THE FIRST BANCSHARES, INC. 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 continued negative impact of the COVID-19 pandemic on our financial statements, including 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 and our ability to manage liquidity in a rapidly changing and unpredictable market. 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: •the continued negative impacts and disruptions resulting from the COVID-19 pandemic on the economies and communities we serve, which has had and may continue to have an adverse impact on our business operations and performance, and could have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically;
•negative impacts on our business, profitability and our stock price that could result from prolonged periods of inflation;
•the risk that a future economic downturn and contraction, including a recession, could have a material adverse effect on our capital, financial condition, credit quality, results of operations and future growth, including the risk that the strength of the current economic environment could be weakened by the continued impact of rising interest rates, supply chain challenges and inflation;
•disruptions to the financial markets as a result of the current or anticipated
impact of military conflict, including
•governmental monetary and fiscal policies, including interest rate policies of theBoard of Governors of theFederal Reserve , as well as legislative, tax and regulatory changes, including those that impact the money supply and inflation; •the costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto, including the costs and effects of litigation related to our participation in government stimulus programs associated with the COVID-19 pandemic; 34
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•reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors; •general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;
•adverse changes in asset quality and resulting credit risk-related losses and expenses;
•ability of borrowers to repay loans, which can be adversely affected by a
number of factors, including changes in economic conditions, adverse trends or
events affecting business industry groups, reductions in real estate values or
markets, business closings or lay-offs, natural disasters, public health
emergencies and international instability;
•current or future legislation, regulatory changes or changes in monetary, tax
or fiscal policy that adversely affect the businesses in which we or our
customers or our borrowers are engaged, including the impact of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"), the
Federal Reserve's actions with respect to interest rates, the capital
requirements promulgated by the Basel Committee on Banking Supervision ("Basel
Committee"), potential impacts from the Tax Cuts and Jobs Act, the CARES Act of
2020, and other COVID-19 relief measures, uncertainty relating to calculation of
LIBOR and other regulatory responses to economic conditions;
•changes in political conditions or the legislative or regulatory environment;
•the adequacy of the level of our allowance for credit losses and the amount of credit loss provisions required to replenish the allowance in future periods;
•reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;
•changes in the interest rate environment which could reduce anticipated or actual margins;
•increased funding costs due to market illiquidity, increased competition for funding, higher interest rates, and increased regulatory requirements with regard to funding;
•results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses through additional credit loss provisions or write-down of our assets;
•the rate of delinquencies and amount of loans charged-off;
•the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;
•risks and uncertainties relating to not successfully closing and integrating the currently contemplated or completed acquisitions within our currently expected timeframe and other terms;
•significant increases in competition in the banking and financial services industries;
•changes in the securities markets;
•loss of consumer confidence and economic disruptions resulting from national disasters or terrorist activities;
•our ability to retain our existing customers, including our deposit relationships;
•changes occurring in business conditions and inflation;
•changes in technology or risks to cybersecurity;
•changes in deposit flows;
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•changes in accounting principles, policies, or guidelines, including the impact of the Current Expected Credit Losses ("CECL") standard;
•our ability to maintain adequate internal control over financial reporting;
•risks related to the continued use, availability and reliability of LIBOR and other "benchmark" rates; and
•other risks and uncertainties detailed from time to time in our filings with
the
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 endedDecember 31, 2021 and in our other filings with theSecurities and Exchange Commission , available at theSEC's website, http://www.sec.gov. ECONOMIC CONDITIONS The economic conditions and growth prospects for our markets, even against the headwinds of inflation and recessionary concerns, continue to reflect a solid and positive overall outlook with economic activity close to pre-pandemic levels. Increasing interest rates and rising building costs have caused some slowing of the highly robust single family housing market, however, there continues to be a shortage of housing in several markets in the southeast. Worker shortages especially in the restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers. Overall, the southeast continues to experience economic growth due to company relocations and expansions combined with overall population growth. 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 withU.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 2021 Form 10-K. As a result of the Company's immediate response to COVID-19, including loan modifications/payment deferral programs and the PPP, the Company has elected to temporarily suspend the application of one provision ofU.S. Generally Accepted Accounting Principles ("GAAP"), as allowed by the CARES Act, which was signed into law by the President onMarch 27, 2020 . OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
Second quarter 2022 compared to second quarter 2021
The Company reported net income available to common shareholders of
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an increase of
Operating net earnings, a non-GAAP financial measure, for the second quarter of 2022 totaled$16.5 million compared to$15.6 million for the second quarter of 2021, an increase of$900 thousand or 5.8%. Operating net earnings, which is a non-GAAP financial measure, for the second quarter of 2022 excludes merger and conversion related costs of$875 thousand , net of tax, government grants from theU.S. Treasury of$128 thousand , net of tax, and bargain purchase gain and loss on sale of fixed assets, net of tax,$123 thousand . Diluted operating earnings per share, a non-GAAP financial measure, was$0.80 on a fully diluted basis for the second quarter 2022, compared to$0.74 for the same period in 2021, excluding the costs and income described above. See reconciliation of non-GAAP financial measures provided below. Net interest income for the second quarter 2022 was$42.1 million , an increase of$4.1 million or 10.6%, compared to$38.1 million for the same period in 2021. Fully tax equivalent ("FTE") net interest income, which is a non-GAAP measure, totaled$43.0 million and$38.7 million for the second quarter of 2022 and 2021, respectively. Purchase accounting adjustments decreased$447 thousand for the second quarter comparisons. Second quarter 2022 FTE net interest margin, which is a non-GAAP measure, of 3.09% including 5 basis points related to purchase accounting adjustments compared to 3.14% for the same quarter in 2021, which included 9 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the net interest margin decreased 1 basis points in prior year quarterly comparison. See reconciliation of non-GAAP financial measures provided below. Non-interest income for the three months endedJune 30, 2022 was$8.7 million compared to$8.8 million for the same period in 2021, reflecting a decrease of$158 thousand or 1.8%. This decrease consisted of$1.1 million decrease in mortgage income. Pre-tax, pre-provision operating earnings, a non-GAAP measure, increased 7.2% to$20.8 million for the quarter-endedJune 30, 2022 as compared to$19.4 million for the second quarter of 2021. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the second quarter 2022 excludes merger and conversion related costs of$1.2 million ,$600 thousand provision for loan losses,$165 thousand bargain purchase gain and loss on sale of fixed assets,$171 thousand government grants from theU.S Treasury offset by$165 thousand in charitable contributions related to theU.S. Treasury awards. See reconciliation of non-GAAP financial measures provided below. Non-interest expense was$31.0 million for the three months endedJune 30, 2022 , an increase of$3.5 million or 12.8%, when compared with the same period in 2021. Charges related to the acquisition of theCadence Branches andBeach Bank as well as charter conversion accounted for$1.2 million of the increase. Charges related to the ongoing operations of the Cadence Branches totaled$1.0 million for the second quarter of 2022. Investment securities totaled$2.105 billion , or 34.9% of total assets atJune 30, 2022 , compared to$1.303 billion , or 23.6% of total assets atJune 30, 2021 . The average balance of investment securities increased$906.8 million in prior year quarterly comparison. The average tax equivalent yield on investment securities, which is a non-GAAP measure, increased 12 basis points to 2.27% from 2.15% in prior year quarterly comparison. The investment portfolio had a net unrealized loss of$149.1 million atJune 30, 2022 as compared to a net unrealized gain of$25.6 million atJune 30, 2021 . See reconciliation of non-GAAP financial measures provided below. The FTE average yield on all earning assets, a non-GAAP measure, decreased 20 basis points in prior year quarterly comparison, from 3.56% for the second quarter of 2021 to 3.36% for the second quarter of 2022. Interest expense on average interest-bearing liabilities decreased 17 basis points from 0.46% for the second quarter of 2021 to 0.29% for the second quarter of 2022. Cost of all deposits averaged 14 basis points for the second quarter of 2022 compared to 28 basis points for the second quarter of 2021. See reconciliation of non-GAAP financial measures provided below.
First six months 2022 compared to first six months 2021
The Company reported net income available to common shareholders of$32.6 million for the six months endedJune 30, 2022 , compared to$32.2 million for the same period last year. Operating net earnings, a non-GAAP financial measure, decreased$764 thousand , or 2.4%, from$32.2 million atJune 30, 2021 to$31.5 million atJune 30, 2022 . Provision for credit losses increased$600 thousand for the year-over-year comparison. Operating net earnings excludes merger and conversion related costs of$1.2 million , net of tax, government grants from theU.S. Treasury of$652 thousand , net of tax, offset by$123 thousand in contributions related to the government grants from theU.S. Treasury and bargain purchase gain and loss on sale of fixed assets, net of tax,$123 thousand for the year-to-date period endingJune 30, 2022 . Operating earnings per share were$1.52 on a fully diluted basis for six-month period endingJune 30, 2022 , 37
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compared to
Net interest income increased by$3.5 million , or 4.5%, for the six months endedJune 30, 2022 , compared to$77.3 million for the same period in 2021. This increase was primarily due to interest earned on a high volume of securities and a lower rate on deposits. Average earning assets atJune 30, 2022 , increased$769.2 million , or 15.9%, and average interest-bearing liabilities increased$662.1 million , or 14.8%, when compared toJune 30, 2021 . Non-interest income for the six months endedJune 30, 2022 , was$19.8 million compared to$18.3 million for the same period in 2021, reflecting an increase of$1.5 million or 8.3%. The increase can be attributed to$1.1 million in services charges on deposit accounts and interchange fee income, BOLI proceeds of$1.6 million , and government grants from theU.S. Treasury of$873 thousand coupled with a$3.1 million decrease in mortgage fee income. The provision for credit losses was$600 thousand for the six months endedJune 30, 2022 , compared with$0 provision for credit losses for the same period in 2021. The allowance for credit losses of$32.4 million atJune 30, 2022 (approximately 1.0% 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$59.5 million for the six months endedJune 30, 2022 , an increase of$4.8 million or 8.8%, when compared with the same period in 2021. The increase is primarily attributable to an increase of$1.6 million in acquisition and charter conversion and$1.7 million related to the ongoing charges associated with the Cadence branches.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE FIRST
The First represents the primary asset of the Company. The First reported total assets of$6.027 billion atJune 30, 2022 compared to$6.067 billion atDecember 31, 2021 , a decrease of$39.6 million . Loans, including loans held for sale, increased$164.4 million to$3.132 billion , or 5.5%, during the first six months of 2022. Deposits atJune 30, 2022 totaled$5.311 billion compared to$5.262 billion atDecember 31, 2021 . For the six months period endedJune 30, 2022 , The First reported net income of$35.5 million compared to$36.4 million for the six months endedJune 30, 2021 . Merger and conversion charges equaled$1.2 million , net of tax, for the first six months of 2022 as compared to$0 for the first six months of 2021.
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$4.1 million , or 10.6%, for the second quarter of 2022 relative to the second quarter of 2021. Net interest income increased by$3.5 million , or 4.5%, to$80.7 million for the six month period endingJune 30, 2022 compared to the same period in 2021. The increase is primarily related to an increase in taxable interest and dividends coupled with a decrease in interest and fees on loans and was partially offset by declines in interest expense on deposits and borrowed funds. PPP loans totaled$6.3 million as ofJune 30, 2022 , a decrease of$151.5 million or 96.0% when compared to the same period last year due to loan forgiveness under the PPP program. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company's earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on nonaccrual status during the reporting period, and the recovery of interest on loans that had been on nonaccrual and were paid off, sold or returned to accrual status. The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages. 38
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Average Balances, Tax Equivalent Interest and Yields/Rates
($ in thousands) Three Months Ended
June 30, 2022 June 30, 2021
Tax Tax
Avg. Equivalent Yield/ Avg. Equivalent Yield/
Balance Interest Rate Balance Interest Rate
Earning Assets:
Taxable securities $ 1,634,679 $ 8,372 2.05 % $ 853,180 $ 4,017 1.88 %
Tax exempt securities 492,405 3,721 3.02 % 367,074 2,554 2.78 %
Total investment securities 2,127,084 12,093 2.27 % 1,220,254 6,571 2.15 %
Interest bearing deposits
in other banks 432,851 32 0.03 % 661,069 38 0.02 %
Loans 3,013,228 34,663 4.60 % 3,042,785 37,275 4.90 %
Total earning assets 5,573,163 46,788 3.36 % 4,924,108 43,884 3.56 %
Other assets 539,078 534,423
Total assets $ 6,112,241 $ 5,458,531 Interest-bearing
liabilities: Deposits$ 4,953,229 $ 1,905 0.15 %$ 4,374,372 $ 3,315 0.30 % Borrowed funds - - 0.00 % 3,355 52 6.20 % Subordinated debentures 144,834 1,841 5.08 % 144,591 1,821 5.04 % Total interest-bearing liabilities 5,098,063 3,746 0.29 % 4,522,318 5,188 0.46 % Other liabilities 420,768 288,363 Shareholders' equity 593,410 647,850 Total liabilities and shareholders' equity$ 6,112,241 $ 5,458,531 Net interest income$ 42,101 $ 38,050 Net interest margin 3.02 % 3.09 % Net interest income (FTE)*$ 43,042 3.06 %$ 38,696 3.11 % Net interest margin (FTE)* 3.09 % 3.14 % 39
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($ in thousands) Six Months Ended
June 30, 2022 June 30, 2021
Tax Tax
Avg. Equivalent Yield/ Avg. Equivalent Yield/
Balance Interest Rate Balance Interest Rate
Earning Assets:
Taxable securities $ 1,565,844 $ 14,523 1.85 % $ 777,054 $ 7,608 1.96 %
Tax exempt securities 446,984 6,964 3.12 % 367,197 5,144 2.80 %
Total investment securities 2,012,828 21,487 2.13 % 1,144,251 12,752 2.23 %
Interest bearing deposits
in other banks 628,279 45 0.01 % 637,559 86 0.03 %
Loans 2,979,738 68,817 4.62 % 3,069,815 76,888 5.01 %
Total earning assets 5,620,845 90,349 3.21 % 4,851,625 89,726 3.70 %
Other assets 535,698 546,608
Total assets $ 6,156,543 $ 5,398,233 Interest-bearing
liabilities: Deposits$ 4,987,254 $ 4,188 0.17 %$ 4,273,907 $ 7,164 0.34 % Borrowed funds - - 0.00 % 51,482 340 1.32 % Subordinated debentures 144,797 3,660 5.06 % 144,590 3,642 5.04 % Total interest-bearing liabilities 5,132,051 7,848 0.31 % 4,469,979 11,146 0.50 % Other liabilities 394,709 281,859 Shareholders' equity 629,783 646,395 Total liabilities and shareholders' equity$ 6,156,543 $ 5,398,233 Net interest income$ 80,740 $ 77,279 Net interest margin 2.87 % 3.19 % Net interest income (FTE)*$ 82,501 2.91 %$ 78,580 3.20 % Net interest margin (FTE)* 2.94 % 3.24 %
____________________________________________________
*Non-GAAP measure. See reconciliation of Non-GAAP financial measures.
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NON-INTEREST INCOME AND NON-INTEREST EXPENSE
The following table provides details on the Company's non-interest income and
non-interest expense for the three and six months ended June 30, 2022 and 2021:
($ in thousands) Three Months Ended
June 30, % of June 30, % of
EARNINGS STATEMENT 2022 Total 2021 Total
Non-interest income:
Service charges on deposit accounts $ 2,038 23.5 % $ 1,756 19.9 %
Mortgage fee income 1,227 14.2 % 2,372 26.9 %
Interchange fee income 3,102 35.8 % 3,145 35.6 %
(Loss) gain on securities, net (80) (0.9) % 77 0.9 %
Gain (loss) on sale of premises and equipment (115) (1.3) % - 0.0 %
Gain on acquisition 281 3.2 % - 0.0 %
Government awards/grants 171 2.0 % - 0.0 %
Other 2,040 23.5 % 1,472 16.7 %
Total non-interest income $ 8,664 100 % $ 8,822 100 %
Non-interest expense:
Salaries and employee benefits $ 17,237 55.6 % $ 16,036 58.5 %
Occupancy expense 3,828 12.4 % 3,813 13.9 %
FDIC/OCC premiums 546 1.8 % 499 1.8 %
Marketing 122 0.4 % 39 0.1 %
Amortization of core deposit intangibles 1,064 3.4 % 1,052 3.8 %
Other professional services 768 2.5 % 1,049 3.8 %
Other non-interest expense 6,218 20.1 % 4,964 18.1 %
Acquisition and charter conversion charges 1,172 3.8 % - 0.0 %
Total non-interest expense $ 30,955 100 % $ 27,452 100 %
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($ in thousands) Six Months Ended
June 30, % of June 30, % of
EARNINGS STATEMENT 2022 Total 2021 Total
Non-interest income:
Service charges on deposit accounts $ 4,078 20.6 % $ 3,516 19.2 %
Mortgage fee income 2,457 12.4 % 5,534 30.2 %
Interchange fee income 6,299 31.8 % 5,789 31.7 %
(Loss) gain on securities, net (83) (0.4) % 97 0.5 %
Gain (loss) on sale of premises and equipment (113) (0.6) % - 0.0 %
Gain on acquisition 281 1.4 % - 0.0 %
Government awards/grants 873 4.4 % - 0.0 %
BOLI income from death proceeds 1,630 8.2 % - 0.0 %
Other 4,399 22.2 % 3,359 18.4 %
Total non-interest income $ 19,821 100 % $ 18,295 100 %
Non-interest expense:
Salaries and employee benefits $ 34,036 57.2 % $ 32,091 58.7 %
Occupancy expense 7,704 12.9 % 7,692 14.1 %
FDIC/OCC premiums 1,112 1.9 % 993 1.8 %
Marketing 208 0.3 % 199 0.4 %
Amortization of core deposit intangibles 2,128 3.6 % 2,104 3.8 %
Other professional services 1,331 2.2 % 1,983 3.6 %
Other non-interest expense 11,446 19.2 % 9,655 17.6 %
Acquisition and charter conversion charges 1,580 2.7 % - 0.0 %
Total non-interest expense $ 59,545 100 % $ 54,717 100 %
PROVISION FOR INCOME TAXES
The Company sets aside a provision for income taxes on a monthly basis. The
amount of the provision is determined by first applying the Company's statutory
income tax rates to estimated taxable income, which is pre-tax book income
adjusted for permanent differences, and then subtracting available tax credits
if applicable. Permanent differences include but are not limited to tax-exempt
interest income, bank-owned life insurance cash surrender value income, and
certain book expenses that are not allowed as tax deductions.
The Company's provision for income taxes was $3.5 million or 18.0% of earnings
before income taxes for the second quarter 2022, compared to $3.8 million or
19.7% of earnings before income taxes for the same period in 2021. The provision
for the six months ended June 30, 2022 was $7.8 million or 19.4% of earnings
before income taxes compared to $8.6 million or 21.1% for the same period in
2021.
BALANCE SHEET ANALYSIS
EARNING ASSETS
The Company's interest-earning assets are comprised of investments and loans,
and the composition, growth characteristics, and credit quality of both are
significant determinants of the Company's financial condition. Investments are
analyzed in the section immediately below, while the loan and lease portfolio
and other factors affecting earning assets are discussed in the sections
following investments.
INVESTMENTS
The Company's investments can at any given time consist of debt securities and
marketable equity securities (together, the "investment portfolio"), investments
in the time deposits of other banks, surplus interest-earning balances in
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ourFederal 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$2.082 billion , or 34.5% of total assets atJune 30, 2022 compared to$1.752 billion , or 28.8% of total assets atDecember 31, 2021 . There were no federal funds sold atJune 30, 2022 andDecember 31, 2021 ; and interest-bearing balances at other banks decreased to$237.6 million atJune 30, 2022 from$804.5 million atDecember 31, 2021 . The Company's investment portfolio increased$330.9 million , or 18.7%, to$2.105 billion atJune 30, 2022 compared toDecember 31, 2021 . The increase in the portfolio is related to purchases that were made in the first six months of 2022 offset by a decrease in the fair market value of$159.8 million . The Company carries available-for-sale investments at their fair market values and held-to-maturities at their amortized costs. The fair value of available-for-sale securities totaled 1.489 billion atJune 30, 2022 compared to$1.752 billion atDecember 31, 2021 . The fair value of held-to-maturity investments totaled$561.3 million and$0 atJune 30, 2022 andDecember 31, 2021 , respectively. All other investment securities are classified as "available-for-sale" to allow maximum flexibility with regard to interest rate risk and liquidity management. Refer to the tables shown in Note 9 - Securities to the Consolidated Financial Statements for information on the Company's amortized cost and fair market value of its investment portfolio by investment type.
LOAN PORTFOLIO
Loans Held for Sale ("LHFS")
The Bank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and concurrently "locks in" with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the mortgage servicing rights being retained by the Bank. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors. Associated servicing rights are not retained. AtJune 30, 2022 , LHFS totaled$6.7 million , compared to$7.7 million atDecember 31, 2021 .
Loans Held for Investment ("LHFI")
LHFI, net of deferred fees and costs, were$3.093 billion atJune 30, 2022 , an increase of$163.7 million , or 5.6%, from$2.929 billion atDecember 31, 2021 . PPP loans were$6.3 million atJune 30, 2022 , a decrease of$34.8 million , or 84.7%, from$41.1 million atDecember 31, 2021 . The following table presents the Company's composition of LHFI, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans ($ in thousands): June 30, 2022 December 31, 2021 Percent Percent Amount of Total Amount of Total Commercial, financial and agriculture (1)$ 402,619 12.9 % $ 397,516 13.4 % Commercial real estate 1,810,204 57.9 % 1,683,698 57.0 % Consumer real estate 871,051 27.9 % 838,654 28.3 % Consumer installment 41,050 1.3 % 39,685 1.3 % Total loans 3,124,924 100 % 2,959,553 100 % Allowance for credit losses (32,400) (30,742) Net loans$ 3,092,524 $ 2,928,811 43
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(1)Loan amount includes
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 ofJune 30, 2022 , management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank's loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area.
NON-PERFORMING ASSETS
Non-performing assets ("NPAs") are comprised of loans for which the Company is
no longer accruing interest, and foreclosed assets including mobile homes and
other real estate owned. Loans are placed on nonaccrual status when they become
ninety days past due (principal and/or interest), unless the loans are
adequately secured and in the process of collection. Nonaccrual loans totaled
$23.7 million at June 30, 2022 , a decrease of $4.3 million from December 31,
2021 .
Other real estate owned is carried at fair value, determined by an appraisal,
less estimated costs to sell. Other real estate owned totaled $2.0 million at
June 30, 2022 as compared to $2.6 million at December 31, 2021 .
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 June 30, 2022 , the Bank had $21.1
million in loans that were classified as TDRs, of which $4.3 million were
performing as agreed with modified terms. At December 31, 2021 , the Bank had
$24.2 million in loans that were classified as TDRs of which $5.2 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
June 30, 2022 , $16.8 million in loans categorized as TDRs were classified as
non-performing as compared to $18.9 million at December 31, 2021 .
The following table presents comparative data for the Company's non-performing assets and performing TDRs as of the dates noted.
($ in thousands) June 30, 2022 December 31, 2021 Nonaccrual Loans Commercial, financial and agriculture $ 335 $ 190 Commercial real estate 19,134 21,527 Consumer real estate 4,205 6,288 Consumer installment 4 8 Total Nonaccrual Loans 23,678 28,013 Other real-estate owned 1,985 2,565 Total NPAs$ 25,663 $ 30,578 Performing TDRs$ 4,329 $ 5,220 Past due 90 days or more and still accruing $ 527 $ 45
Total NPAs as a % of total loans & leases net of unearned income 0.8 %
1.0 %
Total nonaccrual loans as a % of total loans & leases net of unearned income
0.8 % 0.9 %
NPAs totaled
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adjustments were$2.8 million on acquired loans atJune 30, 2022 . The ratio of annualized net charge-offs (recoveries) to total loans was (0.04)% for the quarter endedJune 30, 2022 compared to 0.03% for the year endedDecember 31, 2021 . ALLOWANCE FOR CREDIT LOSSES OnJanuary 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 effectiveJanuary 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 10 "Loans" for a description of the Company's methodology and the quantitative and qualitative factors included in the calculation. AtJune 30, 2022 , the ACL was$32.4 million , or 1.0% of LHFI, an increase of$1.7 million , or 5.4% when compared toDecember 31, 2021 . The increase is related to$450 thousand in provision for credit losses and net recoveries on several loans during 2022. AtDecember 31, 2021 , the allowance for loan losses was approximately$30.7 million , which was 1.0% of LHFI. AtJune 30, 2022 , 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. 45
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The table that follows summarizes the activity in the allowance for credit
losses for the three and six months ended
Allowance for Credit Losses
Three Months Ended Three Months Ended Six Months Ended Six Months Ended Balances:
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Average LHFI outstanding during period:
3,042,785
3,124,924 3,036,732 3,124,924 3,036,732
Allowance for Credit Losses:
Balance at beginning of period $ 31,620 $ 32,663 $ 30,742 $ 35,820
ASC 326 adoption adjustment - - - 397
Provision charged to expense 450 - 450 -
Charge-offs:
Commercial, financial and agriculture 94 490 146 1,476
Commercial real estate 24 166 27 3,007
Consumer real estate 140 124 147 263
Consumer installment 168 108 337 265
Total Charge-offs 426 888 657 5,011
Recoveries:
Commercial, financial and agriculture 44 242 97 325
Commercial real estate 290 161 514 293
Consumer real estate 338 183 948 237
Consumer installment 84 96 306 396
Total Recoveries 756 682 1,865 1,251
Net loan charge offs (recoveries) (330) 206 (1,208) 3,760
Balance at end of period $ 32,400 $ 32,457 $ 32,400 $ 32,457
RATIOS
Net Charge-offs (recoveries) to average
LHFI (annualized) 0.0 % 0.0 % (0.1) % 0.2 %
ACL to LHFI at end of period 1.0 % 1.1 % 1.0 % 1.1 %
Net Loan Charge-offs (recoveries) to PCL (73.3) % 0.0 % (268.4) % 0.0 %
The Company recorded $450 thousand provision for credit losses for the three and
six months ended June 30, 2022 and $0 for the three and six months ended
June 30, 2021 . The increased provision for credit losses resulted primarily from
an increase of $163.7 million in LHFI and $1.2 million in net recoveries during
2022.
The following tables summarizes the ACL at June 30, 2022 and at December 31,
2021 .
($ in thousands) June 30, 2022 December 31, 2021
Commercial, financial and agriculture $ 4,511 $ 4,873
Commercial real estate 18,668 17,552
Consumer real estate 8,752 7,889
Consumer installment 469 428
Total $ 32,400 $ 30,742
ALLOWANCE FOR CREDIT LOSSES ON OBSC EXPOSURES
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the
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Company. The ACL on OBSC exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The Company recorded$150 thousand provision for credit losses on OBSC exposures for the three and six periods endedJune 30, 2022 and$0 for the same period in 2021. OTHER ASSETS The Company's balance of non-interest earning cash and due from banks was$119.1 million atJune 30, 2022 and$115.2 million atDecember 31, 2021 . 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 theFederal Reserve Bank and theFederal Home Loan Bank ("FHLB"). Should a large "short" overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a "long" position is prevalent, the Company will let brokered deposits or other wholesale borrowings roll off as they mature, or might invest excess liquidity in higher-yielding, longer-term bonds. Total other securities increased$362 thousand to$22.6 million atJune 30, 2022 compared to$22.2 million atDecember 31, 2021 . The Company's net premises and equipment atJune 30, 2022 was$126.5 million and$126.0 million atDecember 31, 2021 ; an increase of$553 thousand , or 0.4% for the first six months of 2022. Operating right-of-use assets atJune 30, 2022 , totaled$4.0 million compared to$4.1 million atDecember 31, 2021 , a decrease of$45 thousand . Financing right-of-use assets atJune 30, 2022 , totaled$2.2 million compared to$2.4 million atDecember 31, 2021 , a decrease of$232 thousand . Bank-owned life insurance atJune 30, 2022 totaled$84.8 million compared to$87.4 million atDecember 31, 2021 , a decrease of$2.7 million . The majority of the decrease was due to death benefits received in the first quarter of 2022.Goodwill atJune 30, 2022 increased$279 thousand to$156.9 million compared to$156.7 million atDecember 31, 2021 . Other intangible assets, consisting primarily of the Company's core deposit intangible ("CDI"), decreased by$2.1 million to$27.4 million as ofJune 30, 2022 , compared to$29.5 million atDecember 31, 2021 .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. AtJune 30, 2022 , management has determined that no impairment exists.
Other real estate owned decreased by
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$692.8 million atJune 30, 2022 and$627.8 million atDecember 31, 2021 , although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 22.1% of gross loans atJune 30, 2022 and 21.2% atDecember 31, 2021 . The Company also had undrawn similar standby letters of credit to customers totaling$13.3 million atJune 30, 2022 and$12.3 million atDecember 31, 2021 . 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. 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 ofJune 30, 2022 . That letter of credit is backed by loans which are pledged to the FHLB by the Company. 47
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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 $1.506 billion at June 30, 2022 .
Furthermore, funds can be obtained by drawing down the Company's correspondent
bank deposit accounts, or by liquidating unpledged investments or other readily
saleable assets. In addition, the Company can raise immediate cash for temporary
needs by selling under agreement to repurchase those investments in its
portfolio which are not pledged as collateral. As of June 30, 2022 , the market
value of unpledged debt securities plus pledged securities in excess of current
pledging requirements comprised $1.195 billion of the Company's investment
balances, compared to $985.4 million at December 31, 2021 . Other forms of
balance sheet liquidity include but are not necessarily limited to any
outstanding federal funds sold and vault cash. The Company has a higher level of
actual balance sheet liquidity than might otherwise be the case, since it
utilizes a letter of credit from the FHLB rather than investment securities for
certain pledging requirements.
The Company's liquidity ratio as of
June 30, 2022 Policy Maximum Policy Compliance
Loans to Deposits (including FHLB advances) 58.4 % 90.0 % In Policy
Net Non-core Funding Dependency Ratio (2.9) % 20.0 % In Policy
Fed Funds Purchased / Total Assets 0.0 % 10.0 % In Policy
FHLB Advances / Total Assets 0.0 % 20.0 % In Policy
FRB Advances / Total Assets 0.0 % 10.0 % In Policy
Pledged Securities to Total Securities 46.1 % 90.0 % In Policy
Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.
As ofJune 30, 2022 , cash and cash equivalents were$356.8 million . In addition, loans and investment securities repricing or maturing within one year or less were approximately$636.5 million atJune 30, 2022 . Approximately$692.8 million in loan commitments could fund within the next three months and includes other commitments, primarily commercial and$13.3 million similar letters of credit, atJune 30, 2022 .
Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs.
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 endedDecember 31, 2021 . 48
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DEPOSITS
Deposits are another key balance sheet component impacting the Company's net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company's net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates for the six month periods endedJune 30, 2022 and 2021 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 theFederal Reserve Bank of Atlanta and provides additional funds for liquidity or lending. At quarter-endJune 30, 2022 ,$835.4 million in non-interest deposit balances and$1.044 billion in NOW deposit accounts were reclassified as money market accounts. A distribution of the Company's deposits with reclassification showing the year-to-date average balance and percentage of total deposits by type is presented for the noted periods in the following table. Deposit Distribution June 30, 2022 December 31, 2021 Average Average Average Rate Average Rate ($ in thousands) Balance Paid Balance Paid Non-interest-bearing demand deposits$ 367,059 - $ 253,324 - Interest bearing deposits: NOW accounts and other 1,853,061 0.25 % 1,529,293 0.48 % Money market accounts 2,049,196 0.03 % 1,870,156 0.08 % Savings accounts 521,714 0.02 % 440,997 0.03 % Time deposits 563,283 0.35 % 537,538 0.57 % Total interest-bearing deposits 4,987,254 0.15 % 4,377,964 0.27 % Total deposits$ 5,354,313 0.14 %$ 4,631,288 0.26 % As ofJune 30, 2022 , average deposits increased by$723.0 million , or 15.6% to$5.354 billion from$4.631 billion atDecember 31, 2021 . The most significant growth during 2022 compared to 2021 was in money market accounts. The average cost of interest-bearing deposits and total deposits was 0.15% and 0.14% during atJune 30, 2022 compared to 0.27% and 0.26% atDecember 31, 2021 . The decreased in the average cost of interest-bearing deposit during the first six months of 2022 compared toDecember 31, 2021 was related to the Bank gradually reducing interest rates during 2021. In addition to reducing rates, several larger public fund relationships renewed into lower rates during the first quarter of 2022.
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 theFederal Reserve Bank , securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and federal funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral. Total noninterest-bearing deposit liabilities increased by$66.7 million , or 8.8%, in the first six months of 2022. As ofJune 30, 2022 , junior subordinated debentures increased$150 thousand , net of issuance costs, to$144.9 million . Subordinated debt is discussed more fully in the below Capital section of this report. LEASE LIABILITIES As ofJune 30, 2022 , operating lease liabilities decreased$47 thousand , or 1.1% to$4.1 million from$4.2 million atDecember 31, 2021 . Finance lease liabilities decreased$88 thousand , or 4.2% to$2.0 million from$2.1 million atDecember 31, 2021 . 49
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OTHER LIABILITIES
Other liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities decreased by$3.7 million , or 15.8%, during the first six months of 2022. The primary decrease is related to deferred taxes on AFS unrealized losses that were classified as other assets during 2022. As ofJune 30, 2022 , accrued interest payable decreased$104 thousand , or 6.1% to$1.6 million from$1.7 million atDecember 31, 2021 . The ACL on OBSC exposures increased$150 thousand to$1.2 million atJune 30, 2022 when compared toDecember 31, 2021 .
CAPITAL
AtJune 30, 2022 , the Company had total shareholders' equity of$560.5 million , comprised of$21.8 million in common stock,$41.1 million in treasury stock,$459.5 million in surplus,$231.7 million in undivided profits and$111.4 million in accumulated comprehensive loss on available-for-sale securities. Total shareholders' equity at the end of 2021 was$676.2 million . The decrease of$115.7 million , or 17.1%, in shareholders' equity during the first six months of 2022 is primarily attributable to$119.4 million decrease in accumulated comprehensive loss related to the effect of rising interest rates on the market value of our available-for-sale securities, treasury stock acquired of$22.2 million , and$7.2 million in cash dividends paid, which decreases in total shareholders' equity were offset by capital added through net earnings of$32.6 million . OnDecember 16, 2020 , the Company announced that its Board of Directors has authorized a share repurchase program (the "2021 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 could, but is not required to, from time to time repurchase up$30 million 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, was be determined by management at is discretion and depended on a number of factors, including the market price of the Company's common stock, general market and economic conditions, and applicable legal and regulatory requirements. The 2021 Repurchase Program expired onDecember 31, 2021 . The Company repurchased 165,623 shares in 2021 pursuant to the 2021 Repurchase Program. OnFebruary 8, 2022 , the Company announced the renewal of the 2021 Repurchase Program that previously expired onDecember 31, 2021 . Under the renewed 2021 Repurchase Program, the Company could from time to time repurchase up to an aggregate of$30 million of the Company's issued and outstanding common stock in any manner determined appropriate by the Company's management, less the amount of prior purchases under the program during the 2021 calendar year. The renewed 2021 Repurchase Program was completed inFebruary 2022 when the Company's repurchases under the program approached the maximum authorized amount. The Company repurchased 600,000 shares for$22.2 million under the 2021 Repurchase Program in the first quarter of 2022. OnMarch 9, 2022 , the Company announced that its Board of Directors has authorized a new share repurchase program (the "2022 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 during the 2022 calendar year. Under the program, the Company may, but is not required to, from time to time repurchase up to$30 million of shares of its own common stock in any manner determined appropriate by the Company's management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, will be determined by management at is discretion and will depend on a number of factors, including the market price of the Company's common stock, general market and economic conditions, and applicable legal and regulatory requirements. The 2022 Repurchase Program will have an expiration date ofDecember 31, 2022 . 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 theBasal Committee on Banking Supervision inDecember 2010 (which standards are commonly referred to as "Basel III") to 50
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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 Capital
Required Basel III
June 30, December 31, Minimum Required to Fully
Regulatory Capital Ratios The First Bank 2022 2021 be Well Capitalized Phased In
Common Equity Tier 1 Capital Ratio 16.2 % 16.6 % 6.5 % 7.0 %
Tier 1 Capital Ratio 16.2 % 16.6 % 8.0 % 8.5 %
Total Capital Ratio 17.0 % 17.4 % 10.0 % 10.5 %
Tier 1 Leverage Ratio 10.4 % 10.8 % 5.0 % 7.0 %
Minimum Capital
Regulatory Capital Ratios The First June 30, December 31, Minimum Required to Required Basel III Fully
Bancshares, Inc. 2022 2021 be Well Capitalized Phased In Common Equity Tier 1 Capital Ratio* 12.7 % 13.7 % N/A N/A Tier 1 Capital Ratio** 13.1 % 14.1 % N/A N/A Total Capital Ratio 17.3 % 18.6 % N/A N/A Tier 1 Leverage Ratio 8.6 % 9.2 % N/A N/A
______________________________________
*The numerator does not include Preferred Stock and Trust Preferred. **The numerator includes Trust Preferred.
Our capital ratios remain very strong relative to the median for peer financial institutions, and atJune 30, 2022 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 beganJanuary 1, 2016 and was fully phased-in onJanuary 1, 2019 at 2.5%. Under this guidance banking institutions with a CETI, Tier 1Capital 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 ofJune 30, 2022 , 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
OnJune 30, 2006 , The Company issued$4.1 million of floating rate junior subordinated deferrable interest debentures toThe 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. OnJuly 27, 2007 , The Company issued$6.2 million of floating rate junior subordinated deferrable interest debentures toThe 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 51
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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 acquiredFMB'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.
Subordinated Notes
On
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. OnSeptember 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, maturingOctober 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 afterOctober 1, 2025 , and to redeem the Notes at any time in whole upon certain other specified events. The Company had$144.9 million of subordinated debt, net of deferred issuance costs$2.0 million and unamortized fair value mark$619 thousand , atJune 30, 2022 , compared to$144.7 million , net of deferred issuance costs$2.1 million and unamortized fair value mark$646 thousand , atDecember 31, 2021 .
Reconciliation of Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP inthe United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. This Quarterly Report on Form 10-Q includes operating net earnings; diluted operating earnings per share; net interest income, FTE; pre-tax, pre-provision operating earnings; total interest income, FTE; interest income investment securities, FTE and certain ratios derived from these non-GAAP financial measures. The Company believes that the non-GAAP financial measures included in this Quarterly Report on Form 10-Q allow management and investors to understand and compare results in a more consistent manner for the periods presented herein. The tax equivalent adjustment to net interest income, total interest income, and interest income investment securities recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 25.3% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and believes it enhances the comparability of income and expenses arising from taxable and nontaxable sources. Operating net earnings and diluted operating earnings per share exclude acquisition and charter conversion charges, bargain purchase gain and loss 52
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on sale of fixed assets,Treasury awards, BOLI income from death proceeds, and contributions related to theTreasury awards. Pre-tax, pre-provision operating earnings excludes acquisition and charter conversion charges, provision for credit losses, bargain purchase gain and loss on sale of fixed assets,Treasury awards, BOLI income from death proceeds, and charitable contributions related toTreasury awards. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company's results reported in accordance with GAAP for the periods presented, and other bank holding companies may define or calculate these measures differently. The most comparable GAAP measures to these measures are earnings per share, net interest income, earnings, total interest income, and average yield on investment securities, respectively. These non-GAAP financial measures should not be considered in isolation and do not purport to be an alternative to the efficiency ratio, net income, earnings per share, net interest income, net interest margin, average yield on investment securities, average yield on all earning assets, common equity, book value per common share or other GAAP financial measures as a measure of operating performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided below. Operating Net Earnings ($ in thousands) Three Months Three Months Six Months Six Months Ended June 30, Ended June 30, Ended June 30, Ended June 30, 2022 2021 2022 2021 Net income available to common shareholders$ 15,753 $
15,600
- 1,580 -
Tax on acquisition and charter conversion
charges (297) - (400) -
Bargain purchase gain and loss on sale of
fixed assets (165) - (165) -
Tax on bargain purchase gain and loss on
sale of fixed assets 42 - 42 -
Treasury awards (170) - (872) -
Tax on Treasury awards 42 - 220 -
BOLI income from death proceeds - - (1,630) -
Contributions related to Treasury awards 165 - 165 -
Tax on contributions related to Treasury
awards (42) - (42) -
Net earnings available to common
shareholders, operating $ 16,500 $
15,600
Diluted Operating Earnings per Share
($ in thousands)
Three Months Three Months
Ended June 30, Ended June 30, Six Months Ended Six Months Ended
2022 2021 June 30, 2022 June 30, 2021
Diluted earnings per share $ 0.76 $
0.74
0.06 - 0.08 -
Tax on acquisition and charter conversion
charges (0.02) - (0.02) -
Bargain purchase gain and loss on sale of
fixed assets (0.01) - (0.01) -
Tax on bargain purchase gain and loss on
sale of fixed assets - - - -
Effect of Treasury awards (0.01) - (0.04) -
Tax on Treasury awards 0.01 - 0.01 -
BOLI income from death proceeds - - (0.08) -
Contributions related to Treasury awards 0.01 - 0.01 -
Tax on contributions related to Treasury
awards - - - -
Diluted earnings per share, operating $ 0.80 $
0.74
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Net Interest Income, Fully Tax Equivalent
($ in thousands)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021
Net interest income $ 42,101 $ 38,050 $ 80,740 $ 77,279
Tax exempt investment income (2,780) (1,908) (5,202) (3,843)
Taxable investment income 3,721 2,554 6,963 5,144
Net interest income, FTE $ 43,042 $
38,696
Average earning assets$ 5,573,163 $
4,924,108
3.09 % 3.14 % 2.94 % 3.24 %
Pre-Tax Pre-Provision Operating Earnings
($ in thousands)
Three Months
Ended June 30, Three Months Ended Six Months Ended Six Months Ended
2022 June 30, 2021 June 30, 2022 June 30, 2021
Earnings before income taxes $ 19,210 $ 19,420 $ 40,416 $ 40,857
Acquisition and charter conversion charges 1,172 - 1,580 -
Provision for credit loss 600 - 600 -
Bargain purchase gain and loss on sale of
fixed assets (165) - (165) -
Treasury awards (170) - (872) -
BOLI income from death proceeds - - (1,630) -
Contributions related to Treasury awards 165 - 165 -
Pre-Tax, Pre-Provision Operating Earnings
19,420 $ 40,094 $ 40,857
Total Interest Income, Fully Tax Equivalent
($ in thousands)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021
Total interest income $ 45,847 $ 43,238 $ 88,588 $ 88,425
Tax-exempt investment income (2,780) (1,908) (5,202) (3,843)
Taxable investment income 3,721 2,554 6,963 5,144
Total interest income, FTE $ 46,788 $ 43,884 $ 90,349 $ 89,726
Yield on average earning assets, FTE 3.36 % 3.56 % 3.21 % 3.70 %
($ in thousands)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2022 2021 2022 2021
Interest income investment securities $ 11,152 $ 5,925 $ 19,726 $ 11,451
Tax-exempt investment income (2,780) (1,908) (5,202) (3,843)
Taxable investment income 3,721 2,554 6,963 5,144
Interest income investment securities,
FTE $ 12,093 $
6,571
Average investment securities$ 2,127,084 $
1,220,254
Yield on investment securities, FTE 2.27 % 2.15 % 2.13 % 2.23 %
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