Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐
TRANSITION 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
THE FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Mississippi
64-0862173
(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 class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00
FBMS
The 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 ☑ No ☐
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).
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. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, $1.00 par value, 21,669,316 shares issued and 21,019,709 outstanding as of November 2, 2021.
The First Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2021
Index
Part I. Financial Information
Item 1.
Financial Statements
3
Consolidated Balance Sheets—Unaudited at September 30, 2021
Consolidated Statements of Income—Unaudited
4
Consolidated Statements of Comprehensive Income—Unaudited
5
Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
6
Consolidated Statements of Cash Flows—Unaudited
7
Notes to Consolidated Financial Statements—Unaudited
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
53
Item 4.
Controls and Procedures
55
Part II. Other Information
Legal Proceedings
56
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
57
Signatures
58
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)
September 30,
December 31,
2021
2020
ASSETS
Cash and due from banks
$
113,170
137,684
Interest-bearing deposits with banks
544,126
424,870
Total cash and cash equivalents
657,296
562,554
Debt securities available-for-sale, at fair value
1,463,255
1,022,182
Other securities
22,225
27,475
Total securities
1,485,480
1,049,657
Loans held for sale
8,540
21,432
Loans held for investment
2,960,919
3,123,678
Allowance for credit losses (1)
(32,418)
(35,820)
Net loans held for investment
2,928,501
3,087,858
Interest receivable
23,144
26,344
Premises and equipment
116,875
114,823
Operating lease right-of-use assets
4,245
5,969
Finance lease right-of-use assets
2,474
2,658
Cash surrender value of bank-owned life insurance
87,469
73,732
Goodwill
156,944
Other real estate owned
2,580
5,802
Other assets
38,336
44,987
Total assets
5,511,884
5,152,760
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing
596,126
571,079
Interest-bearing
4,076,415
3,644,201
Total deposits
4,672,541
4,215,280
Interest payable
1,376
2,134
Borrowed funds
—
114,647
Subordinated debentures
144,650
144,592
Operating lease liabilities
4,335
6,031
Finance lease liabilities
2,140
2,281
Allowance for credit losses on off-balance sheet credit exposures (1)
718
Other liabilities
17,441
22,980
Total liabilities
4,843,201
4,507,945
Shareholders' equity:
Common stock, par value $1 per share, 40,000,000 shares authorized;21,669,504 shares issued at September 30, 2021, and 21,598,993 shares issued at December 31, 2020, respectively
21,670
21,599
Additional paid-in capital
458,512
456,919
Retained earnings
193,800
154,241
Accumulated other comprehensive income
13,632
25,816
Treasury stock, at cost, 649,607 shares at September 30, 2021 and 483,984 shares at December 31, 2020
(18,931)
(13,760)
Total shareholders' equity
668,683
644,815
Total liabilities and shareholders' equity
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except earnings and dividends per share)
Three Months Ended
Nine Months Ended
Interest and dividend income:
Interest and fees on loans
37,480
40,999
114,368
117,597
Interest and dividends on securities:
Taxable interest and dividends
5,033
3,433
12,641
10,815
Tax exempt interest
1,905
1,877
5,748
4,985
Interest on federal funds sold and interest bearing deposits in other banks
17
29
103
337
Total interest income
44,435
46,338
132,860
133,734
Interest expense:
Interest on deposits
2,588
4,912
9,752
15,544
Interest on borrowed funds
1,819
1,453
5,801
4,973
Total interest expense
4,407
6,365
15,553
20,517
Net interest income
40,028
39,973
117,307
113,217
Provision for credit losses
6,921
21,628
Net interest income after provision for credit losses
33,052
91,589
Non-interest income:
Service charges on deposit accounts
1,846
1,779
5,363
5,289
Gain on securities
11
107
278
Gain on acquisition
7,023
(Loss) gain on sale of premises and equipment
(397)
(383)
461
Other
8,126
6,983
22,794
17,897
Total non-interest income
9,586
8,794
27,881
30,948
Non-interest expense:
Salaries and employee benefits
16,246
15,494
48,337
44,589
Occupancy and equipment
3,922
3,826
11,614
9,943
Acquisition and integration charges
238
3,273
8,880
7,378
23,814
20,640
Total non-interest expense
29,053
26,936
83,770
78,445
Income before income taxes
20,561
14,910
61,418
44,092
Income tax expense
4,429
2,993
13,042
Net income
16,132
11,917
48,376
37,171
Basic earnings per share
0.77
0.56
2.30
1.81
Diluted earnings per share
0.76
0.55
2.28
1.80
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income:
Unrealized holding gains (losses) arising during the period on available-for-sale securities
(7,306)
368
(16,204)
19,983
Reclassification adjustment for gains included in net income
(11)
(32)
(107)
(278)
(7,317)
336
(16,311)
19,705
Income tax benefit (expense)
1,852
(85)
4,127
(4,993)
Other comprehensive income (loss)
(5,465)
251
(12,184)
14,712
Comprehensive income
10,667
12,168
36,192
51,883
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($ in thousands except per share data, unaudited)
Accumulated
Additional
Common Stock
Paid-in
Retained
Comprehensive
Treasury Stock
Shares
Amount
Capital
Earnings
Income
Total
Balance, January 1, 2020
18,996,948
18,997
409,805
110,460
10,089
(194,682)
(5,693)
543,658
8,311
Other comprehensive income
5,742
Dividends on common stock, $0.10 per share
(1,885)
Issuance of restricted stock grants
60,680
61
(61)
Repurchase of restricted stock for payment of taxes
(10,991)
(367)
(378)
Compensation expense
478
Balance, March 31, 2020
19,046,637
19,047
409,855
116,886
15,831
555,926
16,943
8,719
(2,131)
Issuance of common shares for SWG acquisition
2,546,967
2,547
45,311
47,858
(2,652)
(3)
(56)
(59)
3,750
(4)
Restricted stock grants forfeited
(4,762)
(5)
539
Balance, June 30, 2020
21,589,940
21,590
455,650
131,698
24,550
627,795
(2,141)
13,259
13
(13)
(500)
547
Balance, September 30, 2020
21,602,699
21,603
456,184
141,474
24,801
638,369
Balance, January 1, 2021
21,598,993
(483,984)
16,644
Common stock repurchased
(165,623)
(5,171)
Other comprehensive loss
(9,615)
Dividends on common stock, $0.13 per share
(2,723)
84,578
85
(1)
1
(14,720)
(15)
(426)
(441)
440
Balance, March 31, 2021
21,668,351
21,668
456,849
168,162
16,201
(649,607)
643,949
15,600
2,896
Dividends on common stock, $0.14 per share
(2,942)
3,000
(1,021)
549
Balance, June 30, 2021
21,670,330
457,396
180,820
19,097
660,052
Dividends on common stock, $0.15 per share
(3,152)
(326)
(12)
1,128
Balance, September 30, 2021
21,669,504
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion
10,453
6,393
Loss on sale or writedown of ORE
778
1,150
Securities gain
Acquisition gain
(7,023)
(Gain) loss on disposal of premises and equipment
383
(461)
Restricted stock expense
2,117
1,564
Increase in cash value of life insurance
(1,407)
(1,139)
Federal Home Loan Bank stock dividends
(26)
(118)
Residential loans originated and held for sale
(182,371)
(232,191)
Proceeds from sale of residential loans held for sale
195,263
220,665
Changes in:
3,200
(8,663)
(758)
(188)
Operating lease liability
(1,696)
(95)
Other, net
2,667
(2,231)
Net cash provided by operating activities
76,872
36,184
Cash flows from investing activities:
Maturities, calls and paydowns of available-for-sale securities
174,987
152,873
Proceeds from sales of securities available-for-sale securities
579
Purchases of available-for-sale securities
(636,825)
(241,057)
Redemptions of other securities, net
5,276
351
Net decrease (increase) in loans
160,700
(161,535)
Net changes in premises and equipment
(6,448)
(6,034)
Proceeds from sale of other real estate owned
4,221
3,024
Proceeds from the sale of land
1,416
Purchase of bank-owned life insurance
(12,330)
(5,682)
Cash received in excess of cash paid for acquisition
29,245
Net cash used in investing activities
(310,419)
(226,820)
Cash flows from financing activities:
Increase in deposits
457,443
676,223
Net decrease in borrowed funds
(114,647)
(107,992)
Principal payments on finance lease liabilities
(141)
(137)
Dividends paid on common stock
(8,682)
(6,063)
Cash paid to repurchase common stock
Issuance of subordinated debt, net
63,914
Payment of subordinated debt issuance costs
(60)
(453)
(437)
Net cash provided by financing activities
328,289
625,508
Net change in cash and cash equivalents
94,742
434,872
Beginning cash and cash equivalents
168,864
Ending cash and cash equivalents
603,736
Supplemental disclosures:
Loans transferred to other real estate
1,780
1,752
86
78
Dividends on restricted stock grants
135
94
Stock issued in connection with SWG acquisition
Lease liabilities arising from obtaining right-of-use assets
14
3,162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2021
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 nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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, 2020.
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, A National Banking Association (the “Bank” or “The First”).
At September 30, 2021, the Company had approximately $5.512 billion in assets, $2.929 billion in net loans held for investment (“LHFI”), $4.673 billion in deposits, and $668.7 million in shareholders’ equity. For the nine months ended September 30, 2021, the Company reported net income of $48.4 million.
On February 25, 2021, the Company paid a cash dividend in the amount of $0.13 per share to shareholders of record as of the close of business on February 10, 2021. On May 21, 2021, the Company paid a cash dividend in the amount of $0.14 per share to shareholders of record as of the close of business on May 10, 2021. On July 15, 2021, the Company paid a cash dividend of $0.15 per share to be paid on its common stock on August 25, 2021 to shareholders of record as of the close of business on August 10, 2021. On October 21, 2021, the Company announced that its Board of Directors declared a cash dividend of $0.16 per share to be paid on its common stock on November 26, 2021 to shareholders of record as of the close of business on November 10, 2021.
In August 2021 the Bank, applied to the Mississippi Department of Banking and Consumer Finance to convert from a national association to a Mississippi state-chartered bank. If approved and the conversion is completed, the Mississippi Department of Banking will be the Bank's primary regulator, and the Federal Reserve Bank of Atlanta will be the Bank's primary federal regulator. The application is currently being reviewed.
NOTE 3 – ACCOUNTING STANDARDS
Effect of Recently Adopted Accounting Standards
Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (“ASC 326”) introduces guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities (“AFS”). For assets held at amortized cost basis, Accounting Standards Codification (“ASC”) 326 eliminates the current incurred loss approach and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. This guidance also changes the accounting for purchased loans and debt securities with credit deterioration.
ASC 326 also applies to off-balance sheet credit (“OBSC”) exposures such as unfunded loan commitments, letters of credit and other financial guarantees that are not unconditionally cancellable by the Company. 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. Expected credit losses related to OBSC exposures are presented as a liability.
The allowance for loan credit losses (“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 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 recoveries 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 probability of default (“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 loss given default (“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 LDG rate, 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.
9
The model then uses these inputs in a non-discounted version of discounted cash flow (“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.
The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. These purchased credit deteriorated (“PCD”) loans are recorded at the amount paid. It is the Company’s policy that a loan meets this definition if it is adversely risk rated as Non-Pass (Special Mention, Substandard, Doubtful or Loss) including non-accrual loans, as well as loans identified as TDR’s. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.
Upon adoption of ASC 326, the Company elected to maintain segments of loans that were previously accounted for under ASC 310-30 Accounting for Purchased Loans with Deteriorated Credit Quality and will continue to account for these segments as a unit of account unless the loan is collateral dependent. PCD loans that are collateral dependent will be assessed individually. Loans are only removed from the existing segments if they are written off, paid off, or sold. Upon adoption of ASC 326, the allowance for credit losses was determined for each segment and added to the band’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the segment and the new amortized cost basis is the noncredit premium or discount, which will be amortized into interest income over the remaining life of the segment. Changes to the allowance for credit losses after adoption are recorded through provision expense.
The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. Upon adoption of ASC 326, the Company increased the ACL by $1.1 million and adjusted the amortized cost basis of the PCD assets. The remaining noncredit discount of approximately $685 thousand (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021.Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. Loans classified as nonaccrual, troubled debt restructuring (“TDRs”), greater than 90 days past due and still accruing interest, and PCD loans that are collateral dependent will be reviewed quarterly for potential individual assessment. Any loan classified as nonaccrual, TDR, or PCD that is not determined to need individual assessment will be evaluated collectively within its respective segment.
ASC 326 requires that a loan be evaluated for losses individually and reserved for separately, if the loan does not share similar risk characteristics to any other loan segments. The Company’s process for determining which loans require specific evaluation follows the standard and is two-fold. All non-performing loans, including nonaccrual loans, loans considered to be TDRs or PCDs, are evaluated to determine if they meet the definition of collateral dependent under the new standard. These are loans where no more payments are expected from the borrower, and foreclosure or some other collection action is probable. Secondly, all non-performing loans that are not considered to be collateral dependent, but are 90 days or greater past due and/or have a balance of $500 thousand or greater, will be individually reviewed to determine if the loan displays similar risk characteristic to substandard loans in the related segment.
TDRs are loans for which the contractual terms on the loan have been modified and both of the following conditions exist: (1) the borrower is experiencing financial difficulty and (2) the restructuring constitutes a concession. Concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company assesses all loan modifications to determine whether they constitute a TDR.
The allowance for OBSC exposures was determined using the same methodology that is applied to LHFI. Utilization rates are determined based on historical usage.
10
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2021. As of December 31, 2020, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material.
Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities totaled $5.7 million at December 31, 2020 and is excluded from the estimate of credit losses.
The Company made the following policy elections related to the adoption of the guidance in ASC 326:
The adoption of ASC 326 increased the allowance for credit losses on loans by approximately $397 thousand and OBSC exposures by approximately $718 thousand at January 1, 2021, as shown below. The increase in the allowance for credit losses on loans includes the $1.1 million increase for PCD loans as discussed above, less a decrease in ACL for certain pooled loans:
January 1,
As Reported
Pre-ASC 326
Transition
Under
Assets:
Adoption
Adjustment
ASC 326
Loans
Commercial, financial, and agriculture
6,214
(1,153)
5,061
Commercial real estate
24,319
(4,032)
20,287
Consumer real estate
4,736
5,629
10,365
Consumer installment
551
(47)
504
Allowance for credit losses on loans
35,820
397
36,217
Allowance for credit losses on OBSC exposures
Total allowance for credit losses
1,115
36,935
The transition had no net impact to retained earnings because the allowance for OBSC exposures was offset by decrease in the allowance for certain pooled loans.
New Accounting Standards That Have Not Yet Been Adopted
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 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 guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.
NOTE 4 – BUSINESS COMBINATIONS
Acquisitions
Cadence Bank Branches
On September 2, 2021, The First entered into a definitive agreement to acquire seven Cadence Bank, N.A. (“Cadence”) branches in Northeast Mississippi. The divesture of these branches is a result of the joint Letter of Agreement (“LOA”) entered into between BancorpSouth Bank (“BancorpSouth”) and Cadence with the United States Department of Justice’s Antitrust Division (“DOJ”) in connection with the proposed merger of BancorpSouth and Cadence.
It is expected that the First will assume approximately $450 million in deposits for a premium of $1 million, acquire approximately $42 million in loans at par value, acquire the real estate associated with the seven Cadence branches at their appraised value, and acquire other assets associated with the branches at book value. The definitive purchase agreement provides that the consummation of the transaction must occur within 180 days following the BancorpSouth and Cadence merger. However, this transaction is expected to close in the fourth quarter of 2021, subject to the satisfaction of customary closing conditions, including the consummation of the BancorpSouth and Cadence merger and receipt of all necessary regulatory approvals. The First intends to make offers of employment to current branch employees upon the close of the transaction and will be providing additional information to customers of the branches slated for divestiture.
12
Expenses associated with the branch acquisition were $5 thousand for the three-month period ended September 30, 2021. These costs included charges associated with due diligence as well as legal and consulting expenses, which have been expensed as incurred. The Company will incur additional expenses in connection with the closing, including additional legal and consulting expenses.
NOTE 5 – EARNINGS APPLICABLE TO COMMON SHAREHOLDERS
Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock outstanding, such as restricted stock grants. There were no anti-dilutive common stock equivalents excluded in the calculations.
The following tables disclose the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common shareholders ($ in thousands, except per share amount):
For the Three Months Ended
September 30, 2020
Net Income
Per
(Numerator)
(Denominator)
Share Data
21,020,128
21,405,309
Effect of dilutive shares:
Restricted stock grants
190,763
108,400
21,210,891
21,513,709
For the Nine Months Ended
21,015,996
20,521,779
186,661
125,466
21,202,657
20,647,245
The Company granted 84,578 shares and 60,680 shares of restricted stock in the first quarter of 2021 and 2020, respectively. The Company granted 3,000 shares and 3,750 shares of restricted stock in the second quarter of 2021 and 2020, respectively. The Company did not grant any restricted stock in the third quarter of 2021 and granted 13,259 shares in the third quarter of 2020.
NOTE 6 – COMPREHENSIVE INCOME
As presented in the Consolidated Statements of Comprehensive Income, 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 September 30, 2021, and December 31, 2020 these financial instruments consisted of the following:
December 31, 2020
Fixed Rate
Variable Rate
Commitments to make loans
75,040
14,318
97,738
16,203
Unused lines of credit
188,156
271,516
157,006
195,221
Standby letters of credit
2,194
4,182
11,486
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 0.5% to 18.0% and maturities ranging from approximately 1 year to 30 years.
The Company adopted ASC 326, effective January 1, 2021, which requires the Company to estimate expected credit losses for OBSC exposures which are not unconditionally cancellable. 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 September 30, 2021. 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. Upon adoption of ASC 326, the Company recorded an ACL on unfunded commitments of $718 thousand. The Company recorded no provision for credit losses on OBSC exposures for the three and nine months period ended September 30, 2021.
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.
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 September 30, 2021 and December 31, 2020:
15
Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:
Fair Value Measurements
Significant
Observable
Unobservable
Carrying
Estimated
Quoted Prices
Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
Financial Instruments:
Cash and cash equivalents
Securities available-for-sale:
U.S. Treasury
36,831
Obligations of U.S. government agencies and sponsored entities
190,134
Municipal securities
560,654
541,289
19,365
Mortgage-backed securities
644,459
Corporate obligations
31,177
30,951
226
Loans, net
2,927,915
Accrued interest receivable
5,848
17,296
Noninterest-bearing deposits
Interest-bearing deposits
4,051,141
155,655
Accrued interest payable
Quoted
Prices
9,383
100,170
480,374
460,248
20,126
401,232
31,023
30,788
235
3,089,318
5,690
20,654
Non-interest-bearing deposits
3,647,845
145,289
FHLB and other borrowings
16
Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Quoted Prices in
Active Markets
Significant Other
For
Identical Assets
Available-for-sale
Obligations of U.S. Government agencies and sponsored entities
Total available-for-sale
1,406,833
19,591
992,438
20,361
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
Balance, January 1
408
Paydowns
(64)
(273)
Unrealized gain included in comprehensive income
106
Balance at September 30
241
Municipal Securities
10,345
Purchases
4,209
14,540
Maturities, calls and paydowns
(4,474)
(3,223)
Transfer to level 2
(6,405)
Unrealized (loss) included in comprehensive income
(496)
15,257
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 September 30, 2021 and December 31, 2020. The following tables present quantitative information about recurring Level 3 fair value measurements ($ in thousands):
Significant Unobservable
Trust Preferred Securities
Valuation Technique
Range of Inputs
Discounted cash flow
Probability of default
0.99% - 2.39%
1.08% - 2.48%
Discount Rate
0.50% - 2.50%
0.50% - 2.45%
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 September 30, 2021 and December 31, 2020.
Identical Assests
Collateral dependent loans
4,511
Impaired loans
15,107
NOTE 9 - SECURITIES
On January 1, 2021, the Company adopted ASC 326, which made changes to the accounting for AFS debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires financial assets measured at amortized cost, including held-to-maturity debt securities, to measure an expected credit loss under CECL methodology that requires consideration of a broader range of reasonable and supportable information to inform credit losses estimates. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 3 “Accounting Standards” to the Consolidated Financial Statements for additional information.
All securities information presented as of September 30, 2021 is in accordance with ASC 326. All securities information presented prior to January 1, 2021 is in accordance with previous applicable GAAP. See the Company’s prior accounting policies in Note 1 “Summary of Significant Accounting Policies” of the 2020 Form 10-K.
18
ASC 326 makes targeted improvements to the accounting for credit losses on securities AFS. The concept of other-than-temporarily impaired has been replaced with the allowance for credit losses. Unlike securities held-to-maturity, securities available-for-sale are evaluated on an individual level and pooling of securities is not allowed.
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:
At September 30, 2021, the results of the analysis did not identify any securities where the decline was indicative of credit loss factors; therefore, no DCF analysis was performed and 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. At September 30, 2021, accrued interest receivable totaled $5.8 million for securities AFS 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 September 30, 2021.
The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of AFS securities at September 30, 2021 and December 31, 2020:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Available-for-sale securities:
36,769
155
93
188,372
378
Tax-exempt and taxable obligations of states and municipal subdivisions
552,023
11,873
3,242
Mortgage-backed securities - residential
409,548
5,611
1,755
413,404
Mortgage-backed securities - commercial
228,392
4,087
1,424
231,055
29,902
1,280
1,445,006
25,146
6,897
19
9,063
320
Obligations of U.S. government agencies sponsored entities
97,107
3,130
67
464,348
16,326
300
228,257
8,206
42
236,421
158,784
6,087
60
164,811
30,063
976
987,622
35,045
485
The amortized cost and fair value of debt securities at September 30, 2021 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.
Available-for-Sale
Due less than one year
39,457
39,747
Due after one year through five years
150,510
155,127
Due after five years through ten years
363,236
366,264
Due greater than ten years
253,863
257,658
The amortized costs of securities pledged as collateral, to secure public deposits and for other purposes, was $763.4 million and $576.0 million at September 30, 2021 and December 31, 2020, respectively.
The following table summarizes available-for-sale securities with unrealized losses position for which an allowance for credit losses has not been recorded at September 30, 2021 and that are not deemed to be other than temporarily impaired as of December 31, 2020. The securities are aggregated by major security type and length of time in a continuous unrealized loss position:
Losses < 12 Months
Losses 12 Months or >
20,481
Obligations of U.S government agencies and sponsored entities
70,889
277
5,411
101
76,300
Tax-exempt and taxable obligations of state and municipal subdivisions
204,957
2,917
4,987
325
209,944
238,477
1,748
486
238,963
119,357
1,408
1,555
120,912
654,161
6,443
12,481
454
666,642
20
6,593
65
326
6,919
10,193
30,202
30,213
10,134
3,596
31
13,730
5,217
40
5,257
62,339
444
3,973
41
66,312
At September 30, 2021 and December 31, 2020, the Company’s securities portfolio consisted of 254 and 71 securities, respectively, which were in an unrealized loss position. AFS 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 September 30, 2021. The Company did not consider these investments to be other-than-temporarily impaired at December 31, 2020.
NOTE 10 – LOANS
On January 1, 2021, the Company adopted ASU 326. The FASB issued ASU 326 to replace the incurred loss model for loans and other financial assets with an expected loss model and requires consideration of a wider range of reasonable and supportable information to determine credit losses. In accordance with ASC 326, the Company has developed an ACL methodology, which replaces its previous allowance for loan losses methodology. All loan information presented as of September 30, 2021 is in accordance with ASC 326. All loan information presented prior to January 1, 2021 is in accordance with previous applicable GAAP. See the Company’s prior accounting policies in Note 1 “Summary of Significant Accounting Policies” of the 2020 Form 10-K.
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 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.
21
The composition of the loan portfolio as of September 30, 2021 and December 31, 2020, is summarized below:
Mortgage loans held for sale
Total LHFS
Commercial, financial and agriculture (1)
449,098
579,443
1,650,461
1,652,993
824,513
850,206
36,847
41,036
Total loans
Less allowance for credit losses
Net LHFI
Accrued interest receivable is not included in the amortized cost basis of the Company’s LHFI. At September 30, 2021, accrued interest receivable for LHFI totaled $17.3 million 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.
The following tables presents the aging of the amortized cost basis in past due loans in addition to those loans classified as nonaccrual including PCD loans:
Past Due
Past Due,
30 to 89
90 Days or More and
Nonaccrual
Nonaccrual and
Days
Still Accruing
PCD
and PCD
LHFI
PCD with No ACL
151
228
379
670
15,333
2,382
18,385
1,100
1,154
456
3,318
3,728
8,656
2,008
89
112
2,064
18,900
6,112
27,532
3,108
Total loan balance includes $87.1 million in PPP loans as of September 30, 2021.
22
December 31,2020
Past Due 90
Days or
More and Still
Accruing
PCI
and PCI
1,007
244
2,197
221
3,669
2,116
1,553
19,499
3,388
26,556
5,389
895
2,480
5,954
14,718
419
8,931
2,692
24,208
9,566
45,397
Acquired Loans
On January 1, 2021, the Company adopted ASC 326 and elected to account for its existing acquired PCI loans as PCD loans included within the LHFI portfolio. The Company elected to maintain segments of loans that were previously accounted for under ASC 310-30 and will continue to account for these segments as a unit of account unless the loan is collateral dependent. PCD loans that are collateral dependent will be assessed individually. Loans are only removed from the existing segments if they are written off, paid off, or sold. Upon adoption of ASC 326, the ACL was determined for each segment and added to the band’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the segment and the new amortized cost basis was the noncredit discount of approximately $685 thousand, which will be accreted into interest income over the remaining life of the segment. Changes to the ACL after adoption are recorded through provision expense. As of September 30, 2021, the amortized cost of the Company’s PCD loans totaled $10.6 million, which had an estimated ACL of $1.0 million.
Prior to the adoption of FASB ASC 326, the Company acquired loans with deteriorated credit quality in 2014, 2017, 2018, 2019 and 2020. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (PCI loans). Acquired loans are considered to be impaired if it is probable, based on current available information, that the Company will be unable to collect all cash flows as expected. If expected cash flows cannot reasonably be estimated as to what will be collected, there will not be any interest income recognized on these loans.
23
Impaired LHFI
Prior to the adoption of FASB ASC 326, the Company individually evaluated impaired LHFI. The following table provides a detail of impaired loans broken out according to class as of December 31, 2020. The following table does not include PCI loans. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. Recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.
Average
Interest
Recorded
Unpaid
Related
Investment
Recognized
Balance
Allowance
YTD
Impaired loans with no related allowance:
Commercial, financial and agriculture
198
5,884
11,433
47
712
758
790
24
6,619
6,869
12,438
52
Impaired loans with a related allowance:
2,241
2,254
1,235
2,186
17,973
18,248
4,244
13,687
36
536
544
176
734
26
20,776
21,072
5,669
16,693
98
Total impaired loans:
2,384
23,857
24,335
25,120
83
1,248
1,302
1,524
49
50
Total Impaired Loans
27,395
27,941
29,131
150
The cash basis interest earned in the chart above is materially the same as the interest recognized during impairment for the year ended December 31, 2020.
The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the nine months ended September 30, 2020, was $1.1 million. The Company had no loan commitments to borrowers in nonaccrual status at September 30, 2021 or December 31, 2020.
Troubled Debt Restructurings
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 TDRs.
In response to the Coronavirus Disease 2019 (“COVID-19”) pandemic and its economic impact to its customers, the Company implemented a short-term modification program in accordance with interagency regulatory guidance to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due at the time of the modification. This program allowed for a deferral of payments for up two successive 90-day periods for a cumulative maximum of 180 days. Pursuant to interagency guidance, such short-term deferrals are not deemed to meet the criteria for reporting as TDRs. For borrowers requiring a longer-term modification following the short-term loan modification program the Company worked with these borrowers whose loans were not more 30 days past due at December 31, 2019 and who required modification as a result of COVID-19 to modify such loans under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
As of September 30, 2021, and December 31, 2020, the Company had TDRs totaling $25.9 million and $27.5 million, respectively. As of September 30, 2021, the Company had no additional amount committed on any loan classified as TDR. As of September 30, 2021, TDRs had a related ACL of $3.0 million, compared to a related allowance for loan loss of $4.1 million at December 31, 2020.
The following table presents LHFI by class modified as TDRs that occurred during the three months and nine months ended September 30, 2021 and 2020($ in thousands, except for number of loans).
Three Months Ended September 30,
Outstanding
Number of
Pre-Modification
Post-Modification
4,914
38
113
5,065
5,103
573
602
The TDRs presented above increased the ACL $91 thousand and increased the allowance for loan losses $29 thousand and resulted in no charge-offs for the three months period ended September 30, 2021 and 2020, respectively.
Nine Months Ended September 30,
5,151
168
194
5,370
5,385
46
1,506
1,530
1,576
25
The TDRs presented above increased the ACL $112 thousand and increased the allowance for loan loss $76 thousand and resulted in no charge-offs for the for the nine months period ended September 30, 2021 and 2020,respectively.
The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification ($ in thousands, except for number of loans).
That Subsequently Defaulted:
165
2,291
355
520
2,294
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 $101 thousand and the allowance for loan losses $54 thousand and resulted in no charge-offs for the nine months period ended September 30, 2021 and 2020, respectively.
The following tables represents the Company’s TDRs at September 30, 2021 and December 31, 2020:
Current
days and still
30‑89
accruing
74
127
201
8,324
13,092
21,416
2,203
54
2,026
4,283
10,622
15,245
25,921
Allowance for credit losses
2,872
3,007
59
765
824
4,560
18,076
22,685
1,559
269
2,161
3,989
6,201
321
21,002
27,524
Allowance for loan losses
163
3,936
4,128
Collateral Dependent Loans
The following table presents the amortized cost basis of collateral dependent individually evaluated loans by class of loans as of September 30, 2021:
Real Property
2,177
2,415
4,592
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:
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 September 30, 2021, these loans totaled $120.8 million, of which $72.5 million had been sold to other financial institutions and $48.3 million was retained 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.
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 September 30, 2021, and were generally updated within the prior year.
27
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. Revolving loans converted to term as of the nine months ended September 30, 2021 were not material to the total loan portfolio.
Term Loans Amortized Cost Basis by Origination Year
Revolving
As of September 30, 2021
2019
2018
2017
Prior
Commercial, financial and:
agriculture
Risk Rating
Pass
180,872
64,986
57,228
52,121
27,160
48,124
108
430,599
Special mention
266
1,301
102
100
182
1,951
Substandard
1,432
6,296
377
8,428
16,548
Doubtful
Total commercial, financial
and agriculture
65,267
59,961
58,519
27,637
56,734
Commercial real estate:
275,202
334,184
234,725
201,575
142,712
346,672
1,535,070
2,585
13,236
5,303
21,163
44,541
183
3,261
1,985
17,357
18,684
29,380
70,850
Total commercial real estate
275,385
339,699
239,295
232,168
166,699
397,215
Consumer real estate:
173,505
185,892
79,379
74,386
59,082
133,634
95,284
801,162
1,781
4,129
815
3,461
1,435
11,276
1,245
19,222
Total consumer real estate
173,959
186,428
80,530
77,874
62,298
146,895
96,529
Consumer installment:
12,401
10,470
5,436
2,084
1,239
3,424
36,809
35
Total consumer installment
5,452
1,252
1,764
641,980
595,532
376,768
330,166
230,193
530,185
98,816
2,803,640
2,520
4,222
13,365
7,186
23,331
50,624
637
3,812
4,248
27,114
20,507
49,092
106,655
642,617
601,864
385,238
370,645
257,886
602,608
100,061
28
At December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:
Commercial,
Financial and
Commercial
Consumer
Agriculture
Real Estate
Installment
563,772
1,530,366
834,920
40,884
2,969,942
Special Mention
2,143
64,012
1,889
68,064
11,875
66,535
13,397
132
91,939
1,653
1,676
Subtotal
1,660,936
3,131,621
Less: Unearned discount
7,943
LHFI, net of unearned discount
Allowance for Credit Losses (ACL)
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. See Note 3. “Accounting Standards” to the Consolidated Financial Statements for additional information.
The following table presents the activity in the allowance for credit losses by portfolio segment for the three months and nine months ended September 30, 2021 and the allowance for loan losses for the three months and nine months ended September 30, 2020:
Three Months Ended September 30, 2021
Allowance for credit losses:
Beginning balance
3,910
17,573
10,339
635
32,457
Loans charged-off
(142)
(19)
(166)
(386)
Recoveries
180
39
71
347
Total ending allowance balance
3,825
17,694
10,359
540
32,418
Nine Months Ended September 30, 2021
Impact of ASC 326 adoption on non-PCD loans
(1,319)
(4,607)
(49)
(718)
Impact of ASC 326 adoption on PCD loans
166
575
372
(1,618)
(3,066)
(282)
(431)
(5,397)
382
473
276
467
1,598
Three Months Ended September 30, 2020
Paycheck
Real
Protection
Estate
Program
Unallocated
Allowance for loan losses:
5,208
18,526
3,741
459
130
28,064
Provision for loan losses
607
5,371
1,077
(130)
(78)
(769)
(55)
(934)
37
133
205
5,774
23,146
4,780
556
34,256
Nine Months Ended September 30, 2020
3,043
8,836
1,694
296
13,908
2,936
15,096
3,057
578
(39)
(342)
(1,165)
(151)
(645)
(2,303)
137
327
1,023
The Company recorded no provision for credit losses for the three and nine months ended September 30, 2021, compared to $6.9 million for the three months ended September 30, 2020 and $21.6 million for the nine months ended September 30, 2020. The higher provision in 2020 was related to our estimates of probable incurred losses associated with COVID-19. The improved macroeconomic outlook for 2021 resulted in an overall decrease for credit losses and the Company determined that no further provision adjustment was necessary for the three and nine months ended September 30, 2021.
The following table provides the ending balance in the Company’s LHFI and the ACL, broken down by portfolio segment as of September 30, 2021 ($ in thousands).
Individually evaluated
2,176
2,416
Collectively evaluated
1,648,285
822,097
2,956,327
Allowance for Credit Losses
77
81
17,617
10,355
32,337
30
The following table provides the ending balance in the Company’s LHFI and the allowance for loan losses, broken down by portfolio segment as of December 31, 2020 ($ in thousands).
574,152
1,971,292
494,833
41,498
3,081,775
PCI Loans
9,056
5,185
14,508
576,637
2,004,205
501,266
41,570
Allowance for Loan Losses
4,979
20,075
537
30,151
NOTE 11 – COVID-19 UPDATE
The COVID-19 pandemic continues to have significant effects on global markets, supply chains, businesses and communities. COVID-19 could potentially impact the Company’s future financial condition and results of operations including but not limited to additional credit loss reserves, additional collateral and/or modifications to debt obligations, liquidity, limited dividend payouts or potential shortages of personnel.
The pandemic is having an adverse impact on certain industries the Company serves, including hotels, restaurants, retail, and direct energy. As of September 30, 2021, the Company’s aggregate outstanding exposure in these segments was $457.7 million, and total loan modifications resulting from COVID-19 were approximately $710.7 million. While it is still not yet possible to know the full effect that the pandemic will have on the economy, or to what extent this crisis will impact the Company, all available current industry statistics and internal monitoring of loan repayment ability and payment forgiveness across the portfolio has been analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration.
Despite recent improvements in certain economic indicators, significant constraints to commerce remain in place, and significant uncertainty remains over the timing and scope of additional government stimulus packages. The duration and extent of the downturn and speed of the related recovery on our business, customers, and the economy as a whole remains uncertain. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for credit losses, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes.
NOTE 12 – RECLASSIFICATION
Certain amounts in the 2020 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.
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. The most recent factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the negative impact of the COVID-19 pandemic on our financial statements, including our ability to continue our business activities in certain communities we serve, the duration of the pandemic and its continued effects on financial markets, a reduction in financial transaction and business activities resulting in decreased deposits and reduced loan originations, increases in unemployment rates impacting our borrowers’ ability to repay their loans, our ability to manage liquidity in a rapidly changing and unpredictable market, additional interest rate changes by the Federal Reserve and other government actions in response to the pandemic including additional quarantines, regulations or laws enacted to counter the effects of the COVID-19 pandemic on the economy. 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:
33
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, 2020 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 2020 Form 10-K.
On January 1, 2021, the Company adopted ASC 326, which changes the accounting for the allowance for credit losses. For a discussion of this new accounting policy, refer to Note 3 “Accounting Standards” to the Consolidated Financial Statements.
As a result of the Company’s immediate response to COVID-19, including loan modifications/payment deferral programs and the Paycheck Protection Program (“PPP), the Company has elected to temporarily suspend the application of one provision of U.S. Generally Accepted Accounting Principles (“GAAP”), as allowed by the CARES Act, which was signed into law by the President on March 27, 2020. Sections 4013 and 4014 of the CARES Act provides the Company with temporary relief from TDRs, which the Company believes prudent to elect in these challenging times to allow us time to provide consistent, high-quality financial information to our investors and other stakeholders.
CORONAVIRUS (COVID-19) IMPACT
In March 2020, the World Health Organization recognized the novel Coronavirus Disease 2019 as a pandemic. The spread of COVID-19 created a global public health crisis resulting in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. As the restrictive measures began to be eased during the latter part of 2020 and continue to be eased during 2021, the U.S. economy began to improve from 2020, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. Despite the recent progress, the emergence and spread of variants (including the Delta variant, a rapidly spreading strain of coronavirus) remain risks to containing the virus and ending the pandemic. The Company continues to work to adapt to the changing environment and proactively plan for contingencies. To that end, the Company has and is continuing to take steps to protect the health of our employees and to work with our customers experiencing
34
difficulties as a result of this virus. We have also been working through loan modifications and payment deferral programs to assist affected customers, and have increased our allowance for loan and lease losses.
The pandemic has had and may continue to have an adverse impact on certain industries the Company serves, including hotels, restaurants, retail, and direct energy. As of September 30, 2021, the Company’s aggregate outstanding exposure in these segments was $457.7 million, or 15.5% of total loans. With the risk of further resurgence and possible reimplementation of restrictions remaining, all available current industry statistics and internal monitoring of loan repayment ability and payment forgiveness across the portfolio continues to be analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration.
On March 27, 2020, the CARES Act was signed into law. The CARES Act is a $2 trillion stimulus package that is intended to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes a $349 billion fund for the creation of the PPP through the Small Business Administration (“SBA”) and Treasury Department. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon borrower providing payroll deductions evidencing their compliant use of funds and otherwise complying with the terms of the program. The PPP was amended in April to include an additional $320 billion in funding. On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) that amends the CARES Act. The PPPFA extended the covered period in which to use PPP loans, extended the forgiveness period from eight weeks to a maximum of 24 weeks and increased flexibility for small businesses that have had issues with rehiring employees and attempting to fill vacant positions due to COVID-19. The program reduced the proportion of proceeds that must be spent on payroll costs from 75% to 60%. In addition, the PPPFA also extended the payment deferral period for the PPP loans until the date when the amount of loan forgiveness is determined and remitted to the lender. For PPP recipients who do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends.
Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDR for a limited period of time to account for the effects of COVID-19. To qualify for Section 4013 of the CARES Act, borrowers must have been current at December 31, 2019. All modifications are eligible as long as they are executed between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) the 60th day after the end of the COVID-19 national emergency declared by the President of the U.S. Loans that were current as of December 31, 2019 are not TDRs. In addition, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. We began receiving requests from our borrowers for loan and lease deferrals in March 2020. Payment modifications included the deferral of principal payments or the deferral of principal and interest payments for terms generally 90-180 days. Requests were evaluated individually and approved modifications are based on the unique circumstances of each borrower.
On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the “CAA”). The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. In January 2021, we opened the lending portal and started processing second draw PPP loan applications.
On March 11, 2021, the American Rescue Plan Act of 2021 (“ARP”) was signed into law. The $1.9 trillion stimulus aid package builds upon many measures in the CARES Act from March 2020, and in the CAA from December 2020.
As of September 30, 2021, we have modified approximately 1,643 loans for $710.7 million, of which 1,391 loans for $582.3 million were modified to defer monthly principal and interest payments and 252 loans for $128.4 million were modified from monthly principal and interest payments to interest only. At September 30, 2021, there were 2 loans for $4.9 million that were modified to defer principal and interest payments and 18 loans for $23.0 million that were modified from monthly principal and interest payments to interest only that were outstanding. As of September 30, 2021, we have approximately 1,185 PPP loans approved through the SBA for $87.1 million outstanding.
OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
Third quarter 2021 compared to third quarter 2020
The Company reported net income available to common shareholders of $16.1 million for the three months ended September 30, 2021, compared with net income available to common shareholders of $11.9 million for the same period last year, an increase of $4.2 million or 35.4%. Provision for credit losses totaled $0 for the quarter ended September 30, 2021, a decrease of $6.9 million, or $5.3 million, net of tax, as compared to the third quarter of 2020. For the third quarter of 2021, fully diluted earnings per share were $0.76, compared to $0.55 for the third quarter of 2020.
Operating net earnings, a non-GAAP financial measure, for the third quarter of 2021 totaled $16.1 million compared to $12.1 million for the third quarter of 2020, an increase of $4.0 million or 33.2%. Operating net earnings, which is a non-GAAP financial measure, for the third quarter of 2021 excludes merger-related costs of $4 thousand, net of tax, loss on the sale of fixed assets of $297 thousand, net of tax, $1.4 million, net of tax, related to the U.S. Treasury Rapid Response Program (“RRP”), and $1.0 million, net of tax, in contributions, as a result of the RRP grant, to support projects that will benefit the underserved in the communities we serve. Operating net earnings, a non-GAAP financial measure, for the third quarter 2020 excludes merger-related costs of $177 thousand, net of tax. Diluted operating earnings per share, a non-GAPP financial measure, were $0.76 on a fully diluted basis for the third quarter 2021, compared to $0.56 for the same period in 2020, excluding the merger-related costs and income described above. See reconciliation of non-GAAP financial measures provided below.
Net interest income for the third quarter 2021 was $40.0 million, an increase of $55 thousand or 0.1%, for the three months ended September 30, 2021, compared to $40.0 million for the same period in 2020. Fully tax equivalent (“FTE”) net interest income, which is a non-GAAP measure, totaled $40.7 million and $40.6 million for the third quarter of 2021 and 2020, respectively. Purchase accounting adjustments decreased $686 thousand for the third quarter comparisons. Third quarter 2021 FTE net interest margin, which is a non-GAAP measure, of 3.3% included 10 basis points related to purchase accounting adjustments compared to 3.6% for the same quarter in 2020, which included 17 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the net interest margin decreased 26 basis points in prior year quarterly comparison. See reconciliation of non-GAAP financial measures provided below.
Non-interest income for the three months ended September 30, 2021 was $9.6 million compared to $8.8 million for the same period in 2020, reflecting an increase of $792 thousand or 9.0%. This increase is attributed to the $1.8 million RRP grant from the U.S. Treasury and was offset by the decrease in mortgage income of $1.2 million.
Pre-tax, pre-provision operating earnings, a non-GAAP measure, decreased 6.9% to $20.5 million for the quarter-ended September 30, 2021 as compared to $22.1 million for the third quarter of 2020. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the third quarter 2021 excludes merger-related costs $5 thousand, loss on the sale of fixed assets of $397 thousand, $1.8 million related to the RRP grants, and $1.4 million in contributions, as a result of the RRP grant. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the third quarter 2020 excludes $238 thousand in acquisition charges and $6.9 million in provision for loan loss. See reconciliation of non-GAAP financial measures provided below.
Non-interest expense was $29.1 million for the three months ended September 30, 2021, an increase of $2.1 million or 7.9%, when compared with the same period in 2020. Charitable contributions of $1.4 million during the third quarter of 2021 contributed to the increase. These contributions related to the RRP grant and supported projects in underserved communities.
Investment securities totaled $1.485 billion, or 27.0% of total assets at September 30, 2021, compared to $984.9 million, or 19.1% of total assets at September 30, 2020. The average balance of investment securities increased $406.7 million in prior year quarterly comparison. The average tax equivalent yield on investment securities, which is a non-GAAP measure, 26 basis points to 2.2% from 2.5% in prior year quarterly comparison. The investment portfolio had a net unrealized gain of $18.2 million at September 30, 2021 as compared to a net unrealized gain of $33.2 million at September 30, 2020. See reconciliation of non-GAAP financial measures provided below.
The FTE average yield on all earning assets, a non-GAAP measure, decreased 54 basis points in prior year quarterly comparison, from 4.1% for the third quarter of 2020 to 3.6% for the third quarter of 2021. Interest expense on average interest-bearing liabilities decreased 22 basis points from 0.6% for the third quarter of 2020 to 0.4% for the third quarter of 2021. Cost of all deposits averaged 22 basis points for the third quarter of 2021 compared to 47 basis points for the third quarter of 2020. See reconciliation of non-GAAP financial measures provided below.
First nine months 2021 compared to first nine months 2020
The Company reported net income available to common shareholders of $48.4 million, an increase of $11.2 million, or 30.1% for the nine months ended September 30, 2021, compared to $37.2 million for the same period last year. Excluding the bargain purchase gain of $7.0 million, net of tax, gain on the sale of land of $463 thousand, net of tax, and the decreased provision expense of $16.7 million, net of tax, recorded during the nine months ended September 2020, net income available to common shareholders increased $2.0 million in the year-over-year comparison.
Net interest income increased $4.1 million, or 3.6%, for the nine months ended September 30, 2021, compared to $113.2 million for the same period in 2020. This increase was primarily due to interest earned on a higher volume of securities and a reduction in interest expense due to changes in rates. Average earning assets at September 30, 2021, increased $755.6 million, or 18.2%, and average interest-bearing liabilities increased $711.9 million, or 18.8%, when compared to September 30, 2020.
Non-interest income for the nine months ended September 30, 2021, was $27.9 million compared to $30.9 million for the same period in 2020, reflecting a decrease of $3.1 million or 9.9%. Excluding the gains mentioned above, non-interest income increased $4.6 million in year-over-year comparison. Interchange fee income increased $1.7 million and the RRP grant of $1.8 million accounted for the increase in the year-over-year comparison.
The provision for credit losses was $0 for the nine months ended September 30, 2021, compared with $21.6 million provision for loan losses for the same period in 2020. The allowance for credit losses of $32.4 million at September 30, 2021 (approximately 1.1% of total loans) 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 $83.8 million for the nine months ended September 30, 2021, an increase of $5.3 million or 6.8%, when compared with the same period in 2020. An increase of $3.7 million in salaries and employee benefits, an increase of $1.7 million in occupancy expense and the $1.4 million in charitable contributions contributed to the increase.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE FIRST
The First represents the primary asset of the Company. The First reported total assets of $5.504 billion at September 30, 2021 compared to $5.145 billion at December 31, 2020, an increase of $358.9 million. Loans, including loans held for sale, decreased $139.8 million to $2.969 billion, or 4.5%, during the first nine months of 2021. Deposits at September 30, 2021 totaled $4.715 billion compared to $4.283 billion at December 31, 2020.
For the nine months period ended September 30, 2021, The First reported net income of $55.2 million compared to $43.0 million for the nine months ended September 30, 2020. Merger charges, net of tax, equaled $4 thousand for the first nine months of 2021 as compared to $2.1 million for the first nine months of 2020.
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
Net interest income increased by $55 thousand, or 0.1%, for the third quarter of 2021 relative to the third quarter of 2020. The slight increase was due to interest income earned on a higher volume of securities and was partially offset by declines in total average loans and earning asset yield as well as declining cost of funds. PPP loans totaled $87.1 million as of September 30, 2021 a decrease of $173.1 million or 66.5% when compared to the same period last year. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on nonaccrual status during the reporting period, and the recovery of interest on loans that had been on nonaccrual and were paid off, sold or returned to accrual status.
The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
Average Balances, Tax Equivalent Interest and Yields/Rates
Tax
Avg.
Equivalent
Yield/
interest
Rate
Earning Assets:
Taxable securities
986,821
2.04
%
616,168
2.23
Tax exempt securities
377,610
2,550
2.70
341,550
2,512
2.94
Total investment securities
1,364,431
7,583
2.22
957,718
5,945
2.48
Interest bearing deposits in other banks
656,891
0.01
413,786
0.03
2,983,771
5.02
3,165,653
5.18
Total earning assets
5,005,093
45,080
3.60
4,537,157
46,973
4.14
506,134
548,183
5,511,227
5,085,340
Interest-bearing liabilities:
Deposits
4,422,690
0.23
3,960,054
0.50
206
0.00
115,935
265
0.91
144,630
5.03
81,470
1,188
5.83
Total interest-bearing liabilities
4,567,526
0.39
4,157,459
0.61
279,107
295,354
Shareholders’ equity
664,594
632,527
Total liabilities and shareholders’ equity
Net interest margin
3.20
3.52
Net interest income (FTE)*
40,673
3.22
40,608
3.53
Net interest margin (FTE)*
3.25
3.58
($in thousands)
847,745
1.99
594,216
2.43
370,706
7,693
2.77
289,087
6,674
3.08
1,218,451
20,334
883,303
17,489
2.64
644,074
0.02
288,898
0.16
3,040,818
5.01
2,975,535
5.27
4,903,343
134,805
3.67
4,147,736
135,423
4.35
532,968
516,956
5,436,311
4,664,692
4,324,047
0.30
3,584,416
0.58
34,202
339
1.32
125,608
1,406
1.49
144,604
5,462
5.04
80,969
3,567
5.87
4,502,853
0.46
3,790,993
0.72
280,930
277,911
652,528
595,788
3.19
3.64
119,253
3.21
114,906
3.63
3.24
3.69
* See reconciliation of Non-GAAP financial measures.
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 nine months ended September 30, 2021 and 2020:
EARNINGS STATEMENT
9/30/21
% of Total
9/30/20
19.3
20.2
19.2
29.6
Mortgage fee income
1,732
18.1
2,961
33.7
7,266
26.1
7,174
23.2
Interchange fee income
2,744
28.6
2,491
28.3
8,533
30.6
6,872
22.2
Gain on securities, net
0.1
0.4
0.9
22.7
(4.1)
(1.4)
2.0
RRP Grant
1,826
19.0
1,824
1,531
17.4
5,169
18.5
3,851
11.9
56.0
57.5
57.7
56.8
Occupancy expense
13.5
14.2
13.9
12.7
FDIC/OCC premiums
532
1.8
447
1.7
831
1.1
Marketing
0.3
262
Amortization of core deposit intangibles
1,052
3.6
3.9
3,155
3.8
3,041
Other professional services
934
3.2
990
3.7
3.5
2,848
Other non-interest expense
6,284
21.6
4,865
18.0
15,941
13,658
4.2
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 $4.4 million or 21.5% of earnings before income taxes for the third quarter 2021, compared to $3.0 million or 20.1% of earnings before income taxes for the same period in 2020. The provision for the nine months ended September 30, 2021 was $13.0 million or 21.2% of earnings before income taxes compared to $6.9 million or 15.7% for the same period in 2020. The effective tax rate for 2020 includes any provisions related to the CARES Act that was signed into law on March 27, 2020 and the $7.0 million, non-taxable, bargain purchase gain related to the acquisition of Southwest Georgia Financial Corporation (“SWG”). The CARES Act includes several significant provisions for corporations including increasing the amount of deductible interest under section 163(j) of the Internal Revenue Code of 1986, as amended, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss that corporations can use to offset income.
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 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 $1.463 billion, or 26.5% of total assets at September 30, 2021 compared to $1.022 billion, or 19.8% of total assets at December 31, 2020.
There were no federal funds sold at September 30, 2021 and December 31, 2020; and interest-bearing balances at other banks increased to $544.1 million at September 30, 2021 from $424.9 million at December 31, 2020. The Company’s investment portfolio increased $435.8 million, or 41.5%, to a total fair market value of $1.485 billion at September 30, 2021 compared to December 31, 2020. The increase in the portfolio is related to purchases that were made in the first nine months of 2021. The Company’s investments 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 the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors. Associated servicing rights are not retained. At September 30, 2021, LHFS totaled $8.5 million, compared to $21.4 million at December 31, 2020.
Loans Held for Investment (LHFI)
LHFI, net of deferred fees and costs, were $2.929 billion at September 30, 2021, a decrease of $159.4 million, or 5.4%, from $3.088 billion at December 31, 2020. The Company experienced a decrease in the commercial, financial, and agriculture loan portfolio related to PPP loans forgiven since December 31, 2020. PPP loans were $87.1 million at September 30, 2021, a decrease of $152.6 million, or 63.7%, from $239.7 million at December 31, 2020.
The following table presents the Company’s composition of LHFI, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans ($ in thousands):
September 30, 2021 (1)
Percent
of Total
Commercial, financial and agriculture (2)
15.2
18.6
55.8
52.9
27.8
27.2
1.2
1.3
Net loans
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 September 30, 2021, 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 OREO. 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 $25.0 million at September 30, 2021, a decrease of $8.8 million from December 31, 2020.
Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $2.6 million at September 30, 2021 as compared to $5.8 million at December 31, 2020.
A loan is classified as a restructured loan when the following two conditions are present: first, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower’s financial difficulty. At September 30, 2021, the Bank had $25.9 million in loans that were classified as TDRs, of which $10.6 million were performing as agreed with modified terms. At December 31, 2020, the Bank had $27.5 million in loans that were classified as TDRs of which $6.2 million were performing as agreed with modified terms. TDRs may be classified as either non-performing or performing loans depending on their accrual status. As of September 30, 2021, $15.3 million in loans categorized as TDRs were classified as non-performing as compared to $21.3 million at December 31, 2020.
The following table presents comparative data for the Company’s non-performing assets and performing TDRs as of the dates noted ($ in thousands):
9/30/21 (1)
12/31/20
Nonaccrual Loans
2,418
17,715
22,887
7,046
8,434
Total Nonaccrual Loans
25,012
33,774
Other real-estate owned
Total NPAs
27,592
39,576
Performing TDRs
10,621
Past due 90 days or more and still accruing
Total NPA’s as a % of total loans & leases net of unearned income
Total nonaccrual loans as a % of total loans & leases net of unearned income
0.8
NPAs totaled $27.6 million at September 30, 2021, compared to $39.6 million at December 31, 2020, a decrease of $12.0 million. The ACL/total loans ratio was 1.1% at September 30, 2021, and the ALLL/total loans ratio was 1.2% at December 31, 2020. The decrease in the ACL/total loans ratio is primarily attributable to the $3.8 million in net charge-offs recorded during the nine months ended September 30, 2021. Total valuation accounting adjustments were $4.7 million on acquired loans at September 30, 2021. The ratio of annualized net charge-offs (recoveries) to total loans was 0.005% for the quarter ended September 30, 2021 compared to 0.25% for the year ended December 31, 2020.
ALLOWANCE FOR CREDIT LOSSES
On January 1, 2021, the Company adopted the ASC 326. The FASB issued ASC 326 to replace the incurred loss model for loans and other financial assets with an expected loss model and requires consideration of a wider range of reasonable and supportable information to determine credit losses. In accordance with ASC 326, the Company has developed an ACL methodology effective January 1, 2021, which replaces its previous allowance for loan losses methodology. 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 3 “Accounting Standards” for a complete description of the Company’s methodology and the quantitative and qualitative factors included in the calculation.
Upon the adoption of ASC 326, the Company recorded a $397 thousand increase to the ACL. At September 30, 2021, the ACL was $32.4 million, or 1.1% of LHFI, a decrease of $3.4 million, or 9.5% when compared to December 31, 2020. The decrease is related to charge-offs taken on several loans during 2021 and was offset by a slight increase related to the ASC 326 transition entry. At December 31, 2020, the allowance for loan losses was approximately $35.8 million, which was 1.2% of LHFI.
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At September 30, 2021, management believes the allowance is appropriate and should any of the factors considered by management in evaluating the appropriateness of the allowance for credit losses change, management’s estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for credit losses.
The table that follows summarizes the activity in the allowance for credit losses for the three and nine months ended September 30, 2021 and the allowance for loan losses for the three and nine months ended September 30, 2020 ($ in thousands):
Three Months
Nine Months
Ended
Average LHFI outstanding during period:
LHFI outstanding at end of period:
3,178,414
Allowance for Credit Losses:
Balance at beginning of period
ASC 326 adoption adjustment
Provision charged to expense
Charge-offs:
142
1,618
342
769
3,066
1,165
282
431
645
Total Charge-offs
386
5,397
2,303
Recoveries:
Total Recoveries
Net loan charge offs (recoveries)
729
3,799
Balance at end of period
RATIOS
Net Charge-offs (recoveries) to average LHFI (annualized)
0.0
0.2
ACL to LHFI at end of period
Net Loan Charge-offs (recoveries) to PCL
10.5
5.9
The Company recorded no provision for credit losses for the three and nine months ended September 30, 2021, compared to $6.9 million for the three months ended September 30, 2020 and $21.6 million for the nine months ended September 30, 2020. The higher provision in 2020 was related to our estimates of probable incurred losses associated with COVID-19. The improved macroeconomic outlook for 2021 and the Company’s ACL calculation under ASC 326 resulted in no further provision adjustment for the three and nine months ended September 30, 2021.
The following tables summarizes the ACL at September 30, 2021 and the allowance for loan and lease losses (“ALLL”) at December 31, 2020.
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ALLOWANCE FOR CREDIT LOSSES ON OBSC EXPOSURES
On January 1, 2021, the Company adopted ASC 326. 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. Upon adoption of ASC 326, the Company recorded an ACL on unfunded commitments of $718 thousand. The Company recorded no provision for credit losses on OBSC exposures for the three and nine months period ended September 30, 2021.
OTHER ASSETS
The Company’s balance of non-interest earning cash and due from banks was $113.2 million at September 30, 2021 and $137.7 million at December 31, 2020. 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 decreased $5.3 million, or 19.1%, to $22.2 million at September 30, 2021 compared to $27.5 million at December 31, 2021. The decrease is due to a reduction in FHLB stock. The Company’s net premises and equipment at September 30, 2021 was $116.9 million and $114.8 million at December 31, 2020; an increase of $2.1 million, or 1.8% for the first nine months of 2021. Operating right-of-use assets at September 30, 2021, totaled $4.2 million compared to $6.0 million at December 31, 2020, a decrease of $1.8 million. Financing right-of-use assets at September 30, 2021, totaled $2.5 million compared to $2.7 million at December 31, 2020, a decrease of $184 thousand. Bank-owned life insurance at September 30, 2021 totaled $87.5 million compared to $73.7 million at December 31, 2020, an increase of $13.8 million. The majority of the increase was due to the purchase of $12.3 million in BOLI contracts in the first quarter of 2021. Goodwill at September 30, 2021 remained unchanged at $156.9 million when compared to December 31, 2020. Other intangible assets, consisting primarily of the Company’s core deposit intangible (“CDI”), decreased by $3.2 million to $27.6 million as of September 30, 2021, compared to $30.8 million at December 31, 2020.
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 September 30, 2021, management has determined that no impairment exists.
Other real estate owned decreased by $3.2 million, or 55.5%, to $2.6 million at September 30, 2021 as compared to December 31, 2020.
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 $549.0 million at September 30, 2021 and $466.2 million at December 31, 2020, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 18.5% of gross loans at September 30, 2021 and 14.9% at December 31, 2020. The Company also had undrawn similar standby letters of credit to customers totaling $11.8 million at September 30, 2021 and $15.7 million at December 31, 2020. 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 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.
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In addition to unused commitments to provide credit, the Company is utilizing a $5.0 million letter of credit issued by the FHLB on the Company’s behalf as of September 30, 2021. 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, or solicit brokered deposits if deposits are not immediately obtainable from local sources. The net availability on lines of credit from the FHLB totaled $1.470 billion at September 30, 2021. 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 September 30, 2021, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $755.4 million of the Company’s investment balances, compared to $513.2 million at December 31, 2020. 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 September 30, 2021 was 34.1%, as compared to internal liquidity policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines:
Policy Maximum
Policy Compliance
Loans to Deposits (including FHLB advances)
62.3
90.0
In Policy
Net Non-core Funding Dependency Ratio
(10.0)
20.0
Fed Funds Purchased / Total Assets
10.0
FHLB Advances / Total Assets
FRB Advances / Total Assets
Pledged Securities to Total Securities
52.5
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 September 30, 2021, cash and cash equivalents were $657.3 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately $559.3 million at September 30, 2021. Approximately $560.8 million in loan commitments could fund within the next three months and includes other commitments, primarily commercial and $11.8 million similar letters of credit, at September 30, 2021.
Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs. During March 2020, in response to COVID-19, the Federal Reserve lowered the primary credit rate by 150 basis points to 0.25 percent and extended terms to 90 days to enhance market liquidity and encourage use of the discount window. In addition, the Federal Reserve announced it would begin quantitative easing, or large-scale asset purchases, consisting primarily of Treasury securities and mortgage-backed securities to stem the effects of the pandemic on the financial markets. Failure to continue to contain the COVID-19 pandemic could cause a widespread liquidity crisis, and the availability of these funds or the options to sell securities currently held could be hindered. The full impact and duration of COVID-19 on our business is unknown but if it continues to curtail economic activity, it could impact our ability to obtain funding and result in the reduction of or the cessation of dividends.
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 Annual Report on Form 10-K for the year ended December 31, 2020.
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 nine-month periods ended September 30, 2021 and 2020 is included in the Average Balances, Tax Equivalent Interest and Yield/Rates tables appearing above, under the heading “Net Interest Income and Net Interest Margin.” The Company implemented Deposit Reclassification at the beginning of 2020. This program reclassifies non-interest bearing deposits and NOW deposit balances to money market accounts. This program reduces our reserve balance required at the Federal Reserve Bank of Atlanta and provides additional funds for liquidity or lending. At quarter-end September 30, 2021, $828.1 million in non-interest deposit balances and $854.0 million in NOW deposit accounts were reclassified as money market accounts. A distribution of the Company’s deposits without reclassification showing the balance and percentage of total deposits by type is presented for the noted periods in the following table.
Deposit Distribution
Percent of
Non-interest bearing demand deposits
1,424,208
30.5
1,185,980
28.1
NOW accounts and Other
1,524,935
32.6
1,347,778
32.0
Money Market accounts
758,724
16.3
705,357
16.7
Savings accounts
455,287
9.7
395,116
9.4
Time Deposits of less than $250,000
390,289
8.4
218,418
5.2
Time Deposits of $250,000 or more
119,098
2.5
362,631
8.6
As of September 30, 2021, deposits increased by $457.3 million, or 10.9% to $4.673 billion from $4.215 billion at December 31, 2020. Transaction account balances were above normal as of September 30, 2021 due to PPP loan proceeds and the distribution of federal emergency stimulus funds.
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 non-deposit interest-bearing liabilities decreased by $114.6 million, or 44.2%, in the first nine months of 2021, due to a decrease in notes payable of $110.2 million to the FHLB and $4.4 million to First Horizon Bank. As of September 30, 2021, junior subordinated debentures increased $58 thousand, net of issuance costs, to $144.7 million. Subordinated debt is discussed more fully in the below Capital section of this report.
LEASE LIABILITIES
As of September 30, 2021, operating lease liabilities decreased $1.7 million, or 28.1% to $4.3 million from $6.0 million at December 31, 2020. A majority of the decrease is related to a building lease that was terminated due to the Bank purchasing the facility. Finance lease liabilities decreased $141 thousand, or 6.2% to $2.1 million from $2.3 million at December 31, 2020.
OTHER LIABILITIES
Other liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities decreased by $5.6 million, or 22.2%, during the first nine months of 2021. As of September 30, 2021, accrued interest payable decreased $758 thousand, or 35.5% to $1.4 million from $2.1 million at December 31, 2020. Other accrued but unpaid expenses decreased $4.8 million, or 21.0% to $18.2 million at September 30, 2021. The decrease is related to a $4.4 million decrease in deferred taxes on AFS securities gains.
CAPITAL
At September 30, 2021, the Company had total shareholders’ equity of $668.7 million, comprised of $21.7 million in common stock, $18.9 million in treasury stock, $458.5 million in surplus, $193.8 million in undivided profits and $13.6 million in accumulated comprehensive income on available-for-sale securities. Total shareholders’ equity at the end of 2020 was $644.8 million. The increase of $23.9 million, or 3.7%, in shareholders’ equity during the first nine months of 2021 is primarily comprised of capital added through net earnings of $48.4 million, and offset by $12.2 million decrease in accumulated comprehensive income for available-for-sale securities, treasury stock acquired of $5.2 million and $8.8 million in cash dividends paid.
On May 7, 2020, the Company announced the renewal of its share repurchase program that previously expired on December 31, 2019. Under the program, the Company could from time to time repurchase up to $15 million of shares of its 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, was determined by management at its 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 renewed share repurchase program expired on December 31, 2020, The Company repurchased 289,302 shares in 2020 pursuant to a previous share repurchase program.
On December 16, 2020, the Company announced that its Board of Directors has authorized a share repurchase program (the “Repurchase Program”), pursuant to which the Company may purchase up to an aggregate of $30 million in shares of the Company’s issued and outstanding common stock. Under the program, the Company may, but is not required to, from time to time repurchase up to $30 million in 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 its discretion and will depend on a number of factors, including the market price of the Company’s
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common stock, general market and economic conditions, and applicable legal and regulatory requirements. The Repurchase Program will have an expiration date of December 31, 2021. The Company repurchased 165,623 shares for $5.2 million under the Repurchase Program in the first quarter of 2021.
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.
Minimum
Required to be
Regulatory Capital Ratios The First, A National Banking Association
Well Capitalized
Common Equity Tier 1 Capital Ratio
16.9
15.8
6.5
Tier 1 Capital Ratio
8.0
Total Capital Ratio
17.9
Tier 1 Leverage Ratio
10.8
10.4
5.0
Regulatory Capital Ratios The First Bancshares, Inc.
Common Equity Tier 1 Capital Ratio*
14.1
N/A
Tier 1 Capital Ratio**
14.5
14.0
19.1
9.2
Our capital ratios remain very strong relative to the median for peer financial institutions, and at September 30, 2021 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 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 September 30, 2021, 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 September 30, 2021 was $668.7 million, or approximately 12.1% 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”) in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. Trust 2 issued $4.0 million of Trust Preferred Securities (“TPSs”) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of 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 London Interbank Offer Rate (“LIBOR”) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.
On July 27, 2007, The Company issued $6.2 million of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 (“Trust 3”) in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6.0 million of TPSs to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 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 LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.
In 2018, the Company acquired FMB’s Capital Trust 1 (“Trust 1”), which consisted of $6.1 million of floating rate junior subordinated deferrable interest debentures in which the Company owns all of the common equity. The debentures are the sole asset of Trust 1. Trust 1 issued $6.0 million of TPSs to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 1’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 2033. Interest on the preferred securities is the three-month LIBOR plus 2.85% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.
In accordance with the provisions of ASC 810, Consolidation, the trusts are not included in the consolidated financial statements.
On August 25, 2021, the Bank applied for the U.S. Department of the Treasury’s Emergency Capital Investment Program (“ECIP”) for up to $250.0 million in non-dilutive, low-cost Tier 1 perpetual preferred capital. Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions to augment their efforts to support small businesses and consumers in their communities. There can be no assurance that the Bank will be awarded capital under ECIP.
Subordinated Notes
On April 30, 2018, The Company entered into two Subordinated Note Purchase Agreements pursuant to which the Company sold and issued $24 million in aggregate principal amount of 5.875% fixed-to-floating rate subordinated notes due 2028 and $42 million in aggregate principal amount of 6.40% fixed-to-floating rate subordinated notes due 2033 (collectively, the “Notes”).
The Notes 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 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.
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 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 Secured Overnight Financing Rate (“SOFR”) plus 412.6 basis points), payable quarterly in arrears. As provided in the Notes, under specified conditions the interest rate on the Notes 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, in whole or in part, on any interest payment date on or after October 1, 2025, and to redeem the Notes at any time in whole upon certain other specified events.
The Company had $144.7 million of subordinated debt, net of deferred issuance costs $2.2 million and unamortized fair value mark $817 thousand, at September 30, 2021, compared to $144.6 million, net of deferred issuance costs $2.2 million and unamortized fair value mark $700 thousand, at December 31, 2020.
Reconciliation of Non-GAAP Financial Measures
Our accounting and reporting policies conform to generally accepted accounting principles (“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 and total interest income 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 charges, gain on acquisition, loss on sale of premises and equipment, Treasury awards, and charitable contributions related to the Treasury awards. Pre-tax, pre-provision operating earnings excludes acquisition charges, provision for credit losses, Treasury awards and gains, loss on sale of premises and equipment, and charitable contributions related to the 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
Net income available to common shareholders
Effect of acquisition charges
Tax on acquisition charges
(743)
Gain on acquisition and loss on sale of premises and equipment
(7,643)
Tax on loss from the sale of premises and equipment
(100)
157
Treasury awards
(1,826)
Tax on Treasury awards
462
Contributions related to Treasury awards
1,400
Tax on Contributions related to Treasury awards
(354)
Net earnings available to common shareholders, operating
16,115
12,094
48,359
32,215
51
Diluted Operating Earnings per Share
(0.03)
Effect of bargain purchase gain and loss on premises and equipment
(0.38)
Tax on loss from sale of premises and equipment
Effect of Treasury awards
(0.09)
Effect on Contributions related to Treasury awards
0.07
(0.02)
Diluted earnings per share, operating
1.56
Net Interest Income, Fully Tax Equivalent
Tax exempt investment income
(1,905)
(1,877)
(5,748)
(4,985)
Taxable investment income
2,513
7,694
Net interest income, FTE
40,609
Average earning assets
Net interest margin, FTE
Pre-Tax Pre-Provision Operating Earnings
Earnings before income taxes
Acquisition charges
Loss on sale of premises and equipment
Treasury awards and gains
Charitable contributions related to Treasury awards
Pre-Tax, Pre-Provision Operating Earnings
20,537
22,069
61,394
61,350
Total Interest Income, Fully Tax Equivalent
46,337
Tax-exempt investment income
Total interest income, FTE
134,806
Yield on average earning assets, FTE
Interest Income Investment Securities, Fully Tax Equivalent
Interest income investment securities
6,938
5,309
18,389
15,800
Interest income investment securities, FTE
20,335
Average investment securities
1,364,461
Yield on investment securities, FTE
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:
Net Interest Income at Risk
Market Value of Equity
Change in Interest
% Change
Rates
from Base
Policy Limit
Up 400 bps
11.2
(20.0)
25.7
(40.0)
Up 300 bps
9.9
(15.0)
23.3
(30.0)
Up 200 bps
7.7
Up 100 bps
4.4
(5.0)
Down 100 bps
(3.1)
(16.3)
Down 200 bps
(4.2)
(35.0)
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 September 30,
2021, 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:
Net Interest Income at Risk – Sensitivity Year 1
-200 bp
-100 bp
STATIC
+100 bp
+200 bp
+300 bp
+400 bp
Net Interest Income
132,668
134,268
138,501
144,549
149,211
152,167
153,943
Dollar Change
(5,833)
(4,233)
6,048
10,709
13,666
15,442
NII @ Risk - Sensitivity Y1
Policy Limits
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 $5.8 million lower than in a stable interest rate scenario, for a negative variance of 4.2%. The unfavorable variance increases if rates were to drop below 200 basis points, due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts, for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This effect would be exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures.
Net interest income would likely improve by $10.7 million, or 7.7 %, 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 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 181.1%, 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 September 30, 2021, under different interest rate scenarios relative to a base case of current interest rates:
Balance Sheet Shock
(Base)
729,025
939,878
1,122,239
1,243,566
1,329,343
1,384,087
1,410,164
Change in EVE from base
(393,214)
(182,361)
121,327
207,104
261,848
287,925
The table shows that our EVE will generally deteriorate in declining rate scenarios, but should benefit from a parallel shift upward in the yield curve. 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2021, (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
Effective January 1, 2021, the Company adopted ASC 326. The Company designed new controls and modified existing controls as part of the adoption. Management revised previous internal controls used under legacy GAAP and incorporated new internal controls related to the methodology of the new allowance for credit losses. There were no other changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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 from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
(a)Exhibits
Exhibit No.
Description
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).
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
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).
3.4
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).
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).
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
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.
(Registrant)
/s/ M. RAY (HOPPY) COLE, JR.
November 9, 2021
M. Ray (Hoppy) Cole, Jr.
(Date)
Chief Executive Officer
/s/ DONNA T. (DEE DEE) LOWERY
Donna T. (Dee Dee) Lowery, Executive
Vice President and Chief Financial Officer