THE FIRST BANCSHARES, INC. FORWARD LOOKING STATEMENTS
Certain statements made or incorporated by reference in this 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
and Section 21E of 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," "plans," "potential" 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 novel coronavirus ("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:
· the negative impacts and disruptions resulting from the outbreak of the
novel coronavirus, or COVID-19, 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;
· government or regulatory responses to the COVID-19 pandemic;
· 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
rates, the capital requirements promulgated by the Basel Committee on
Banking Supervision ("Basel Committee"), potential impacts from the TaxCuts and Jobs Act, the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") of 2020, 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 loan loss provisions required to replenish the allowance in
future periods;
· reduced earnings due to higher credit losses because our loans areconcentrated 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 loan losses through additional
loan 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;
28
· 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;
· changes in accounting principles, policies, or guidelines, including the
impact of the new 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 Securities and Exchange Commission ("SEC").
We have based our forward-looking statements on our current expectations about
future events. Although we believe that the expectations reflected in and the
assumptions underlying our forward-looking statements are reasonable, we cannot
guarantee that these expectations will be achieved or the assumptions will be
accurate. The Company disclaims any obligation to update such factors or to
publicly announce the results of any revisions to any of the forward-looking
statements included herein to reflect future events or developments. Additional
information concerning these risks and uncertainties is contained in Item 1A.
Risk Factors in our Annual Report on Form 10-K for the year ended December 31,
2019 , in this Quarterly Report on Form 10Q, and in our other filings with the
Securities and Exchange Commission , available at the SEC's
website, http://www.sec.gov.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States . The financial information
and disclosures contained within those statements are significantly impacted by
Management's estimates and judgments, which are based on historical experience
and incorporate various assumptions that are believed to be reasonable under
current circumstances. Actual results may differ from those estimates under
divergent conditions.
Critical accounting policies are those that involve the most complex and
subjective decisions and assessments, and have the greatest potential impact on
the Company's stated results of operations. In Management's opinion, the
Company's critical accounting policies deal with the following areas: the
establishment of the allowance for loan and lease losses (referred to as the
"allowance for loan losses" or the "ALLL"), as explained in detail in Note 10 -
Loans to the Consolidated Financial Statements and in the "Allowance for Loan
and Lease Losses" sections of this Item 2. - Management's Discussion and
Analysis of Financial Condition and Results of Operations; the valuation of
impaired loans and foreclosed assets, as discussed in Note 10 - Loans to the
Consolidated Financial Statements; income taxes and deferred tax assets and
liabilities, especially with regard to the ability of the Company to recover
deferred tax assets as discussed in the "Provision for Income Taxes" and "Other
Assets" sections of this Item No. 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations; and goodwill and other intangible
assets, which are evaluated annually for impairment, as discussed in the "Other
Assets" section of this Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations. Critical accounting policies are
evaluated on an ongoing basis to ensure that the Company's financial statements
incorporate our most recent expectations with regard to those areas.
As a result of the Company's immediate response to COVID-19, including loan
modifications/payment deferral programs and the Paycheck Protection Program, as
well as acquisition and integration of SWG, and increased uncertainty related to
certain judgments and estimates, the Company has elected to temporarily defer or
suspend the application of two provisions 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 provide
the Company with temporary relief from troubled debt restructurings and from
CECL, 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.
29
OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
First quarter 2020 compared to first quarter 2019
The Company reported net income available to common shareholders of$8.3 million for the three months endedMarch 31, 2020 , compared with net income available to common shareholders of$7.6 million for the same period last year. For the first quarter of 2020, fully diluted earnings per share were$0.44 , compared to$0.48 for the first quarter of 2019. Operating net earnings, a non-GAAP financial measure, for the first quarter of 2020 totaled$8.9 million compared to$9.9 million for the first quarter of 2019, a decrease of$1.0 million or 10.5%. The net, after tax, provision charge in the quarter comparison was$4.6 million , which accounted for the decrease. Operating net earnings for the first quarter of 2020 excludes merger-related costs of$576 thousand , net of tax. Operating net earnings for the first quarter of 2019 excludes merger-related costs of$2.5 million , net of tax, and income of$174 thousand , net of tax, related to theCommunity Development Financial Institutions Fund of the U.S. Treasury . Operating earnings per share were$0.47 on a fully diluted basis for the first quarter 2020, compared to$0.63 for the same period in 2019, excluding the merger-related costs and income described above. See reconciliation of non-GAAP financial measures provided below. Net interest income increased to$34.1 million , or 25.6%, for the three months endedMarch 31, 2020 , compared to$27.1 million for the same period in 2019. The increase was due to interest income earned on a higher volume of loans. Fully tax equivalent ("FTE") net interest income, which is a non-GAAP measure, totaled$34.5 million and$27.4 million for the first quarter of 2020 and 2019, respectively. FTE net interest income increased$7.1 million in the prior year quarterly comparison due to increased loan volume. Purchase accounting adjustments accounted for$1.2 million of the difference in net interest income for the first quarter comparisons. First quarter 2020 FTE net interest margin, which is a non-GAPP measure, of 3.93% included 28 basis points related to purchase accounting adjustments compared to 3.89% for the same quarter in 2019, which included 18 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the net interest margin decreased 6 basis points in prior year quarterly comparison. In the first quarter of 2020, theFederal Reserve reduced the Federal Funds rate to near zero. The reduction in the rates contributed to the 6 basis point decrease in the core net interest margin. Quarterly average earning assets atMarch 31, 2020 increased$701 thousand , or 24.9%. Non-interest income for the three months endedMarch 31, 2020 , was$6.5 million compared to$5.6 million for the same period in 2019, reflecting an increase of$920 thousand or 16.6%. Service charges and interchange fee income increased$417 thousand along with mortgage income of$658 thousand . Pre-tax, pre-provision operating earnings which exclude acquisition charges and treasury awards increased 29.9% to$17.8 million for the quarter endedMarch 31, 2020 as compared to$13.7 million for the first quarter of 2019. See reconciliation of non-GAAP financial measures provided below. Provision for loan losses totaled$7.1 million for the quarter endedMarch 31, 2020 , an increase of$6.0 million , or 532% as compared to$1.1 million for the first quarter of 2019.$5.6 million of the$7.1 million provision for loan loss expense for the quarter endedMarch 31, 2020 was related to anticipated economic effects of COVID-19. The allowance for loan losses of$20.8 million atMarch 31, 2020 or 0.80% of total loans is based on our methodology and is considered by management to be adequate to cover losses inherent in the loan portfolio. See "Allowance for Loan and Lease 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$23.4 million for the three months endedMarch 31, 2020 , an increase of$1.5 million or 7.1%, when compared with the same period in 2019. Excluding the decrease in acquisition charges of$2.4 million for the first quarter of 2019, non-interest expense increased$4.0 million in the first quarter of 2020, of which$3.1 million was attributable to the operations of FPB and FFB, as compared to first quarter of 2019. FINANCIAL CONDITION The First represents the primary asset of the Company. The First reported total assets of$4.054 billion atMarch 31, 2020 compared to$3.935 billion atDecember 31, 2019 , an increase of$119.5 million . Loans increased$1.9 million to$2.602 billion , or 0.1%, during the first three months of 2020. Deposits atMarch 31, 2020 totaled$3.280 billion compared to$3.082 billion atDecember 31, 2019 . 30 For the three months period endedMarch 31, 2020 , The First reported net income of$10.1 million compared to$9.6 million for the three months endedMarch 31, 2019 . Merger charges, net of tax, equaled$576 thousand for the first three months of 2020 as compared to$2.5 million for the first three months of 2019.
CORONAVIRUS (COVID-19) IMPACT
InMarch 2020 , theWorld Health Organization recognized the novel Coronavirus Disease 2019 ("COVID-19") as a pandemic. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally. In response to the outbreak, federal and state authorities in theU.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, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have 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 thatFederal Reserve policy will maintain a low interest rate environment for the foreseeable future. These disruptions may result in a decline in demand for banking products or services, including loans and deposits, which could impact our future financial condition, result of operations and liquidity. The impacts of the COVID-19 pandemic on the economy and the banking industry are rapidly evolving and the future effects are unknown at this time. The Company is working to adapt to the changing environment and proactively plan for contingencies. To that end, the Company has and is taking steps to protect the health of our employees and to work with our customers experiencing difficulties as a result of this virus. The Company has many non-branch personnel working remotely. All of our branches are open, and we are servicing our clients with limited lobby access by appointment only. 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. Our staff has been working to assist clients with payment modifications and processing of Paycheck Protection Program ("PPP") applications with theUnited States Small Business Administration (the "SBA"). As ofApril 24, 2020 , we have approximately 1,660 PPP loans approved through the SBA for$199.3 million and have processed payment modifications on 926 loans with principal balances of$401.5 million , representing 15% of total portfolio dollars. 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$6.9 million , or 25.6%, for the first quarter of 2020 relative to the first quarter of 2019. The increase was due to interest income earned on a higher volume of loans. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company's earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on nonaccrual status during the reporting period, and the recovery of interest on loans that had been on nonaccrual and were paid off, sold or returned to accrual status. 31
The following tables depict, for the periods indicated, certain information
related to the average balance sheet and average yields on assets and average
costs of liabilities. Such yields are derived by dividing income or expense by
the average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
Average Balances, Tax Equivalent Interest and Yields/Rates
($ in thousands) Three Months Ended
Three Months Ended
March 31, 2020 March 31, 2019
Tax Tax
Avg. Equivalent Yield/ Avg. Equivalent Yield/
Balance interest Rate Balance interest Rate
Earning Assets: Taxable securities$ 560,613 $ 3,944 2.81 %$ 435,576 $ 3,581 3.29 % Tax exempt securities 224,212 1,821 3.25 % 117,831 1,015 3.45 %
Total investment securities 784,825 5,765 2.94 % 553,407 4,596 3.32 % Interest bearing deposits in other banks 129,978 289 0.89 % 94,778 130 0.55 % Loans 2,602,340 36,005 5.53 % 2,167,495 28,804 5.32 % Total earning assets 3,517,143 42,059 4.78 % 2,815,680 33,530 4.76 % Other assets 473,350 366,081 Total assets$ 3,990,493 $ 3,181,761 Interest-bearing liabilities: Deposits$ 3,042,529 $ 5,413 0.71 %$ 2,024,718 $ 4,363 0.86 % Borrowed funds 145,267 917 2.53 % 86,269 546 2.53 %
Subordinated debentures 80,697 1,203 5.96 % 80,540 1,233 6.12 % Total interest-bearing liabilities 3,268,493 7,533 0.92 % 2,191,527 6,142 1.12 % Other liabilities 174,691 600,017 Stockholders' equity 547,309 390,217 Total liabilities and stockholders' equity$ 3,990,493 $ 3,181,761 Net interest income$ 34,065 $ 27,131 Net interest margin 3.87 % 3.85 % Net interest income (FTE)*$ 34,526 3.86 %$ 27,388 3.64 % Net interest margin (FTE)* 3.93 % 3.89 %
*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 three months ended
($ in thousands) Three Months Ended
% of % of
EARNINGS STATEMENT 3/31/20 Total 3/31/19 Total
Non-interest income:
Service charges on deposit accounts $ 1,914 29.56 % $ 1,831 32.97 %
Mortgage fee income 1,567 24.20 % 909 16.37 %
Interchange fee income 1,986 30.68 % 1,652 29.74 %Gain (loss) on securities , net 174 2.69 %
38 0.68 % Financial assistance award - - 233 4.20 % Other charges and fees 833 12.87 % 891 16.04 % Total non-interest income$ 6,474 100 %$ 5,554 100 % Non-interest expense: Salaries and employee benefits$ 13,228 56.43 %$ 10,697 48.87 % Occupancy expense 2,918 12.45 % 2,442 11.15 % FDIC premiums 147 0.63 % (52 ) (0.24 )% Marketing 213 0.91 % 175 0.80 %
Amortization of core deposit intangibles 938 4.00 % 716 3.27 %
Other professional services 874 3.73 %
920 4.20 %
Other non-interest expense 4,381 18.69 %
3,816 17.43 %
Acquisition and integration charges 740 3.16 %
3,179 14.52 % Total non-interest expense$ 23,439 100 %$ 21,893 100 % 32 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$1.7 million or 16.9% of earnings before income taxes for the first quarter of 2020, compared to$2.0 million or 21.0% of earnings before income taxes for the same period in 2019. The decrease in the effective tax rate for 2020 is related to the CARES Act that was signed into law onMarch 27, 2020 . The Act includes several significant provisions for corporations including increasing the amount of deductible interest under section 163(j), 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 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$763.0 million , or 18.8% of total assets atMarch 31, 2020 compared to$765.1 million , or 19.4% of total assets atDecember 31, 2019 . There were no federal funds sold atMarch 31, 2020 andDecember 31, 2019 ; and interest-bearing balances at other banks increased to$179.5 million atMarch 31, 2020 from$79.0 million atDecember 31, 2019 . The Company's investment portfolio decreased$2.9 million , or 0.4%, to a total fair market value of$788.9 million atMarch 31, 2020 compared toDecember 31, 2019 . The portfolio decrease can be attributed to calls, maturities and mortgage paydowns related to the decline in interest rates since the end of 2019. The Company's investments are classified as "available-for-sale" to allow maximum flexibility with regard to interest rate risk and liquidity management. 33 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 AND LEASE PORTFOLIO
The Company's gross loans and leases, excluding the associated allowance for loan losses and including loans held for sale, totaled$2.616 billion atMarch 31, 2020 , an increase of$4.4 million , or 0.2%, fromDecember 31, 2019 . The increase is attributed to organic loan growth. The following table shows the composition of the loan portfolio by category ($ in thousands): Composition of Loan Portfolio March 31, 2020 December 31, 2019 Percent Percent Amount of Total Amount of Total
Loans held for sale$ 13,288 0.5 %$ 10,810 0.4 % Commercial, financial and agricultural 327,979 12.5 %
332,600 12.7 %
Real estate - commercial 1,048,854 40.1 % 1,028,012 39.4 %
Real estate - residential 828,378 31.7 % 814,282 31.2 %
Real estate - construction 334,707 12.8 % 359,195 13.8 %Lease financing receivable 3,526 0.1 % 3,095 0.1 % Obligations of states and subdivisions 18,218 0.7 %
20,716 0.8 %
Consumer and other 40,626 1.6 % 42,458 1.6 %
Total loans 2,615,576 100 % 2,611,168 100 %Allowance for loan losses (20,804 ) (13,908 ) Net loans$ 2,594,772 $ 2,597,260 In the context of this discussion, a "real estate residential loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in its market area by obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes that the risk elements of its loan portfolio have been reduced through strategies that diversify the lending mix.
Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Associated servicing rights are not retained. Commitments from investors to purchase the loans are obtained upon origination.
LOAN CONCENTRATIONS Diversification within the loan portfolio is an important means of reducing inherent lending risk. AtMarch 31, 2020 , The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas, which includeMississippi ,Louisiana ,Alabama ,Florida andGeorgia . NON-PERFORMING ASSETS Non-performing assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and 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, including PCI loans, totaled$37.8 million atMarch 31, 2020 , an decrease of$1.0 million fromDecember 31, 2019 . Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled$7.0 million atMarch 31, 2020 as compared to$7.3 million atDecember 31, 2019 . 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. AtMarch 31, 2020 , the Bank had$31.1 million in loans that were classified as "TDRs", of which$6.2 million were performing as agreed with modified terms. AtDecember 31, 2019 , the Bank had$32.0 million in loans that were classified as troubled debt restructurings of which$6.8 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 ofMarch 31, 2020 ,$24.9 million in loans categorized as TDRs were classified as non-performing as compared to$25.1 million at December
31,
2019.
34
The following table, which includes purchased credit impaired loans, presents
comparative data for the Company's non-performing assets and performing TDRs as
of the dates noted:
($ in thousands) 3/31/20 12/31/19
Nonaccrual Loans
Real Estate:
1-4 Family residential construction $ - $ -
Other Construction/land 1,578 1,548
1-4 family residential revolving/open-end 1,154 998
1-4 family residential closed-end 8,679 8,986
Nonfarm, nonresidential, owner-occupied 20,270 20,157
Nonfarm, nonresidential, other nonfarm nonresidential 3,772 4,647
Total Real Estate 35,453 36,336
Commercial and industrial 2,069 2,234
Loans to individuals - other 229
265
Total Nonaccrual Loans 37,751 38,835
Other real-estate owned 6,974 7,299
Total Non-performing Assets$ 44,725 $ 46,134 Performing TDRs$ 6,171
1.72 % 1.77 % Total nonaccrual loans as a % of total loans & leases net of unearned income
1.45 % 1.49 %
Non-performing assets totaled$44.7 million atMarch 31, 2020 , compared to$46.1 million atDecember 31, 2019 , a decrease of$1.4 million . The ALLL/total loans ratio was 0.80% atMarch 31, 2020 , and 0.53% atDecember 31, 2019 . The increase in the ALLL/total loans ratio is primarily attributable to an increase in the ALLL due to concerns with the anticipated economic effects of COVID-19, as discussed under the heading "Allowance for Loan and Lease Losses" below. Total valuation accounting adjustments total$11.1 million on acquired loans. The ratio of annualized net charge-offs (recoveries) to total loans was 0.03% for the quarter endedMarch 31, 2020 compared to (0.002)% atDecember 31, 2019 .
The following table represents the Company's impaired loans, excluding PCI loans, as of the dates noted:
($ in thousands) March 31, December 31,
2020 2019
Impaired Loans:
Impaired loans without a valuation allowance $ 14,067 Impaired loans with a valuation allowance 15,159
15,761
Total impaired loans$ 29,226 $ 29,939 Allowance for loan losses on impaired loans at period end 4,035
4,424
Total nonaccrual loans $ 29,226 $ 29,939 Past due 90 days or more and still accruing 2,392
2,715
Average investment in impaired loans 29,266
26,195
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company has developed policies and procedures for evaluating the overall
quality of its credit portfolio and the timely identification of potential
problem loans. Management's judgment as to the adequacy of the allowance for
credit losses is based upon a number of assumptions about future events which it
believes to be reasonable, but which may not prove to be accurate. The level of
this allowance is dependent upon a number of factors, including the total amount
of past due loans, general economic conditions, and management's assessment of
potential losses. This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant change. Ultimately, losses may
vary from current estimates and future additions to the allowance may be
necessary. Thus, there can be no assurance that charge-offs in future periods
will not exceed the allowance for loan losses or that additional increases in
the allowance for loan losses will not be required. Management evaluates the
adequacy of the allowance for loan losses quarterly and makes provisions for
loan losses based on this evaluation.
35
The Company's allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance. The Company's determination of this part of the allowance is based upon quantitative and qualitative factors. The Company uses a loan loss history based upon the prior ten years to determine the appropriate allowance. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management's knowledge of the loan portfolio. These factors require judgment on the part of management and are based upon state and national economic reports received from various institutions and agencies including theFederal Reserve Bank ,United States Bureau of Economic Analysis ,Bureau of Labor Statistics , meetings with the Company's loan officers and loan committees, and data and guidance received or obtained from the Company's regulatory authorities. The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. Impaired loans are determined based upon a review by internal loan review and senior loan officers. Impaired loans are loans for which the Bank does not expect to receive contractual interest and/or principal by the due date. A specific allowance is assigned to each loan determined to be impaired based upon the value of the loan's underlying collateral. Appraisals are used by management to determine the value of the collateral.
The sum of the two parts constitutes management's best estimate of an appropriate allowance for loan losses. On a quarterly basis, the estimated allowance is determined and presented to the Company's audit committee for review and approval.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis, and a specific allowance is assigned to each loan determined to be impaired. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if, in the Company's opinion, the ultimate source of repayment will be generated from the liquidation of collateral. The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower's financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. AtMarch 31, 2020 , the consolidated allowance for loan losses was approximately$20.8 million , or 0.80% of outstanding loans excluding loans held for sale. AtDecember 31, 2019 , the allowance for loan losses amounted to approximately$13.9 million , which was 0.53% of outstanding loans excluding loans held for sale. The provision for loan losses is a charge to earnings to maintain the allowance for loan losses at a level consistent with management's assessment of the collectability of the loan portfolio in light of current economic conditions and market trends. During the quarter, theWorld Health Organization declared the spread of the COVID-19 virus to be a global pandemic. This has caused significant disruptions to theU.S. economy across all industries. While it is 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. This analysis of the possibility of increasing credit losses resulted in the need for a higher than normal provision expense to provide the required allowance reserve for this situation. If economic conditions continue to worsen, further funding to the allowance may be required in future periods. The Company maintains the allowance at a level that management believes is adequate to absorb probable incurred losses inherent in the loan portfolio. Specifically identifiable and quantifiable losses are immediately charged-off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off. The Company's provision for loan losses was$7.1 million atMarch 31, 2020 ,$3.7 million atDecember 31, 2019 and$1.1 million atMarch 31, 2019 . The overall allowance for loan losses results from consistent application of our loan loss reserve methodology as described above. AtMarch 31, 2020 , management believes the allowance is appropriate and has been derived from consistent application of our methodology. Should any of the factors considered by management in evaluating the appropriateness of the allowance for loan losses change, management's estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for loan losses. 36
The table that follows summarizes the activity in the allowance for loan and lease losses for the noted periods ($ in thousands):
Allowance for Loan and Lease Losses
Three Months Three Months For the Year
Ended Ended Ended
Balances: 3/31/20 3/31/19 12/31/19Average gross loans & leases outstanding during
period:$ 2,602,340 $ 2,167,495 $ 2,341,202 Gross loans & leases outstanding at end of period: 2,615,575 2,341,586 2,611,168 Allowance for Loan and Lease Losses: Balance at beginning of period$ 13,908 $ 10,065 $ 10,065 Provision charged to expense 7,102 1,123 3,738 Charge-offs: Real Estate-
1-4 family residential construction - - - Other construction/land - - - 1-4 family revolving, open-ended - - 54 1-4 family closed-end 9 42 109 Nonfarm, nonresidential, owner-occupied 333
- 54Total Real Estate 342 42 217 Commercial and industrial 99 4 141 Credit cards - - 33 Automobile loans 21 1 48 Loans to individuals - other 28 28 - All other loans 10 - 225 Total 500 75 664 Recoveries: Real Estate-
1-4 family residential construction - - - Other construction/land 9 6 129 1-4 family revolving, open-ended 25 1 19 1-4 family closed-end 24 19 221 Nonfarm, nonresidential, owner-occupied 60
4 13Total Real Estate 118 30 382 Commercial and industrial 76 12 85 Credit cards - - 3 Automobile loans 33 13 40 Loans to individuals - other 21 12 72 All other loans 46 55 187 Total 294 122 769
Net loan charge offs (recoveries) 206
(47 ) (105 ) Balance at end of period$ 20,804 $ 11,235 $ 13,908 RATIOS
Net Charge-offs (recoveries) to average loans &
leases (annualized) 0.03 % (0.008 )% (0.004 )% Allowance for loan losses to gross loans & leases at end of period 0.80 % 0.48 % 0.53 %
Net Loan Charge-offs (recoveries) to provision
for loan losses 2.90 % (4.19 )% (2.81 )%
37
The following tables represent how the allowance for loan losses is allocated to
a particular loan type, as well as the percentage of the category to total loans
at March 31, 2020 and December 31, 2019 .
Allocation of the Allowance for Loan Losses
($ in thousands) March 31, 2020
% of loans
in each category
Amount to total loansCommercial, financial and agriculture$ 4,466
13.2 %
Commercial real estate 13,095 65.8 %
Consumer real estate 2,840 19.6 %
Installment and other 403 1.4 %
Unallocated - -
Total $ 20,804 100 %
($ in thousands) December 31, 2019
% of loans
in each category
Amount to total loansCommercial, financial and agriculture$ 3,043
13.1 %
Commercial real estate 8,836 65.5 %
Consumer real estate 1,694 19.8 %
Installment and other 296 1.6 %
Unallocated 39 -
Total $ 13,908 100 %
OTHER ASSETS
The Company's balance of non-interest earning cash and due from banks was $107.3
million at March 31, 2020 and $89.7 million at December 31, 2019 . 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
persists 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 $779 thousand due to a decrease in FHLB stock.
The Company's net premises and equipment at March 31, 2020 was $108.0 million
and $105.0 million at December 31, 2019 ; an increase of $3.0 million , or 2.9%
for the first three months of 2020. The increase is attributed to the recording
of a finance lease in the first quarter of 2020. Bank-owned life insurance
increased to 65.7 million at March 31, 2020 , an increase of $6.1 million from
December 31 . 2019. Goodwill at March 31, 2020 remained unchanged at $158.6
million when compared to December 31, 2019 . Other intangible assets, consisting
primarily of the Company's core deposit intangible, decreased by $938 thousand
in the first quarter of 2020, as compared to December 31, 2019 .
38
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. Given the
recent events surrounding the COVID-19 pandemic, the Company performed a peer
stock price comparison and did not note any impairment. At this time, we do not
believe there exists any impairment to goodwill and intangible assets,
long-lived assets, or available-for-sale securities due to the COVID-19
pandemic.
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$361.5 million atMarch 31, 2020 and$410.3 million atDecember 31, 2019 , although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 14.0% of gross loans atMarch 31, 2020 and 15.8% atDecember 31, 2019 , with the decrease related to revolving open-ended lines secured by 1-4 family and commercial and industrial loans. The Company also had undrawn standby similar letters of credit to customers totaling$12.3 million atMarch 31, 2020 and$12.1 million atDecember 31, 2019 . 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 ofMarch 31, 2020 . 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 via 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$1.093 billion atMarch 31, 2020 . 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 ofMarch 31, 2020 , the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised$306.8 million of the Company's investment balances, compared to$348.3 million atDecember 31, 2019 . The decrease in unpledged securities fromMarch 2020 compared toDecember 2019 is primarily due to an decrease in portfolio assets. 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. That letter of credit, which is backed by loans that are pledged to the FHLB by the Company, totaled$109.5 million atMarch 31, 2020 . 39
The Company's liquidity ratio as of
Policy
March 31, 2020 Policy Maximum ComplianceLoans to Deposits (including FHLB advances) 76.7 % 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 2.7 % 20.0 % In Policy
FRB Advances / Total Assets 0.0 % 10.0 % In PolicyPledged Securities toTotal Securities 58.3 %
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 ofMarch 31, 2020 , cash and cash equivalents were$286.8 million . In addition, loans and investment securities repricing or maturing within one year or less were approximately$682.3 million atMarch 31, 2020 . Approximately$363.4 million in loan commitments could fund within the next three months and other commitments, primarily commercial and similar letters of credit, totaled$11.2 million atMarch 31, 2020 . Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs. DuringMarch 2020 , in response to COVID-19, theFederal 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, theFederal Reserve announced it would begin quantitative easing, or large-scale asset purchases, consisting primarily ofTreasury securities and mortgage-backed securities to stem the effects of the pandemic on the financial markets. A prolonged outbreak of 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 stockholder 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, 2019 .
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 three-month periods endedMarch 31, 2020 and 2019 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 noninterest 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 endMarch 31, 2020 ,$409.3 million in noninterest deposit balances and$643.5 million in NOW deposit accounts were reclassified as money market accounts. A distribution of the Company's deposits showing the balance and percentage of total deposits by type is presented for the noted periods in the following table. Deposit Distribution March 31, 2020 December 31, 2019 ($ in thousands) Amount Percent of Total Amount Percent of Total Non-interest bearing demand deposits$ 340,606 10.4 %
$ 723,208 23.5 % NOW accounts and Other 478,526 14.6 % 941,598 30.7 % Money Market accounts 1,530,796 46.7 % 462,810 15.0 % Savings accounts 296,177 9.0 % 287,200 9.3 %
Time Deposits of less than$250,000 462,808 14.1 % 479,386 15.6 % Time Deposits of$250,000 or more 168,881 5.2 %
182,331 5.9 %
Total deposits $ 3,277,794 100 % $ 3,076,533 100 %
40
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 non-deposit interest-bearing liabilities decreased by$98.1 million , or 33.3%, in the first three months of 2020, due in part to a decrease in notes payable to the FHLB of$95.2 million . The Company had junior subordinated debentures totaling$80.7 million atMarch 31, 2020 and$80.7 million December 31, 2019 , which consists of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities and of 10 and 15 year subordinated notes issued by the Company in 2018. OTHER LIABILITIES Other liabilities are principally comprised of accrued interest payable, lease liabilities and other accrued but unpaid expenses. Other liabilities increased by$4.5 million , or 16.9%, during the first three months of 2020. The Company recorded a finance lease during the first quarter of 2019 resulting in an increase to other liabilities of$2.7 million . For more information regarding the Company's leases, see Note 12 - Leases to the Consolidated Financial Statements. CAPITAL AtMarch 31, 2020 , the Company had total stockholders' equity of$555.9 million , comprised of$19.0 million in common stock,$5.7 million in treasury stock,$409.9 million in surplus,$116.9 million in undivided profits and$15.8 million in accumulated comprehensive income (loss) on available-for-sale securities. Total stockholders' equity at the end of 2019 was$543.7 million . The increase of$12.3 million , or 2.3%, in stockholders' equity during the first three months of 2020 is comprised of capital added via net earnings of$8.3 million , an$5.7 million increase in accumulated comprehensive income for available-for-sale securities and, offset by$1.9 million in cash dividends paid. OnMarch 28, 2019 , the Company announced that its Board of Directors authorized a share repurchase program to purchase up to an aggregate of$20 million of the Company's common stock (the "March 2019 program"). This share repurchase program expired as ofDecember 31, 2019 . Under theMarch 2019 program, the Company repurchased shares of its common stock periodically in a manner determined by the Company's management. The Company repurchased 168,188 shares under theMarch 2019 program during the year endedDecember 31, 2019 . 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 Basel III requirement 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 Regulatory Capital Ratios March 31, December 31, to be Well
The First, A National Banking Association 2020 2019
Capitalized
Common Equity Tier 1 Capital Ratio 15.5 % 15.1 % 6.5 %
Tier 1 Capital Ratio 15.5 % 15.1 % 8.0 %
Total Capital Ratio 16.2 % 15.6 % 10.0 %
Tier 1 Leverage Ratio 11.4 % 11.8 % 5.0 %
41
Minimum
Required to
Regulatory Capital Ratios March 31, December 31, be Well
The First Bancshares, Inc. 2020 2019 Capitalized
Common Equity Tier 1 Capital Ratio* 12.7 % 12.5 % N/A
Tier 1 Capital Ratio** 13.2 % 13.0 % N/A
Total Capital Ratio 16.3 % 15.8 % N/A
Tier 1 Leverage Ratio 9.8 % 10.3 % 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 atMarch 31, 2020 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. In the first quarter of 2020,U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). The Company has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security ("CARES Act"), until the date on which the national emergency related to the COVID-19 outbreak is terminated orDecember 31, 2020 whichever occurs first. The Company has elected to utilize the five-year CECL transition. As ofMarch 31, 2020 , 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$4,124,000 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$4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of 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$6,186,000 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$6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 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 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$6,000,000 of Trust Preferred Securities to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 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.
42
In accordance with the provisions of ASC Topic 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.
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, operating earnings per share, fully tax
equivalent ("FTE") net interest income, FTE net interest margin and tangible
book value per common share. 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
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. 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. These non-GAAP financial measures should not be considered
in isolation and do not purport to be an alternative to net income, earnings per
share, net interest income, net interest margin, 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
Ended Ended
March 31, March 31,
2020 2019
Net income available to common
shareholders $ 8,311 $ 7,635
Effect of acquisition charges 740 3,179
Tax on acquisition charges (164 ) (712 )
Treasury awards - (233 )
Tax on Treasury awards - 59
Net earnings available to common
shareholders, operating $ 8,887 $ 9,928
Operating Earnings per Share
($ in thousands) Three Months Three Months
Ended Ended
March 31, March 31,
2020 2019
Book value per common share $ 29.49 $ 26.30
Effect of intangible assets per share 9.97 8.51
Tangible book value per common share
Diluted earnings per share $ 0.44 $ 0.48
Effect of acquisition charges 0.04 0.21
Tax on acquisition charges (0.01 ) (0.05 )
Effect of Treasury Awards - (0.01 )
Tax on Treasury Awards - -
Diluted earnings per share, operating
43
Net Interest Income Fully Tax Equivalent
($ in thousands) Three Months Three Months
Ended Ended
March 31, March 31,
2020 2019
Net interest income $ 34,065 $ 27,131
Tax exempt investment income (1,360 ) (758 )
Taxable investment income 1,821 1,015
Net interest income fully tax equivalent
Average earning assets $ 3,517,143 $ 2,815,680
Net interest margin fully tax equivalent 3.93 % 3.89 %
Pre-Tax Pre-Provision Operating Earnings
($ in thousands) Three Months Three Months
Ended Ended
March 31, March 31,
2020 2019
Earnings before income taxes $ 9,998 $ 9,669
Acquisition charges 740 3,179
Provision for loan losses 7,102 1,123
Treasury Awards - (233 )
Pre-Tax, Pre-Provision Operating Earnings
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