Derivative AssetsDerivative LiabilitiesDerivative AssetsDerivative Liabilities
Interest rate swap contracts$12,469 $12,469 12,825 $12,825 

The Company also enters into a collateral agreement with the counterparty requiring the Company to post cash or
cash equivalent collateral to mitigate the credit risk in the transaction. At June 30, 2023 and December 31, 2022, the Company had $500 thousand of collateral posted with its counterparties, which is included in the consolidated statement of financial condition as cash and cash equivalents as "restricted cash". The Company also receives a swap spread to compensate it for the credit exposure it takes on the customer-facing portion of the transaction and this upfront cash payment from the counterparty is recorded in other income, net of any transaction execution expenses, in the consolidated statement of operations. For the three months and six months ended June 30, 2023, net swap spread income included in other income was $326 thousand and $495 thousand, respectively.

Entering into derivative contracts potentially exposes the Company to the risk of counterparties' failure to fulfill their legal obligations, including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. The Company assesses the credit risk of its dealer counterparties by regularly monitoring publicly available credit rating information, evaluating other market indicators, and periodically reviewing detailed financials.

The Company records the fair value of its interest rate swap contracts separately within other assets and other liabilities as current accounting rules do not permit the netting of customer and counterparty fair value amounts in the consolidated statement of financial condition.
NOTE 12 – RECLASSIFICATION
Certain amounts in the 2022 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.
NOTE 13 – SUBSEQUENT EVENTS/OTHER
In April 2023, the U.S. Department of Treasury (the "Treasury") informed the Company that the Treasury has reviewed the Company's application to receive a grant through the Community Development Financial Institution Fund ("CDFI Fund") related to the Equitable Recovery Program ("ERP"), and that the Company would be eligible to receive an ERP grant in an amount up to $6.2 million. The Company has not yet determined whether it will accept the offer to receive the ERP grant.
If the Company moves forward with pursuing the ERP grant from the Treasury, the Company would be required to fulfill certain conditions established by the Treasury and would be subject to certain restrictions following its acceptance of the investment.
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Authorized by the Consolidated Appropriations Act, 2021, the ERP was created to respond to the economic effects of the Coronavirus Disease ("COVID-19") pandemic. These funds will strengthen the ability of the CDFIs to help low-and moderate-income communities recover from the COVID-19 pandemic and invest in long-term prosperity.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements made or incorporated by reference in this Quarterly Report on Form 10-Q of the Company (the “Report”) which are not statements of historical fact, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Report, constitute forward-looking statements within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, many of which are beyond the Company’s control and which may cause the Company’s actual results, performance or achievements or the financial services industry or economy generally, to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are forward-looking statements. You can identify these forward-looking statements through the Company’s use of words such as “believes,” “anticipates,” “expects,” “may,” “will,” “assumes,” “predicts,” “could,” “should,” “would,” “intends,” “targets,” “estimates,” “projects,” “seek,” “plans,” “potential,” “aim,” and other similar words and expressions of the future or otherwise regarding the outlook for the Company’s future business and financial performance and/or the performance of the financial services industry and economy in general. Forward-looking statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this document. Many of these factors are beyond the Company’s ability to control or predict. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:
•negative impacts on our business, profitability and our stock price that could result from prolonged periods of inflation;
•risks and uncertainties relating to recent, pending or potential future mergers or acquisitions, including risks related to the completion of such acquisitions within expected timeframes and the successful integration of the business that we acquire into our operations;
•the risk that a future economic downturn and contraction, including a recession, could have a material adverse effect on our capital, financial condition, credit quality, results of operations and future growth, including the risk that the strength of the current economic environment could be weakened by the continued impact of rising interest rates, supply chain challenges and inflation;
•disruptions to the financial markets as a result of the current or anticipated impact of military conflict, including Russia’s military action in Ukraine, terrorism or other geopolitical events;
•governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve;
•the costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto;
•reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors occurring in those areas;
•general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;
•adverse changes in asset quality and resulting credit risk-related losses and expenses;
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•ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters, public health emergencies and international instability;
•developments in our mortgage banking business, including loan modifications, general demand, and the effects of judicial or regulatory requirements or guidance;
•changes in laws and regulations affecting our businesses, including governmental monetary and fiscal policies, legislation and regulations relating to bank products and services, as well as changes in the enforcement and interpretation of such laws and regulations by applicable governmental and self-regulatory agencies, which could require us to change certain business practices, increase compliance risk, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses;
•the financial impact of future tax legislation;
•changes in political conditions or the legislative or regulatory environment, including the possibility that the U.S. could default on its debt obligations;
•the adequacy of the level of our allowance for credit losses and the amount of credit loss provisions required to replenish the allowance in future periods;
•reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;
•changes in the interest rate environment which could reduce anticipated or actual margins;
•increased funding costs due to market illiquidity, increased competition for funding, higher interest rates, and increased regulatory requirements with regard to funding;
•results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses through additional credit loss provisions or write-down of our assets;
•the rate of delinquencies and amount of loans charged-off;
•the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;
•significant increases in competition in the banking and financial services industries;
•changes in the securities markets;
•significant turbulence or a disruption in the capital or financial markets and the effect of a fall in stock market prices on our investment securities;
•loss of consumer confidence and economic disruptions resulting from national disasters or terrorist activities;
•our ability to retain our existing customers, including our deposit relationships;
•changes occurring in business conditions and inflation;
•changes in technology or risks to cybersecurity;
•changes in deposit flows;
•changes in accounting principles, policies, or guidelines, including the impact of the Current Expected Credit Losses (“CECL”) standard;
•our ability to maintain adequate internal control over financial reporting; and
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•other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”).
We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in and the assumptions underlying our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved, or the assumptions will be accurate. The Company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional information concerning these risks and uncertainties is contained in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022 "the Company's 2022 Form 10-K" and in our other filings with the Securities and Exchange Commission, available at the SEC’s website, http://www.sec.gov.
CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues, and expenses. Accounting policies considered critical to our financial results include the allowance for credit losses and related provision, income taxes, goodwill, and business combinations. The most critical of these is the accounting policy related to the allowance for credit losses. The allowance is based in large measure upon management’s evaluation of borrowers’ abilities to make loan payments, local and national economic conditions, and other subjective factors. If any of these factors were to deteriorate, management would update its estimates and judgments which may require additional loss provisions. The Company’s critical accounting policies are discussed in detail in Note B “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of the Company’s 2022 Form 10-K.
On January 1, 2023, the Company adopted FASB ASU 2022-02, which eliminates the TDR recognition and measurement guidance and instead requires that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.
OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
Second quarter 2023 compared to second quarter 2022
The Company reported net income available to common shareholders of $23.8 million for the three months ended June 30, 2023, compared with net income available to common shareholders of $15.8 million for the same period last year, an increase of $8.0 million or 50.9%. For the second quarter of 2023, fully diluted earnings per share were $0.75, compared to $0.76 for the second quarter of 2022.
Operating net earnings, a non-GAAP financial measure, for the second quarter of 2023 totaled $26.8 million compared to $16.5 million for the second quarter of 2022, an increase of $10.3 million or 62.7%. Operating net earnings, which is a non-GAAP financial measure, for the second quarter of 2023 excludes merger and conversion related costs of $3.1 million, net of tax. Operating net earnings, a non-GAAP financial measure, for the second quarter of 2022 excludes merger and conversion related costs of $875 thousand, net of tax, government grants from the U.S. Treasury of $128 thousand, net of tax, offset by $123 thousand in charitable contribution related to the U.S. Treasury awards, and bargain purchase gain and loss on sale of fixed assets, net of tax, $123 thousand. Diluted operating earnings per share, a non-GAAP financial measure, was $0.85 on a fully diluted basis for the second quarter 2023, compared to $0.80 for the same period in 2022, excluding the costs and income described above. See reconciliation of non-GAAP financial measures provided below.
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Net interest income for the second quarter 2023 was $66.0 million, an increase of $23.9 million or 56.8%, compared to $42.1 million for the same period in 2022. Fully tax equivalent (“FTE”) net interest income, which is a non-GAAP measure, totaled $67.0 million and $43.0 million for the second quarter of 2023 and 2022, respectively. Purchase accounting adjustments increased $5.9 million for the second quarter comparisons. The increase was largely due to increased interest rates as well as the acquisitions of BBI and HSBI.
Second quarter 2023 net interest margin was 3.76% including 37 basis points related to purchase accounting adjustments compared to 3.02% for the same quarter in 2022, which included 4 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the core net interest margin, a non-GAAP financial measure, increased 41 basis points in prior year quarterly comparison primarily due to an increase in average loans as well as interest rate increases. See reconciliation of non-GAAP financial measures provided below.
Non-interest income for the three months ended June 30, 2023 was $12.4 million compared to $8.7 million for the same period in 2022, reflecting an increase of $3.7 million or 43.4%. This increase was attributable to increases in service charges on deposit accounts and interchange fee income of $2.8 million and an increase of $1.7 million in other charges and fees. This increase was partially offset by a decrease of $454 thousand in mortgage income.
Pre-tax, pre-provision operating earnings, a non-GAAP measure, increased 71.3% to $35.7 million for the quarter-ended June 30, 2023 as compared to $20.8 million for the second quarter of 2022. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the second quarter 2023 excludes merger and conversion related costs of $4.1 million, and $1.3 million provision for credit losses. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the second quarter of 2022 excludes merger and conversion related costs of $1.2 million, $600 thousand provision for loan losses, $165 thousand bargain purchase gain and loss on sale of fixed assets, and $171 thousand in government grants from the U.S. Treasury offset by $165 thousand in charitable contributions related to the U.S. Treasury awards. See reconciliation of non-GAAP financial measures provided below.
Non-interest expense was $46.9 million for the three months ended June 30, 2023, an increase of $15.9 million or 51.5%, when compared with the same period in 2022. For the second quarter of 2023, charges related to the ongoing operations of BBI and HSBI totaled $10.0 million and acquisition charges of $2.9 million.
Investment securities totaled $1.898 billion, or 24.1% of total assets at June 30, 2023, compared to $2.105 billion, or 34.9% of total assets at June 30, 2022. For the second quarter of 2023 compared to the second quarter of 2022, the average balance of investment securities decreased $183.2 million. The average yield on investment securities increased 13 basis points to 2.23% from 2.10% in prior year quarterly comparison. The investment portfolio had a net unrealized loss of $157.6 million at June 30, 2023 as compared to a net unrealized loss of $149.1 million at June 30, 2022.
The average yield on all earning assets increased 162 basis points in prior year quarterly comparison, from 3.29% for the second quarter of 2022 to 4.91% for the second quarter of 2023. Interest expense on average interest-bearing liabilities increased 126 basis points from 0.39% for the second quarter of 2022 to 1.65% for the second quarter of 2023.
Cost of all deposits averaged 91 basis points for the second quarter of 2023 compared to 14 basis points for the second quarter of 2022. This increase was a result of rising interest rates and increased competition for deposits.
First six months 2023 compared to first six months 2022
In the year-over-year comparison, net income available to common shareholders increased $7.5 million, or 22.9%, from $32.6 million for the six months ended June 30, 2022 to $40.1 million for the same period ended June 30, 2023.
Operating net earnings, a non-GAAP financial measure, increased $22.5 million, or 71.3%, from $31.5 million at June 30, 2022 to $54.0 million at June 30, 2023. Provision for credit losses increased $11.7 million for the year-over-year comparison. Operating net earnings, a non-GAAP financial measure, excludes merger and conversion related costs of $5.9 million, net of tax, and initial provision for acquired loans for $8.0 million, net of tax, for the year-to-date period ending June 30, 2023. Operating net earnings, a non-GAAP financial measure, excludes merger and conversion related costs of $1.2 million, net of tax, government grants from the U.S. Treasury of $652 thousand, net of tax, offset by $123 thousand in contributions related to the government grants from the U.S. Treasury and $123 thousand bargain purchase gain and loss on sale of fixed assets, net of tax, for the year-to-date period ending June 30, 2022. Operating earnings per share were $1.71 on a fully diluted basis for six-month period ending June 30, 2023, compared to $1.52 for the same period in 2022,
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excluding the merger-related costs and income described above. See reconciliation of non-GAAP financial measures provided below.

Net interest income was $131.0 million, an increase of $50.2 million, or 62.2%, for the six months ended June 30, 2023, compared to $80.7 million for the same period in 2022. This increase was primarily due to interest income earned on a high volume of loans and securities, including loans and securities acquired from the HSBI and BBI. Average earning assets at June 30, 2023, increased $1.464 billion, or 26.0%, and average interest-bearing liabilities increased $1,024.7 million, or 26.3%, when compared to June 30, 2022.

Non-interest income for the six months ended June 30, 2023, was $25.0 million compared to $19.8 million for the same period in June 30, 2022, reflecting an increase of $5.2 million or 26.3%. The increase can be attributed to $3.0 million in services charges on deposit accounts and $ 2.7 million in interchange fee income.

The provision for credit losses was $12.3 million for the six months ended June 30, 2023, compared with $600 thousand provision for credit losses for the same period in 2022. The 2023 provision for credit losses includes $10.7 million associated with day one post-merger accounting provision recorded for non-PCD loans and unfunded commitments acquired in the HSBI merger. The allowance for credit losses of $52.6 million at June 30, 2023 is considered by management to be adequate to cover losses inherent in the loan portfolio. See “Allowance for Credit Losses” in Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation.

Non-interest expense was $92.6 million for the six months ended June 30, 2023, an increase of $33.0 million or 55.5%, when compared with the same period in 2022. The increase was partially attributable to $6.3 million in acquisition and charter conversion charges and $20.9 million in increased operating expenses associated with the BBI and HSBI acquisitions for the six months ended June 30, 2023.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE FIRST
The First represents the primary asset of the Company. The First reported total assets of $7.852 billion at June 30, 2023 compared to $6.462 billion at December 31, 2022, an increase of $1.390 billion. Loans, including loans held for sale, increased $1.239 billion to $5.018 billion, or 32.8%, during the first six months of 2023. Deposits at June 30, 2023 totaled $6.511 billion compared to $5.494 billion at December 31, 2022. The majority of the increase in assets, loans, and deposits is attributed to the HSBI acquisition.
For the six months period ended June 30, 2023, The First reported net income of $46.7 million compared to $35.5 million for the six months ended June 30, 2022. Merger and conversion charges equaled $5.9 million, net of tax, for the first six months of 2023 as compared to $1.2 million, net of tax, for the first six months of 2022.
EARNINGS PERFORMANCE
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is non-interest income, which primarily consists of customer service charges and fees as well as mortgage income but also comes from non-customer sources such as bank-owned life insurance. The majority of the Company’s non-interest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.
NET INTEREST INCOME AND NET INTEREST MARGIN
For the three months ended June 30, 2023, net interest income increased by $23.9 million, or 56.8%, when compared with the same period in 2022. The increase was largely due to increased interest rates as well as the acquisitions of BBI and HSBI. PPP loans totaled $514 thousand as of June 30, 2023, a decrease of $5.8 million or 91.8% when compared to the same period last year due to loan forgiveness under the PPP program. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on nonaccrual status during the reporting period, and the recovery of interest on loans that had been on nonaccrual and were paid off, sold or returned to accrual status.
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The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
Average Balances, Tax Equivalent Interest and Yields/Rates
($ in thousands)Three Months Ended
June 30, 2023June 30, 2022
Avg.
Balance		Tax
Equivalent
Interest		Yield/
Rate		Avg.
Balance		Tax
Equivalent
Interest		Yield/
Rate
Earning Assets:
Taxable securities$1,473,166 $7,867 2.14 %$1,634,679 $8,372 2.05 %
Tax exempt securities470,742 3,946 3.35 %492,405 3,721 3.02 %
Total investment securities1,943,908 11,813 2.43 %2,127,084 12,093 2.27 %
Interest bearing deposits in other banks93,464 789 3.38 %432,851 32 0.03 %
Loans4,982,368 74,590 5.99 %3,013,228 34,663 4.60 %
Total earning assets7,019,740 87,192 4.97 %5,573,163 46,788 3.36 %
Other assets862,390  539,078   
Total assets$7,882,130 $6,112,241   
Interest-bearing liabilities:      
Deposits$4,465,800 $14,762 1.32 %$3,706,711 $1,905 0.21 %
Borrowed funds277,531 3,264 4.70 %— — — %
Subordinated debentures145,418 2,138 5.88 %144,834 1,841 5.08 %
Total interest-bearing liabilities4,888,749 20,164 1.65 %3,851,545 3,746 0.39 %
Other liabilities2,091,882   1,667,286  
Shareholders’ equity901,499   593,410  
Total liabilities and shareholders’ equity$7,882,130  $6,112,241  
Net interest income$66,030   $42,101 
Net interest margin 3.76 % 3.02 %
Net interest income (FTE)*$67,028 3.32 % $43,042 3.06 %
Net interest margin (FTE)*  3.82 %  3.09 %
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($ in thousands)Six Months Ended
June 30, 2023June 30, 2022
Avg.
Balance		Tax
Equivalent
Interest		Yield/
Rate		Avg.
Balance		Tax
Equivalent
Interest		Yield/
Rate
Earning Assets:
Taxable securities$1,519,140 $16,625 2.19 %$1,565,844 $14,524 1.85 %
Tax exempt securities466,752 7,892 3.38 %446,984 6,963 3.12 %
Total investment securities1,985,892 24,517 2.47 %2,012,828 21,487 2.13 %
Interest bearing deposits in other banks119,916 1,687 2.81 %628,279 45 0.01 %
Loans4,979,034 142,324 5.72 %2,979,738 68,817 4.62 %
Total earning assets7,084,842 168,528 4.76 %5,620,845 90,349 3.21 %
Other assets857,516 535,698 
Total assets$7,942,358 $6,156,543 
Interest-bearing liabilities:
Deposits$4,587,933 $27,039 1.18 %$3,746,538 $4,188 0.22 %
Borrowed funds177,868 4,223 4.75 %— — — %
Subordinated debentures150,225 4,314 5.74 %144,797 3,660 5.06 %
Total interest-bearing liabilities4,916,026 35,576 1.45 %3,891,335 7,848 0.40 %
Other liabilities2,140,995 1,635,425 
Shareholders’ equity885,337 629,783 
Total liabilities and shareholders’ equity$7,942,358 $6,156,543 
Net interest income$130,956 $80,740 
Net interest margin2.46 %2.87 %
Net interest income (FTE)*$132,952 3.31 %$82,501 2.91 %
Net interest margin (FTE)*3.75 %2.94 %
____________________________________________________
*Non-GAAP measure. See reconciliation of non-GAAP financial measures.
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NON-INTEREST INCOME AND NON-INTEREST EXPENSE
The following table provides details on the Company’s non-interest income and non-interest expense for the three and six months ended June 30, 2023 and 2022:
($ in thousands)Three Months Ended
EARNINGS STATEMENTJune 30,
2023		% of
Total		June 30,
2022		% of
Total
Non-interest income:
Service charges on deposit accounts$3,425 27.6 %$2,038 23.5 %
Mortgage fee income773 6.2 %1,227 14.2 %
Interchange fee income4,543 36.6 %3,102 35.8 %
(Loss) gain on securities, net(48)(0.4)%(80)(0.9)%
Gain (loss) on sale of premises and equipment— 0.0 %(115)(1.3)%
Gain on acquisition— 0.0 %281 3.2 %
Government awards/grants— 0.0 %171 2.0 %
Other3,730 30.0 %2,040 23.5 %
Total non-interest income$12,423 100 %$8,664 100 %
Non-interest expense:  
Salaries and employee benefits$23,315 49.7 %$17,237 55.6 %
Occupancy expense5,041 10.7 %3,828 12.4 %
FDIC/OCC premiums758 1.6 %546 1.8 %
Marketing45 0.1 %122 0.4 %
Amortization of core deposit intangibles2,391 5.1 %1,064 3.4 %
Other professional services1,570 3.3 %768 2.5 %
Other non-interest expense9,678 20.6 %6,218 20.1 %
Acquisition and charter conversion charges4,101 8.7 %1,172 3.8 %
Total non-interest expense$46,899 100 %$30,955 100 %
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($ in thousands)Six Months Ended
EARNINGS STATEMENTJune 30,
2023		% of
Total		June 30,
2022		% of
Total
Non-interest income:
Service charges on deposit accounts$7,082 28.4 %$4,078 20.6 %
Mortgage fee income1,406 5.6 %2,457 12.4 %
Interchange fee income9,041 36.1 %6,299 31.8 %
(Loss) gain on securities, net(48)(0.2)%(83)(0.4)%
Gain (loss) on sale of premises and equipment663 2.6 %(113)(0.6)%
Gain on acquisition— 0.0 %281 1.4 %
Government awards/grants— 0.0 %873 4.4 %
BOLI income from death proceeds— 0.0 %1,630 8.2 %
Other6,891 27.5 %4,399 22.2 %
Total non-interest income$25,035 100 %$19,821 100 %
Non-interest expense:
Salaries and employee benefits$46,888 50.7 %$34,036 57.2 %
Occupancy expense10,337 11.2 %7,704 12.9 %
FDIC/OCC premiums1,428 1.5 %1,112 1.9 %
Marketing203 0.2 %208 0.3 %
Amortization of core deposit intangibles4,793 5.2 %2,128 3.6 %
Other professional services2,638 2.8 %1,331 2.2 %
Other non-interest expense18,388 19.9 %11,446 19.2 %
Acquisition and charter conversion charges7,894 8.5 %1,580 2.7 %
Total non-interest expense$92,569 100 %$59,545 100 %
PROVISION FOR INCOME TAXES
The Company sets aside a provision for income taxes on a monthly basis. The amount of the provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits if applicable. Permanent differences include but are not limited to tax-exempt interest income, bank-owned life insurance cash surrender value income, and certain book expenses that are not allowed as tax deductions.
The Company’s provision for income taxes was $6.5 million or 21.5% of earnings before income taxes for the second quarter 2023, compared to $3.5 million or 18.0% of earnings before income taxes for the same period in 2022. The provision for the six months ended June 30, 2023 was $11.1 million or 21.7% of earnings before income taxes compared to $7.8 million or 19.4% for the same period in 2022.
BALANCE SHEET ANALYSIS
EARNING ASSETS
The Company’s interest-earning assets are comprised of investments and loans, and the composition, growth characteristics, and credit quality of both are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.
INVESTMENTS
The Company’s investments can at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in
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our Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. Surplus FRB balances and federal funds sold to correspondent banks represent the temporary investment of excess liquidity. The Company’s investments serve several purposes: 1) they provide liquidity to even out cash flows from the loan and deposit activities of customers; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with maturity and interest rate characteristics that can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; 4) they are another interest-earning option for surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. Total securities, excluding other securities, totaled $1.863 billion, or 23.7% of total assets at June 30, 2023 compared to $1.949 billion, or 30.2% of total assets at December 31, 2022.
There were no federal funds sold at June 30, 2023 and December 31, 2022; and interest-bearing balances at other banks increased to $88.3 million at June 30, 2023 from $78.1 million at December 31, 2022. The increase in interest-bearing balances is primarily related to an increase in the Federal Reserve Bank deposits. The Company’s investment portfolio decreased $84.2 million, or 4.2%, to $1.898 billion at June 30, 2023 compared to December 31, 2022. The decrease is attributed to $89.3 million in securities that matured, prepaid, or were called offset by a $3.6 million change in the net unrealized loss of the security portfolio. The Company sold approximately $171.2 million in securities that were acquired in the HSBI acquisition. The investment portfolio had a net unrealized loss of $157.6 million at June 30, 2023 as compared to a net unrealized loss of $161.2 million at December 31, 2022. The Company carries available-for-sale investments at their fair market values and held-to-maturity investments at their amortized costs. The fair value of available-for-sale securities totaled $1.199 billion at June 30, 2023 compared to $1.257 billion at December 31, 2022. The fair value of held-to-maturity investments totaled $613.8 million and $642.1 million at June 30, 2023 and December 31, 2022, respectively. All other investment securities are classified as “available-for-sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.
Refer to the tables shown in Note 9 – "Securities" to the Consolidated Financial Statements for information on the Company’s amortized cost and fair market value of its investment portfolio by investment type.
LOAN PORTFOLIO
Loans Held for Sale (“LHFS”)
The Bank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and concurrently “locks in” with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the mortgage servicing rights being retained by the Bank. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at fair value in the aggregate as determined by the outstanding commitments from investors. Associated servicing rights are not retained. At June 30, 2023, LHFS totaled $6.6 million, compared to $4.4 million at December 31, 2022.
Loans Held for Investment (“LHFI”)
LHFI, net of deferred fees and costs, were $4.958 billion at June 30, 2023, an increase of $1.223 billion, or 32.7%, from $3.735 billion at December 31, 2022. The acquisition of HSBI accounted for approximately $1.159 billion, net of purchase accounting adjustments, of the increase. PPP loans were $514 thousand at June 30, 2023, a decrease of $196 thousand, or 27.6%, from $710 thousand at December 31, 2022.
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The following table presents the Company’s composition of LHFI, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans ($ in thousands):
June 30, 2023December 31, 2022
AmountPercent
of Total		AmountPercent
of Total
Commercial, financial and agriculture (1)$790,295 15.8 %$536,192 14.2 %
Commercial real estate2,915,886 58.2 %2,135,263 56.5 %
Consumer real estate1,249,295 24.9 %1,058,999 28.1 %
Consumer installment55,449 1.1 %43,703 1.2 %
Total loans5,010,925 100 %3,774,157 100 %
Allowance for credit losses(52,614)(38,917) 
Net loans$4,958,311 $3,735,240 
_______________________________________
(1)Loan amount includes $514 thousand and $710 thousand in PPP loans at June 30, 2023 and December 31, 2022, respectively.
Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes that the risk elements of its loan portfolio have been reduced through strategies that diversify the lending mix.
LOAN CONCENTRATIONS
Diversification within the loan portfolio is an important means of reducing inherent lending risk. As of June 30, 2023, management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area.
NON-PERFORMING ASSETS
Non-performing assets (“NPAs”) are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and other real estate owned. Loans are placed on nonaccrual status when they become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans totaled $16.0 million at June 30, 2023, an increase of $3.4 million from December 31, 2022.
Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $5.6 million at June 30, 2023, an increase of $756 thousand as compared to $4.8 million at December 31, 2022. The acquisition of HSBI accounted for approximately $857 thousand of the increase and was offset by sales and write-downs during 2023.

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The following table presents comparative data for the Company’s non-performing assets as of the dates noted.
($ in thousands)June 30, 2023December 31, 2022
Nonaccrual Loans
Commercial, financial and agriculture$1,287 $19 
Commercial real estate9,989 8,574 
Consumer real estate4,743 3,997 
Consumer installment18 1 
Total Nonaccrual Loans16,037 12,591 
  
Other real-estate owned5,588 4,832 
  
Total NPAs$21,625 $17,423 
Past due 90 days or more and still accruing$— $289 
Total NPAs as a % of total loans & leases net of unearned income0.4 %0.5 %
Total nonaccrual loans as a % of total loans & leases net of unearned income0.3 %0.3 %
NPAs totaled $21.6 million at June 30, 2023, compared to $17.4 million at December 31, 2022, an increase of $4.2 million. The ACL/total loans ratio was 1.05% at June 30, 2023, and 1.03% at December 31, 2022. Total valuation accounting adjustments were $33.6 million on acquired loans at June 30, 2023. The Company recorded a $9.5 million credit mark related to the BBI acquisition in 2022 and a $33.2 million credit mark related to the HSBI acquisition in 2023. The ratio of annualized net charge-offs (recoveries) to total loans was 0.07% for the quarter ended June 30, 2023 compared to 0.004% for the quarter ended December 31, 2022.
ALLOWANCE FOR CREDIT LOSSES
The ACL is a valuation account that is deducted from loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environment conditions, such as changes in unemployment rates, property values, or other relevant factors. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Management evaluates the adequacy of the ACL quarterly and makes provisions for credit losses based on this evaluation. See Note 10 - “Loans” for a description of the Company’s methodology and the quantitative and qualitative factors included in the calculation.
At June 30, 2023, the ACL was $52.6 million, or 1.0% of LHFI, an increase of $13.7 million, or 35.2% when compared to December 31, 2022. The 2023 provision for credit losses includes $10.7 million associated with a day one post-merger accounting provision recorded for non-PCD loans and unfunded commitments and a $3.2 million initial allowance on PCD loans related to the HSBI acquisition. At December 31, 2022, provision for credit losses includes $3.9 million associated with a day one post-merger accounting provision recorded for non-PCD loans and unfunded commitments and a $1.3 million initial allowance on PCD loans acquired in the BBI acquisition. At December 31, 2022, the allowance for credit losses was approximately $38.9 million, which was 1.0% of LHFI.
At June 30, 2023, management believes the allowance is appropriate and should any of the factors considered by management in evaluating the appropriateness of the allowance for credit losses change, management’s estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for credit losses.
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The table that follows summarizes the activity in the allowance for credit losses for the three and six months ended June 30, 2023 and 2022 ($ in thousands):
Allowance for Credit Losses
Balances:Three Months Ended
June 30, 2023		Three Months Ended
June 30, 2022		Six Months Ended
June 30, 2023		Six Months Ended
June 30, 2022
Average LHFI outstanding during period:$4,982,368 $3,013,228 $4,979,034 $2,979,739 
LHFI outstanding at end of period:$5,010,925 $3,124,924 5,010,925 3,124,924 
Allowance for Credit Losses:
Balance at beginning of period$52,450 $31,620 $38,917 $30,742 
Initial allowance on PCD loans— 3,176 
Provision:
Initial provision for acquired non-PCD loans— — 10,219 — 
Provision for credit losses charged to expense1,000 450 1,281 450 
Charge-offs:
Commercial, financial and agriculture421 94 424 146 
Commercial real estate— 24 — 27 
Consumer real estate24 140 24 147 
Consumer installment681 168 1,018 337 
Total Charge-offs1,126 426 1,466 657 
Recoveries:
Commercial, financial and agriculture14 44 57 97 
Commercial real estate71 290 86 514 
Consumer real estate64 338 82 948 
Consumer installment141 84 262 306 
Total Recoveries290 756 487 1,865 
Net loan charge offs (recoveries)836 (330)979 (1,208)
Balance at end of period$52,614 $32,400 $52,614 $32,400 
RATIOS
Net Charge-offs (recoveries) to average LHFI (annualized)0.1 %0.0 %0.04 %(0.1)%
ACL to LHFI at end of period1.0 %1.0 %1.0 %1.0 %
Net Loan Charge-offs (recoveries) to PCL83.6 %(73.3)%76.4 %(268.4)%
The Company recorded a $1.0 million provision for credit losses for the three months ended June 30, 2023 and $11.5 million for the six months ended June 30, 2023, compared to $450 thousand for the three and six months ended June 30, 2022. The increase in 2023 is related to the initial provision for acquired non-PCD loans of $10.2 million and an initial allowance on PCD loans of $3.2 million recorded as of March 31, 2023 due to the acquisition of HSBI.
The following table summarizes the ACL at June 30, 2023 and at December 31, 2022.
($ in thousands)June 30, 2023December 31, 2022
Commercial, financial and agriculture$8,972 $6,349 
Commercial real estate28,726 20,389 
Consumer real estate14,123 11,599 
Consumer installment793 580 
Total$52,614 $38,917 
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ALLOWANCE FOR CREDIT LOSSES ON OBSC EXPOSURES
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on OBSC exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The Company recorded $250 thousand and $750 thousand provision for credit losses on OBSC exposures for the three and six month period ended June 30, 2023, respectively, compared to $150 thousand for the three and six month period ended in June 30, 2022. The increase in the ACL on OBSC exposures for the six months ended June 30, 2023 was primarily due to the day one provision for unfunded commitments related to the HSBI acquisition.
OTHER ASSETS
The Company’s balance of non-interest earning cash and due from banks was $105.8 million at June 30, 2023 and $67.2 million at December 31, 2022. The balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the level of cash maintained on hand at our branches, and our reserve requirement among other things, and is subject to significant fluctuation in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to and borrowings from correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank (“FHLB”). Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, the Company will let brokered deposits or other wholesale borrowings roll off as they mature, or might invest excess liquidity in higher-yielding, longer-term bonds.
Total other securities increased $1.8 million to $35.7 million at June 30, 2023 compared to $33.9 million at December 31, 2022. The increase in other securities is related to an increase in stock held at the Federal Reserve Bank. The Company’s net premises and equipment at June 30, 2023 was $178.5 million and $143.5 million at December 31, 2022; an increase of $35.0 million, or 24.4% for the first six months of 2023. The increase is attributed to the HSBI acquisition. Operating right-of-use assets at June 30, 2023 totaled $6.2 million compared to $7.6 million at December 31, 2022, a decrease of $1.4 million. The decrease in operating right-of-use assets is attributed to several lease cancellations in the first quarter of 2023. Financing right-of-use assets at June 30, 2023 totaled $1.7 million compared to $1.9 million at December 31, 2022, a decrease of $232 thousand. Bank-owned life insurance at June 30, 2023 totaled $132.7 million compared to $95.6 million at December 31, 2022, an increase of $37.2 million. A majority of the increase in bank-owned life insurance is attributed to $35.6 million of insurance included in the acquisition of HSBI. Goodwill at June 30, 2023 increased $92.3 million to $272.5 million compared to $180.3 million at December 31, 2022. The HSBI acquisition added approximately $92.1 million in goodwill. Other intangible assets, consisting primarily of the Company’s core deposit intangible (“CDI”), increased by $38.9 million to $73.6 million as of June 30, 2023, compared to $34.6 million at December 31, 2022. The HSBI acquisition added approximately $43.7 million in CDI.
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually, and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. At June 30, 2023, management has determined that no impairment exists.
Other real estate owned increased by $756 thousand, or 15.6%, to $5.6 million at June 30, 2023 as compared to December 31, 2022. The acquisition of HSBI accounted for approximately $857 thousand.
OFF-BALANCE SHEET ARRANGEMENTS
The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. Unused commitments to extend credit totaled $1.122 billion at June 30, 2023 and $706.1 million at December 31, 2022, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 22.4% of gross loans at June 30, 2023 and 18.7% at December 31, 2022. The Company also had undrawn similar standby letters of credit to customers totaling $27.7 million at June 30, 2023 and $14.2 million at December 31, 2022. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of
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unused commitments. For more information regarding the Company’s off-balance sheet arrangements, see Note 7 "Financial Instruments with Off-Balance Risk" to the Consolidated Financial Statements.
In addition to unused commitments to provide credit, the Company is utilizing a $255.0 million letter of credit issued by the FHLB on the Company’s behalf as of June 30, 2023. That letter of credit is backed by loans which are pledged to the FHLB by the Company.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by management on a monthly basis, with various scenarios applied to assess its ability to meet liquidity needs under adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored, and we are focused on maintaining adequate liquidity resources to draw upon should unexpected needs arise.
The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances through FHLB lines of credit, utilize the bank term funding program, or solicit brokered deposits if deposits are not immediately obtainable from local sources. The net availability on lines of credit from the FHLB totaled $2.066 billion at June 30, 2023. Furthermore, funds can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cash for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As of June 30, 2023, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $909.2 million of the Company’s investment balances, compared to $1.066 billion at December 31, 2022. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding federal funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise be the case since it utilizes a letter of credit from the FHLB rather than investment securities for certain pledging requirements.
The Company’s liquidity ratio as of June 30, 2023 was 16.7%, as compared to internal liquidity policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines:
June 30, 2023Policy MaximumPolicy Compliance
Loans to Deposits (including FHLB advances)76.7 %90.0 %In Policy
Net Non-core Funding Dependency Ratio4.6 %20.0 %In Policy
Fed Funds Purchased / Total Assets0.0 %10.0 %In Policy
FHLB Advances / Total Assets0.0 %20.0 %In Policy
FRB Advances / Total Assets3.6 %10.0 %In Policy
Pledged Securities to Total Securities58.2 %90.0 %In Policy
Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.
As of June 30, 2023, cash and cash equivalents were $194.1 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately $1.384 billion at June 30, 2023. Approximately $1.122 billion in loan commitments could fund within the next three months and includes other commitments, primarily commercial and $27.7 million similar letters of credit, at June 30, 2023.
Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs.
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The Company’s primary uses of funds are ordinary operating expenses and shareholder dividends, and its primary source of funds is dividends from the Bank since the Company does not conduct regular banking operations. Both the Company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 1. Business "Supervision and Regulation" in the Company’s 2022 Form 10-K.
DEPOSITS
Deposits are another key balance sheet component impacting the Company’s net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates for the six-month periods ended June 30, 2023 and 2022 are included in the Average Balances, Tax Equivalent Interest and Yield/Rates tables appearing above, under the heading “Net Interest Income and Net Interest Margin.”
Deposit DistributionJune 30, 2023December 31, 2022
($ in thousands)Average
Balance		Average
Rate
Paid		Average
Balance		Average
Rate
Paid
Non-interest-bearing demand deposits$2,070,069 — $1,660,301 — 
Interest bearing deposits:
NOW accounts and other2,085,845 1.16 %1,810,575 0.44 %
Money market accounts1,035,120 1.28 %831,463 0.29 %
Savings accounts640,622 0.16 %535,449 0.04 %
Time deposits826,346 1.90 %590,385 0.58 %
Total interest-bearing deposits4,587,933 1.18 %3,767,872 0.37 %
Total deposits$6,658,002 0.81 %$5,428,173 0.26 %
As of June 30, 2023, average deposits increased by $1.230 billion, or 22.7% to $6.658 billion from $5.428 billion at December 31, 2022. During January 2023, deposits totaling $1.392 billion, net of purchase accounting adjustments were acquired in the HSBI merger. The average cost of interest-bearing deposits and total deposits was 1.18% and 0.81% during at June 30, 2023 compared to 0.37% and 0.26% at December 31, 2022. The increase in the average cost of interest-bearing deposit during the first six months of 2022 compared to December 31, 2022 is attributed to the increase in volume due to the HSBI acquisition coupled with an increase in rates attributable to the higher rate environment.
The Company's estimated uninsured deposits totaled $2.200 billion at June 30, 2023, compared to $2.076 billion at December 31, 2022, representing 33.9% and 37.8% of total deposits at June 30, 2023, and December 31, 2022, respectively. These estimates were derived using the same methodologies and assumptions used for the Bank's regulatory reporting.
OTHER INTEREST-BEARING LIABILITIES
The Company’s non-deposit borrowings may, at any given time, include federal funds purchased from correspondent banks, borrowings from the FHLB, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances, and federal funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.
Total noninterest-bearing deposit liabilities increased by $456.5 million, or 28.0%, in the first six months of 2023. The increase in noninterest-bearing deposits is attributed to the HSBI acquisition. As of June 30, 2023, junior subordinated debentures decreased $16.8 million, net of issuance costs, to $128.2 million. The decrease in subordinated debentures was attributable to the Company's redemption of $24.0 million of its 5.875% fixed-to-floating rate subordinated note due 2028, and the Company's repayment of $2.0 million of its 4.25% fixed-to-floating rate subordinated notes due 2030. The decrease in junior subordinated debentures was partially offset by the addition of $9.0 million, net of purchase accounting
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adjustments, of subordinated debt that the Company acquired as part of the HSBI acquisition. Subordinated debt is discussed more fully in the below Capital section of this report.
BANK TERM FUNDING PROGRAM BORROWINGS
On March 12, 2023, the Federal Reserve Board announced the Bank Term Funding Program ("BTFP"), which offers loans to banks with a term up to one year. The loans are secured by pledging the banks' U.S. treasuries, agency securities, agency mortgage-backed securities, and any other qualifying asset. These pledged securities will be valued at par for collateral purposes. The BTFP offers up to one year fixed-rate term borrowings that are prepayable without penalty.
The Bank participated in the BTFP and had outstanding debt of $280.0 million and pledged securities totaling a fair value of $293.7 million and a letter of credit at the FHLB totaling $250.0 million at June 30, 2023. The securities pledged have a par value of $321.1 million. The Bank's BTFP borrowings, which were drawn between March 15, 2023 and May 2, 2023, bear interest rates ranging from 4.69% to 4.82% and are set to mature one year from their issuance date.
LEASE LIABILITIES
As of June 30, 2023, operating lease liabilities decreased $1.5 million, or 18.7% to $6.4 million from $7.8 million at December 31, 2022. The decrease in operating lease liabilities is attributed to several leases that were cancelled in the first quarter of 2023. Finance lease liabilities decreased $89 thousand, or 4.6% to $1.8 million from $1.9 million at December 31, 2022.
OTHER LIABILITIES
Other liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities increased by $18.2 million, or 50.9%, during the first six months of 2023. The increase is primarily related to the HSBI acquisition which included increases of $4.9 million in federal income taxes, $4.7 million in other expense payable, $1.3 million in escrow payable and $1.4 million in property taxes payable. As of June 30, 2023, accrued interest payable increased $4.6 million, or 139.7% to $8.0 million from $3.3 million at December 31, 2022. A majority of the increase is related to interest accrued on BTFP borrowings from the FRB. The ACL on OBSC exposures increased $750 thousand to $2.1 million at June 30, 2023 when compared to December 31, 2022. The increase in the ACL on OBSC exposures for the six months ended June 30, 2023, was due to the day one provision for unfunded commitments related to the HSBI acquisition and loan growth.
CAPITAL
At June 30, 2023, the Company had total shareholders’ equity of $899.4 million, comprised of $32.3 million in common stock, $41.1 million in treasury stock, $774.1 million in surplus, $279.4 million in undivided profits, and $145.2 million in accumulated comprehensive loss on available-for-sale securities. Total shareholders’ equity at the end of 2022 was $646.7 million. The increase of $252.8 million, or 39.1%, in shareholders’ equity during the first six months of 2023 is primarily attributable to $3.7 million decrease in accumulated comprehensive loss related to the effect of rising interest rates on the market value of our available-for-sale securities and $13.3 million in cash dividends paid. These decreases in total shareholders’ equity were offset by capital added through net earnings of $40.1 million, and $221.5 million added through the HSBI acquisition.
On February 8, 2022, the Company announced the renewal of the 2021 Repurchase Program that previously expired on December 31, 2021. Under the renewed 2021 Repurchase Program, the Company could from time to time, repurchase up to an aggregate of $30 million of the Company’s issued and outstanding common stock in any manner determined appropriate by the Company’s management, less the amount of prior purchases under the program during the 2021 calendar year. The renewed 2021 Repurchase Program was completed in February 2022 when the Company’s repurchases under the program approached the maximum authorized amount.
On March 9, 2022, the Company announced that its Board of Directors authorized a new share repurchase program (the “2022 Repurchase Program”), pursuant to which the Company could purchase up to an aggregate of $30 million in shares of the Company’s issued and outstanding common stock during the 2022 calendar year. Under the program, the Company could, but was not required to, repurchase up to $30 million of shares of its own common stock in any manner determined appropriate by the Company’s management. The actual timing and method of any purchases, the
56
target number of shares and the maximum price (or range of prices) under the program, was determined by management at its discretion and depended on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The 2022 Repurchase Program expired on December 31, 2022.
The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in fiscal year 2023. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our statement of condition or result of operations.
On February 28, 2023, the Company announced that its Board of Directors authorized a new share repurchase program (the "2023 Repurchase Program"), pursuant to which the Company may purchase up to an aggregate of $50 million in shares of the Company's issued and outstanding common stock during the 2023 calendar year. Under the program, the Company may, but is not required to, from time to time, repurchase up to $50 million of shares of its own common stock in any manner determined appropriate by the Company’s management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, will be determined by management at is discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The 2023 Repurchase Program has an expiration date of December 31, 2023.
The Company uses a variety of measures to evaluate its capital adequacy, including risk-based capital and leverage ratios that are calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the requirement of the standards initially adopted by the Basal Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) to include accumulated other comprehensive income in risk-based capital. The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of the dates indicated.
Regulatory Capital Ratios The First BankJune 30,
2023		December 31,
2022		Minimum Required to
be Well Capitalized		Minimum Capital
Required Basel III Fully
Phased In
Common Equity Tier 1 Capital Ratio13.2 %15.6 %6.5 %7.0 %
Tier 1 Capital Ratio13.2 %15.6 %8.0 %8.5 %
Total Capital Ratio14.1 %16.4 %10.0 %10.5 %
Tier 1 Leverage Ratio10.3 %11.1 %5.0 %7.0 %
Regulatory Capital Ratios The First Bancshares, Inc.June 30,
2023		December 31,
2022		Minimum Required to
be Well Capitalized		Minimum Capital
Required Basel III Fully
Phased In
Common Equity Tier 1 Capital Ratio*11.5 %12.7 %N/AN/A
Tier 1 Capital Ratio**11.9 %13.0 %N/AN/A
Total Capital Ratio14.5 %16.7 %N/AN/A
Tier 1 Leverage Ratio9.3 %9.3 %N/AN/A
______________________________________
*The numerator does not include Preferred Stock and Trust Preferred.
**The numerator includes Trust Preferred.
Our capital ratios remain very strong relative to the median for peer financial institutions, and at June 30, 2023 were well above the threshold for the Company and the Bank to be classified as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. Basel III rules require a “capital conservation buffer” for both the Company and the Bank. The capital conservation buffer is subject to a three-year phase-in period that began January 1, 2016 and was fully phased-in on
57
January 1, 2019 at 2.5%. Under this guidance banking institutions with a CETI, Tier 1 Capital Ratio and Total Risk Based Capital above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.
As of June 30, 2023, management believes that each of the Bank and the Company met all capital adequacy requirements to which they are subject. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.
Total consolidated equity capital at June 30, 2023 was $899.4 million, or approximately 11.4% of total assets. The Company currently has adequate capital to meet the minimum capital requirements for all regulatory agencies.
On June 30, 2006, the Company issued $4.1 million of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 (“Trust 2”). The debentures are the sole asset of Trust 2, and the Company is the sole owner of the common equity of Trust 2. Trust 2 issued $4.0 million of Trust Preferred Securities 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 2’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 term Secured Overnight Financing Rate ("SOFR") plus 1.65% plus a tenor spread adjustment of .026161% 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 $6.2 million of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 (“Trust 3”). The Company owns all of the common equity of Trust 3, and the debentures are the sole asset of Trust 3. Trust 3 issued $6.0 million of Trust Preferred Securities 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 3’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 term SOFR plus 1.40% plus a tenor spread adjustment of .026161% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.
In 2018, as a result of the acquisition of FMB Banking Corporation ("FMB"), the Company became the successor to FMB's obligations in respect of $6.1 million of floating rate junior subordinated debentures issued to FMB Capital Trust 1 ("FMB Trust"). The debentures are the sole asset of FMB Trust, and the Company is the sole owner of the common equity of FMB Trust. FMB Trust issued $6.0 million of Trust Preferred Securities to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of FMB Trust's obligations under the preferred securities. The preferred securities issued by the FMB Trust are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2033. Interest on the preferred securities is the three-month term SOFR plus 2.85% plus a tenor spread adjustment of .026161% and is payable quarterly.
On January 1, 2023, as a result of the acquisition of HSBI, the Company became the successor to HSBI's obligations in respect of $10.3 million of subordinated debentures issued to Liberty Shares Statutory Trust II ("Liberty Trust"). The debentures are the sole asset of Liberty Trust, and the Company is the sole owner of the common equity of Liberty Trust. Liberty Trust issued $10.0 million of preferred securities to an investor. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of Liberty Trust's obligations under the preferred securities. The preferred securities issued by the Liberty Trust 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 term SOFR plus 1.48% plus a tenor spread adjustment of .026161% and is payable quarterly.
In accordance with the provisions of ASC 810, Consolidation, the trusts are not included in the consolidated financial statements.
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Subordinated Notes
On April 30, 2018, the Company entered into two Subordinated Note Purchase Agreements pursuant to which the Company sold and issued $24.0 million in aggregate principal amount of 5.875% fixed-to-floating rate subordinated notes due 2028 (the "Notes due 2028") and $42.0 million in aggregate principal amount of 6.40% fixed-to-floating rate subordinated notes due 2033 (the “Notes due 2033”). In May of 2023, the Company redeemed all $24.0 million of the outstanding 5.875% fixed-to-floating rate subordinated notes due 2028.
The Notes due 2033 are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are not subject to redemption at the option of the holder. Principal and interest on the Notes are subject to acceleration only in limited circumstances. The Notes due 2023 are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness, and each Note is pari passu in right to payment with respect to the other Notes. The Notes due 2023 have a fifteen year term, maturing May 1, 2033, and will bear interest at a fixed annual rate of 6.40%, payable quarterly in arrears, for the first ten years of the term. Thereafter, the interest rate will re-set quarterly to an interest rate per annum equal to a benchmark rate (which is expected to be three-month term SOFR plus 3.39% plus a tenor spread adjustment of .026161%)., payable quarterly in arrears. As provided in the Notes due 2033, under specified conditions the interest rate on the Notes due 2033 during the applicable floating rate period may be determined based on a rate other than Three-Month Term SOFR. The Company is entitled to redeem the Notes due 2033, in whole or in part, on any interest payment date on or after May 1, 2028, and to redeem the Notes due 2033 at any time in whole upon certain other specified events.
On September 25, 2020, the Company entered into a Subordinated Note Purchase Agreement with certain qualified institutional buyers pursuant to which the Company sold and issued $65.0 million in aggregate principal amount of its 4.25% Fixed to Floating Rate Subordinated Notes due 2030 (the "Notes due 2030"). The Notes due 2030 are unsecured and have a ten-year term, maturing October 1, 2030, and will bear interest at a fixed annual rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate (which is expected to be the Three-Month Term SOFR plus 412.6 basis points), payable quarterly in arrears. As provided in the Notes due 2030, under specified conditions the interest rate on the Notes due 2030 during the applicable floating rate period may be determined based on a rate other than Three-Month Term SOFR. The Company is entitled to redeem the Notes due 2030, in whole or in part, on any interest payment date on or after October 1, 2025, and to redeem the Notes due 2030 at any time in whole upon certain other specified events.
The Company had $128.2 million of subordinated debt, net of deferred issuance costs $1.8 million and unamortized fair value mark $2.1 million, at June 30, 2023, compared to $145.0 million, net of deferred issuance costs $1.9 million and unamortized fair value mark $593 thousand, at December 31, 2022. The decrease in subordinated debt was attributable to the Company's redemption of $24.0 million of its 5.875% fixed-to-floating rate subordinated not due 2028 and the Company's repayment of $2.0 million of its 4.25% fixed-to-floating rate subordinated notes due 2030 in May of 2023, which resulted in the Company recording a $217 thousand gain on the repurchased debt. The decrease in subordinated debt was partially offset by the addition of $9.0 million, net purchase accounting adjustments, of subordinated debt that the Company acquired as part of the HSBI acquisition.
Reconciliation of Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. This Quarterly Report on Form 10-Q includes operating net earnings; diluted operating earnings per share; net interest income, FTE; pre-tax, pre-provision operating earnings; total interest income, FTE; interest income investment securities, FTE and certain ratios derived from these non-GAAP financial measures. The Company believes that the non-GAAP financial measures included in this Quarterly Report on Form 10-Q allow management and investors to understand and compare results in a more consistent manner for the periods presented herein. The tax equivalent adjustment to net interest income, total interest income, and interest income investment securities recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 25.3% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and believes it enhances the comparability of income and expenses arising from taxable and nontaxable sources. Operating net earnings and diluted operating earnings per share exclude acquisition and charter conversion charges, initial provision for acquired loans, bargain purchase gain and loss on sale of fixed assets, Treasury awards, BOLI income from death proceeds, and contributions related to the Treasury awards. Pre-tax, pre-provision operating earnings excludes acquisition and charter conversion charges, provision for credit losses, bargain purchase gain and loss on sale of fixed assets, Treasury awards,
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BOLI income from death proceeds, and charitable contributions related to Treasury awards. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented, and other bank holding companies may define or calculate these measures differently. The most comparable GAAP measures to these measures are earnings per share, net interest income, earnings, total interest income, and average yield on investment securities, respectively. These non-GAAP financial measures should not be considered in isolation and do not purport to be an alternative to the efficiency ratio, net income, earnings per share, net interest income, net interest margin, average yield on investment securities, average yield on all earning assets, common equity, book value per common share or other GAAP financial measures as a measure of operating performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided below.
Operating Net Earnings
($ in thousands)Three Months Ended June 30, 2023Three Months Ended June 30, 2022Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Net income available to common shareholders$23,779 $15,753 $40,050 $32,582 
Acquisition and charter conversion charges4,101 1,172 7,894 1,580 
Tax on acquisition and charter conversion charges(1,037)(297)(1,997)(400)
Initial provision for acquired loans— — 10,727 — 
Tax on initial provision for acquired loans— — (2,714)— 
Bargain purchase gain and loss on sale of fixed assets— (165)— (165)
Tax on bargain purchase gain and loss on sale of fixed assets— 42 — 42 
Treasury awards— (170)— (872)
Tax on Treasury awards— 42 — 220 
BOLI income from death proceeds— — — (1,630)
Contributions related to Treasury awards— 165 — 165 
Tax on contributions related to Treasury awards— (42)— (42)
Net earnings available to common shareholders, operating$26,843 $16,500 $53,960 $31,480 
Diluted Operating Earnings per Share
($ in thousands)Three Months Ended June 30, 2023Three Months Ended June 30, 2022Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Diluted earnings per share$0.75 $0.76 $1.27 $1.57 
Acquisition and charter conversion charges0.13 0.06 0.24 0.08 
Tax on acquisition and charter conversion charges(0.03)(0.02)(0.05)(0.02)
Initial provision for acquired loans— — 0.34 — 
Tax on initial provision for acquired loans— — (0.09)— 
Bargain purchase gain and loss on sale of fixed assets— (0.01)— (0.01)
Tax on bargain purchase gain and loss on sale of fixed assets— — — — 
Effect of Treasury awards— (0.01)— (0.04)
Tax on Treasury awards— 0.01 — 0.01 
BOLI income from death proceeds— — — (0.08)
Contributions related to Treasury awards— 0.01 — 0.01 
Tax on contributions related to Treasury awards— — — — 
Diluted earnings per share, operating$0.85 $0.80 $1.71 $1.52 
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Net Interest Income, Fully Tax Equivalent
($ in thousands)Three Months Ended June 30, 2023Three Months Ended June 30, 2022Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Net interest income$66,030$42,101$130,956 $80,740 
Tax exempt investment income(2,948)(2,780)(5,896)(5,202)
Taxable investment income3,9463,7217,892 6,963 
Net interest income, FTE$67,028$43,042$132,952 $82,501 
Average earning assets$7,019,740$5,573,163$7,084,842 $5,620,845 
Net interest margin, FTE3.82 %3.09 %3.75 %2.94 %
Pre-Tax Pre-Provision Operating Earnings
($ in thousands)Three Months Ended June 30, 2023Three Months Ended June 30, 2022Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Earnings before income taxes$30,304 $19,210$51,172 $40,416 
Acquisition and charter conversion charges4,101 1,1727,894 1,580 
Provision for credit loss1,250 600 12,250 600 
Bargain purchase gain and loss on sale of fixed assets— (165)— (165)
Treasury awards— (171)— (872)
BOLI income from death proceeds— —— (1,630)
Contributions related to Treasury awards— 165 — 165 
Pre-Tax, Pre-Provision Operating Earnings$35,655 $20,811$71,316 $40,094 
Total Interest Income, Fully Tax Equivalent
($ in thousands)Three Months Ended June 30, 2023Three Months Ended June 30, 2022Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Total interest income$86,194$45,847$166,532 $88,588 
Tax-exempt investment income(2,948)(2,780)(5,896)(5,202)
Taxable investment income3,9463,7217,892 6,963 
Total interest income, FTE$87,192$46,788$168,528 $90,349 
Yield on average earning assets, FTE4.97 %3.36 %4.76 %3.21 %
Interest Income Investment Securities, Fully Tax Equivalent
($ in thousands)Three Months Ended June 30, 2023Three Months Ended June 30, 2022Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Interest income investment securities$10,815$11,152$22,521 $19,726 
Tax-exempt investment income(2,948)(2,780)(5,896)(5,202)
Taxable investment income3,9463,7217,892 6,963 
Interest income investment securities, FTE$11,813$12,093$24,517 $21,487 
Average investment securities$1,943,908$2,127,084$1,985,892 $2,012,828 
Yield on investment securities, FTE2.43 %2.27 %2.47 %2.13 %
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.
To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios every month. The model imports relevant information for the Company’s financial instruments and incorporates management’s assumptions on pricing, duration, and optionality for anticipated new volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).
The following table shows the estimated changes in net interest income at risk and market value of equity along with policy limits:
June 30, 2023Net Interest Income at RiskMarket Value of Equity
Change in Interest
Rates
% Change
from Base		Policy Limit% Change
from Base		Policy Limit
Up 400 bps(2.6)%(20.0)%(7.3)%(40.0)%
Up 300 bps(0.1)%(15.0)%(3.3)%(30.0)%
Up 200 bps1.3 %(10.0)%(0.3)%(20.0)%
Up 100 bps1.2 %(5.0)%1.1 %(10.0)%
Down 100 bps(0.8)%(5.0)%(2.6)%(10.0)%
Down 200 bps(4.2)%(10.0)%(9.1)%(20.0)%
We use seven standard interest rate scenarios in conducting our 12-month net interest income simulations: “static,” upward shocks of 100, 200, 300 and 400 basis points, and downward shocks of 100, and 200 basis points. Pursuant to policy guidelines, we typically attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock. As of June 30, 2023, the Company had the following estimated net interest income sensitivity profile, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:
June 30, 2023Net Interest Income at Risk – Sensitivity Year 1
($ in thousands) -200 bp-100 bpSTATIC +100 bp+200 bp+300 bp+400 bp
Net Interest Income238,176 246,556 248,517 251,513 251,644 248,292 242,086 
Dollar Change(10,341)(1,961)2,996 3,127(225)(6,431)
NII @ Risk - Sensitivity Y1(4.2)%(0.8)%1.2 %1.3 %(0.1)%(2.6)%
Policy Limits(10.0)%(5.0)%(5.0)%(10.0)%(15.0)%(20.0)%
If there were an immediate and sustained downward adjustment of 200 basis points in interest rates, all else being equal, net interest income over the next twelve months would likely be approximately $10.3 million lower than in a stable interest rate scenario, for a negative variance of 4.2%.
Net interest income would likely improve by $3.1 million, or 1.3%, if interest rates were to increase by 200 basis points relative to a stable interest rate scenario, with the favorable variance expanding the higher interest rates rise. The initial increase in rising rate scenarios will be limited to some extent by the fact that some of our variable-rate loans are
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currently at rate floors, resulting in a re-pricing lag while base rates are increasing to floored levels, but the Company would expect to benefit from a material upward shift in the yield curve.
The Company’s one-year cumulative GAP ratio is approximately 169.0%, which means that there are more assets repricing than liabilities within the first year. The Company is asset sensitive. These results are based on cash flows from assumptions of assets and liabilities that reprice (maturities, likely calls, prepayments, etc.). Typically, the net interest income of asset-sensitive financial institutions should improve with rising rates and decrease with declining rates.
If interest rates change in the modeled amounts, our assets and liabilities may not perform as anticipated. Measuring interest rate risk has inherent limitations including model assumptions. For example, changes in market indices as modeled in conjunction with changes in the shapes of the yield curves could result in different net interest income. We consider many factors in monitoring our interest rate risk, and management adjusts strategies for the balance sheet and earnings as needed.
In addition to the net interest income simulations shown above, we run stress scenarios modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits, which flowed into the Company in the most recent economic cycle, and potential unfavorable movement in deposit rates relative to yields on earning assets. Even though net interest income will naturally be lower with no balance sheet growth, the rate-driven variances projected for net interest income in a static growth environment are similar to the changes noted above for our standard projections. When a greater level of non-maturity deposit runoff is assumed or unfavorable deposit rate changes are factored into the model, projected net interest income in declining rate and flat rate scenarios does not change materially relative to standard growth projections. However, the benefit we would otherwise experience in rising rate scenarios is minimized and net interest income remains relatively flat.
The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate risk. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at projected replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time as the characteristics of the Company’s balance sheet evolve and interest rate and yield curve assumptions are updated.
The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and management’s best estimates. The table below shows estimated changes in the Company’s EVE as of June 30, 2023, under different interest rate scenarios relative to a base case of current interest rates:
June 30, 2023Balance Sheet Shock
($ in thousands)-200 bp-100 bpSTATIC
(Base)		+100 bp+200 bp+300 bp+400 bp
Market Value of Equity1,376,1681,474,8631,514,6371,530,5561,510,7521,464,0641,404,833
Change in EVE from base(138,469)(39,774)15,919(3,885)(50,573)(109,804)
% Change(9.1)%(2.6)%1.1 %(0.3)%(3.3)%(7.3)%
Policy Limits(20.0)%(10.0)%(10.0)%(20.0)%(30.0)%(40.0)%
We also run stress scenarios for EVE to simulate the possibility of higher loan prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2023, (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) and 15d-15(e) promulgated under the Exchange Act. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the Evaluation Date, 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.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended June 30, 2023 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings in the normal course of business. Management does not believe, based on currently available information, that the outcome of any such proceedings will have a material adverse effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes in the Risk Factors described in the Company's 2022 Annual Report on Form 10-K other than as set out in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, in Item 1A of Part II.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
PeriodCurrent Program
Total
Number of
Shares
Purchased		Average
Price Paid
Per Share		Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs		Maximum
Approximate Dollar
Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
(in thousands) (a)
April 1 - April 30— $— — $50,000 
May 1 - May 31— — — 50,000 
June 1 - June 30— — — 50,000 
Total— $— — 
______________________________________
(a)On February 28, 2023, the Company announced that its Board of Directors authorized a new share repurchase program (the "2023 Repurchase Program"), pursuant to which the Company may purchase up to an aggregate of $50 million in shares of the Company's issued and outstanding common stock. The 2023 Repurchase Program expires on December 31, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
During the quarter ended June 30, 2023, none of the Company's directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement."

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Table of Contents
ITEM 6. EXHIBITS
(a)Exhibits
Exhibit No.Description
2.1
Agreement and Plan of Merger, dated as of April 26, 2022, by and between The Fist Bancshares, Inc. and Beach Bancorp, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on May 2, 2022).
2.2
Agreement and Plan of Merger, dated as of July 27, 2022, by and between The First Bancshares, Inc. and Heritage Southeast Bancorporation, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on August 1, 2022).
3.1
Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on July 28, 2016).
3.2
Amendment to the Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2018).
3.3
Amendment to the Amended and Restated Articles of Incorporation of the First Bancshares, Inc. (as incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on May 26, 2023).
3.4
Amended and Restated Bylaws of The First Bancshares, Inc. effective as of March 17, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on March 18, 2016).
3.5
Amendment No. 1 to the Amended and Restated Bylaws of The First Bancshares, Inc. effective as of May 7, 2020 (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q filed on May 11, 2020).
4.1
Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement No. 333-220491 on Form S-3 filed on September 15, 2017).
4.2
Form of Global Subordinated Note for The First Bancshares, Inc. 5.875% Fixed-to-Floating Rate Subordinated Notes Due 2028 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 1, 2018).
4.3
Form of Global Subordinated Note for The First Bancshares, Inc. 6.4% Fixed-to-Floating Rate Subordinated Notes Due 2033 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May 1, 2018).
4.4
Indenture by and between The First Bancshares, Inc. and U.S. Bank National Association, dated September 25, 2020 (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on September 25, 2020).
4.5
Form of Global Subordinated Note for The First Bancshares, Inc. 4.25% Fixed-to-Floating Rate Subordinated Notes Due 2030 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on September 25, 2020).
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
________________________________________________
* Filed herewith.
** Furnished herewith.
66
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)
August 9, 2023/s/ M. RAY (HOPPY) COLE, JR.
M. Ray (Hoppy) Cole, Jr.
Chief Executive Officer and President (Principal Executive Officer), Chairman of the Board
(Date)
August 9, 2023/s/ DONNA T. (DEE DEE) LOWERY
Donna T. (Dee Dee) Lowery, Executive
Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)
(Date)
67

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