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 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," "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 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 theFederal 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 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;
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;
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;
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ability of borrowers to repay loans, which can be adversely affected by a
number of factors, including changes in economic conditions, adverse trends or
? events affecting business industry groups, reductions in real estate values or
markets, business closings or lay-offs, natural disasters, public health emergencies and international instability;
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
?
requirements promulgated by the
Committee"), potential impacts from the Tax Cuts and Jobs Act, the 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 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 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;
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;
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? 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, 2019 , in this Quarterly Report on Form 10Q, and in our other filings with theSecurities and Exchange Commission , available at theSEC's website, http://www.sec.gov. CRITICAL ACCOUNTING POLICIES The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe 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 ofU.S. Generally Accepted Accounting Principles (GAAP), as allowed by the CARES Act, which was signed into law by the President onMarch 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.
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 36 Table of Contents 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. The pandemic is having an adverse impact on certain industries the Company serves, including hotels, restaurants, retail, convenience stores, healthcare, and direct energy. As ofSeptember 30, 2020 , the Company's aggregate outstanding exposure in these segments was$452.5 million , or 14.3% of total loans. 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. Based on management's current assessment of the increased inherent risk in the loan portfolio, the provision for loan and leases losses as ofSeptember 30, 2020 totaled$21.6 million of which$18.0 million was related to the anticipated economic effects of COVID-19. If economic conditions continue to worsen, further funding to the allowance may be required in future periods. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES Act") was signed into law. The CARES Act is a$2 trillion stimulus package that is intended to provide relief toU.S businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes a$349 billion fund for the creation of the Paycheck Protection Program ("PPP") through theSmall Business Administration ("SBA") andTreasury Department . The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing payroll deductions evidencing their compliant use of funds and otherwise complying with the terms of the program. The PPP was amended in April to include an additional$320 billion in funding. OnJune 5, 2020 ,President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 ("PPPFA") that amends the CARES Act. The PPPFA extended the covered period in which to use PPP loans, extended the forgiveness period from eight weeks to a maximum of 24 weeks and increased flexibility for small businesses that have had issues with rehiring employees and attempting to fill vacant positions due to COVID-19. The program reduced the proportion of proceeds that must be spent on payroll costs from 75% to 60%. In addition, the PPPFA also extended the payment deferral period for the PPP loans until the date when the amount of loan forgiveness is determined and remitted to the lender. For PPP recipientswho do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends. Section 4013 of the CARES Act, "Temporary Relief from Troubled Debt Restructurings," provides banks the option to temporarily suspend certain requirements underU.S. GAAP related to TDR for a limited period of time to account for the effects of COVID-19. To qualify for Section 4013 of the CARES Act, borrowers must have been current atDecember 31, 2019 . All modifications are eligible as long as they are executed betweenMarch 1, 2020 and the earlier of (i)December 31, 2020 , or (ii) the 60th day after the end of the COVID-19 national emergency declared by the President of theU.S. Loans that were current as ofDecember 31, 2019 are not TDRs. In addition, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to COVID-19 to borrowerswho were current prior to any relief are not TDRs under ASC Subtopic 310-40, "Troubled Debt Restructuring by Creditors." These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. We began receiving requests from our borrowers for loan and lease deferrals in March. Payment modifications include the deferral of principal payments or the deferral of principal and interest payments for terms generally 90-180 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower. As ofSeptember 30, 2020 , we have modified approximately 1,610 loans for$709.6 million , of which 1,386 loans for$564.0 million were modified to defer monthly principal and interest payments and 224 loans for$145.6 were modified from monthly principal and interest payments to interest only. As ofSeptember 30, 2020 we have approximately 3,230 loans approved through the SBA for$260.2 million . The Company had finalized the formal review and approval process and the results of its CECL estimate as of year-end but 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 novel coronavirus ("COVID-19") outbreak is terminated orDecember 31, 2020 whichever occurs first. Upon adoption of ASU 2016-13, the Company has determined that the impact to the allowance for credit losses will be an increase under the new standard due to the life of loan loss estimation methodology, as well as the requirement to record an allowance on acquired loans previously recorded at fair value. As disclosed previously, it can be reasonably expected that a 37 Table of Contents
probable range in the reserve as a percentage of total loans after adoption of
this guidance to be between 0.68% and 1.39% as of
OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
Third quarter 2020 compared to third quarter 2019
The Company reported net income available to common shareholders of$11.9 million for the three months endedSeptember 30, 2020 , compared with net income available to common shareholders of$12.3 million for the same period last year, a decrease of$355 thousand or 2.9%. In comparing the quarters, an increased provision for loan losses in the amount of$5.9 million was expensed during the third quarter of 2020 as compared to the third quarter 2019. For the third quarter of 2020, fully diluted earnings per share were$0.55 , compared to$0.71 for the third quarter of 2019. The additional provision for loan losses expense of$5.9 million , which is primarily attributable to the COVID-19 pandemic, accounted for a decrease of$0.21 in fully diluted earnings per share. Operating net earnings, a non-GAAP financial measure, for the third quarter of 2020 totaled$12.1 million compared to$12.8 million for the third quarter of 2019, a decrease of$731 thousand or 5.69%. Operating net earnings for the third quarter of 2020 excludes merger-related costs of$177 thousand , net of tax. Operating net earnings for the third quarter of 2019 excludes merger-related costs of$553 thousand , net of tax. Operating earnings per share were$0.56 on a fully diluted basis for the third quarter 2020, compared to$0.74 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
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 $40.6 million and $30.7 million for the third quarter of 2020 and 2019,
respectively. FTE net interest income increased $9.9 million in the prior year
quarterly comparison due to increased loan volume. Purchase accounting
adjustments accounted for $557 thousand of the difference in net interest income
for the third quarter comparisons. Third quarter 2020 FTE net interest margin,
which is a non-GAPP measure, of 3.58% included 17 basis points related to
purchase accounting adjustments compared to 4.05% for the same quarter in 2019,
which included 19 basis points related to purchase accounting adjustments.Excluding the purchase accounting adjustments, the net interest margin decreased 45 basis points in prior year quarterly comparison.
Non-interest income for the three months endedSeptember 30, 2020 , was$8.8 million compared to$7.1 million for the same period in 2019, reflecting an increase of$1.7 million or 23.8%. Mortgage income increased$1.2 million in prior year quarterly comparison primarily due to an increase in mortgage loan volume.
Pre-tax, pre-provision operating earnings, a non-GAAP measure, excludes
acquisition charges, increased 26.5% to
See reconciliation of non-GAAP financial measures provided below.
Provision for loan losses totaled$6.9 million for the quarter endedSeptember 30, 2020 , an increase of$5.9 million , or 610.6% as compared to$974 thousand for the third quarter of 2019.$5.8 million of the$6.9 million provision for loan loss expense for the quarter endedSeptember 30, 2020 was related to the economic effects of COVID-19. The allowance for loan losses of$34.3 million atSeptember 30, 2020 or 1.09% 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$26.9 million for the three months endedSeptember 30, 2020 , an increase of$6.1 million or 29.3%, when compared with the same period in 2019. Excluding the net decrease in acquisition charges of$467 thousand for the quarterly comparison, non-interest expense increased$6.6 million in the third quarter of 2020, of which$4.1 million was attributable to the operations of FFB and SWG, as compared to second quarter of 2019. 38 Table of Contents Investment securities totaled$984.9 million , or 19.1% of total assets atSeptember 30, 2020 , versus$640.8 million , or 18.4% of total assets atSeptember 30, 2019 . The average balance of investment securities increased$335.8 million in prior year quarterly comparison, mostly as a result of the acquisitions of FFB and SWG. The average tax equivalent yield on investment securities decreased 76 basis points to 2.48% from 3.24% in prior year quarterly comparison. The investment portfolio had a net unrealized gain of$33.2 million atSeptember 30, 2020 as compared to a net unrealized gain of$13.9 million atSeptember 30, 2019 . The FTE average yield on all earning assets, a non-GAAP measure, decreased 80 basis points in prior year quarterly comparison, from 4.94% for the third quarter of 2019 to 4.14% for the third quarter of 2020. Average interest expense decreased 56 basis points from 1.17% for the third quarter of 2019 to 0.61% for the third quarter of 2020. Cost of all deposits averaged 47 basis points for the third quarter of 2020 compared to 76 basis points for the third quarter of 2019. See reconciliation of non-GAAP financial measures provided below.
First nine months 2020 compared to first nine months 2019
The Company reported net income available to common shareholders of$37.2 million for the nine months endedSeptember 30, 2020 , compared to$31.9 million for the same period last year. Operating net earnings decreased$2.6 million , or 7.4%, from$34.8 million atSeptember 30, 2019 to$32.2 million atSeptember 30, 2020 . Provision for loan losses increased$18.7 million for the year-over-year comparison. Operating net earnings excludes merger-related costs of$2.5 million , net of tax,$7.0 million bargain purchase gain and a gain on the sale of land of$463 thousand , net of tax, for the year-to-date period endingSeptember 30, 2020 , and merger-related costs of$3.1 million , net of tax, and income of$174 thousand , net of tax, related to the Financial Assistance Award from theU.S. Department of the Treasury , for the year-to-date period endingSeptember 30, 2019 . Operating earnings per share were$1.56 on a fully diluted basis for nine-month period endingSeptember 30, 2020 , compared to$2.07 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
This increase was primarily due to interest earned on a high volume of loans and securities. Average earning assets atSeptember 30, 2020 , increased$1.086 billion , or 35.5%, and average interest-bearing liabilities increased$1.446 billion , or 61.7%, when compared toDecember 31, 2019 . Non-interest income for the nine months endedSeptember 30, 2020 , was$30.9 million compared to$19.4 million for the same period in 2019, reflecting an increase of$11.6 million or 59.7%. Excluding the awards and gains mentioned above, non-interest income increased$4.2 million in year-over-year comparison.
Mortgage income increased
The provision for loan losses was
The
allowance for loan losses of$34.3 million atSeptember 30, 2020 (approximately 1.09% of total loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. Total valuation accounting adjustments totaled$8.8 million on acquired loans. 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$78.4 million for the nine months endedSeptember 30, 2020 , an increase of$14.8 million or 23.3%, when compared with the same period in 2019.$11.7 million of the increase is related to the operations of FFB
and SWG. FINANCIAL CONDITION
The First represents the primary asset of the Company. The First reported total assets of$5.155 billion atSeptember 30, 2020 compared to$3.935 billion atDecember 31, 2019 , an increase of$1.220 billion . Loans increased$546.9 million to$3.144 billion , or 21.1%, during the first nine months of 2020.
Deposits at
For the nine months period endedSeptember 30, 2020 , The First reported net income of$43.0 million compared to$37.3 million for the nine months endedSeptember 30, 2019 . Merger charges, net of tax, equaled$2.1 million for the first nine months of 2020 as compared to$3.1 million for the first nine months of 2019. 39 Table of Contents 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$9.5 million , or 31.2%, for the third quarter of 2020 relative to the third quarter of 2019. The increase was due to interest income earned on a higher volume of loans. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company's earning assets, deposits, and other interest-bearing liabilities.
Net
interest income is also impacted by the reversal of interest for loans placed on
nonaccrual status during the reporting period, and the recovery of interest on
loans that had been on nonaccrual and were paid off, sold or returned to accrual
status.
The following tables depict, for the periods indicated, certain information
related to the average balance sheet and average yields on assets and average
costs of liabilities. Such yields are derived by dividing income or expense by
the average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
Average Balances, Tax Equivalent Interest and Yields/Rates
($ in thousands) Three Months Ended Three Months Ended
September 30, 2020 September 30, 2019
Tax Tax
Avg. Equivalent Yield/ Avg. Equivalent Yield/
Balance interest Rate Balance interest Rate
Earning Assets:
Taxable securities $ 616,168 $ 3,432 2.23 % $ 494,184 $ 3,926 3.18 %
Tax exempt securities 341,550 2,513 2.94 % 127,750 1,108 3.47 %Total investment securities 957,718 5,945 2.48 % 621,934 5,034 3.24 % Interest bearing deposits in other banks 413,786 29
0.03 % 71,165 9 0.05 % Loans 3,165,653 40,999 5.18 % 2,343,392 32,480 5.54 % Total earning assets 4,537,157 46,973 4.14 % 3,036,491 37,521 4.94 % Other assets 548,183 402,711 Total assets$ 5,085,340 $ 3,439,202 Interest-bearing liabilities: Deposits$ 3,960,054 $ 4,912 0.50 %$ 2,140,419 $ 5,061 0.95 % Borrowed funds 115,935 265 0.91 % 95,241 451 1.89 % Subordinated debentures 81,470 1,188 5.83 % 80,619 1,270 6.30 %
Total interest-bearing liabilities 4,157,459 6,365
0.61 % 2,316,279 6,782 1.17 % Other liabilities 295,354 652,899 Shareholders' equity 632,527 470,024
Total liabilities and shareholders' equity$ 5,085,340
$ 3,439,202 Net interest income$ 39,973 $ 30,459 Net interest margin 3.52 % 4.01 % Net interest income (FTE)*$ 40,608 3.53 %$ 30,739 3.77 % Net interest margin (FTE)* 3.58 % 4.05 %
* See reconciliation of Non-GAAP financial measures.
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($in thousands) Nine Months Ended Nine Months Ended
September 30, 2020 September 30, 2019
Tax Tax
Avg. Equivalent Yield/ Avg. Equivalent Yield/
Balance interest Rate Balance interest Rate
Earning Assets:
Taxable securities $ 594,216 $ 10,815 2.43 % $ 475,967 $ 11,734 3.29 %
Tax exempt securities 289,087 6,674 3.08 % 123,353 3,181 3.44 %
Total investment securities 883,303 17,489 2.64 % 599,320 14,915 3.32 %
Interest bearing deposits in other
banks 288,898 337 0.16 % 85,370 227 0.34 %
Loans 2,975,535 117,597 5.27 % 2,283,468 93,748 5.47 %
Total earning assets 4,147,736 135,423 4.35 % 2,968,158 108,890 4.89 %
Other assets 516,956 392,135
Total assets $ 4,664,692 $ 3,360,293
Interest-bearing liabilities:
Deposits $ 3,584,416 $ 15,544 0.58 % $ 2,128,661 $ 14,747 0.92 %
Borrowed funds 125,608 1,406 1.49 % 73,024 1,285 2.35 %
Subordinated debentures 80,969 3,567 5.87 % 80,579 3,691 6.11 %
Total interest-bearing liabilities 3,790,993 20,517 0.72 % 2,282,264 19,723 1.15 %
Other liabilities 277,911 639,335
Shareholders' equity 595,788 438,694
Total liabilities and shareholders'
equity $ 4,664,692 $ 3,360,293
Net interest income $ 113,217 $ 88,362
Net interest margin 3.64 % 3.97 %
Net interest income (FTE)* $ 114,906 3.63 % $ 89,167 3.74 %
Net interest margin (FTE)* 3.69 % 4.01 %
* 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 nine months ended September 30, 2020 and 2019: ($ in thousands) Three Months Ended Nine Months Ended EARNINGS STATEMENT 9/30/20 % of Total 9/30/19 % of Total 9/30/20 % of Total 9/30/19 % of Total Non-interest income: Service charges on deposit accounts 1,779 20.2 %$ 1,979 27.9 % 5,289 17.1 %$ 5,728 29.6 % Mortgage fee income 2,961 33.7 % 1,800 25.3 % 7,174 23.2 % 4,268 22.0 % Interchange fee income 2,491 28.3 % 2,252
31.7 % 6,871 22.2 % 5,949 30.7 % Gain (loss) on securities , net
32 0.4 % 57 0.8 % 278 0.9 % 131 0.7 %
Financial assistance award - - % - - % - - % 233 1.2 %
Gain on acquisition - - % - - % 7,023 22.7 % - - %
Gain on sale of premises and
equipment - - % - - % 461 2.0 % - - %
Other charges and fees 1,531 17.4 % 1,015
14.3 % 3,852 11.9 % 3,064 15.8 %
Total non-interest income
100 % $ 7,103 100 % $ 30,948 100 % $ 19,373 100 %
Non-interest expense:
Salaries and employee
benefits 15,494 57.5 % 11,612 55.8 % 44,589 56.8 % 33,924 53.3 %
Occupancy expense 3,826 14.2 % 2,632 12.6 % 9,943 12.7 % 7,606 12.0 %
FDIC premiums 447 1.7 % 111 0.5 % 831 1.1 % 485 0.8 %
Marketing 24 0.1 % 62 0.3 % 262 0.3 % 397 0.6 %
Amortization of core deposit
intangibles 1,052 3.9 % 796 3.8 % 3,041 3.9 % 2,308 3.6 %
Other professional services 990 3.7 % 1,140 5.5 % 2,848 3.6 % 3,040 4.8 %
Other non-interest expense 4,865 18.0 % 3,767 18.1 % 13,658 17.4 % 11,874 18.7 % Acquisition and integration charges
238 0.9 % 705 3.4 % 3,273 4.2 % 3,975 6.2 %
Total non-interest expense $ 26,936 100 % $ 20,825 100 %$ 78,445 100 %$ 63,609 100 % 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$3.0 million or 20.1% of earnings before income taxes for the third quarter 2020, compared to$3.5 million or 22.1% of earnings before income taxes for the same period in 2019. The provision for the nine months endedSeptember 30, 2020 was$6.9 million or 15.7% of earnings before income taxes compared to$9.3 million or 22.7% of earnings before income taxes for the same period in 2019. The decrease in the effective tax rate for 2020 is attributed to the$7.0 million , non-taxable, bargain purchase gain related to the SWG acquisition and 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. 42 Table of Contents 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$957.5 million , or 18.5% of total assets atSeptember 30, 2020 compared to$765.1 million , or 19.4% of total assets atDecember 31, 2019 . There were no federal funds sold atSeptember 30, 2020 andDecember 31, 2019 ; and interest-bearing balances at other banks increased to$471.8 million atSeptember 30, 2020 from$79.0 million atDecember 31, 2019 . The Company's investment portfolio increased$193.1 million , or 24.4%, to a total fair market value of$984.9 million atSeptember 30, 2020 compared toDecember 31, 2019 ,$89.7 million of which was due to the acquisition of SWG duringApril 2020 , as well as an increase in the fair market value of$19.7 million . The Company's investments are classified as "available-for-sale" to allow maximum flexibility with regard to interest rate risk and liquidity management. Refer to the tables shown in Note 9 - Securities to the Consolidated Financial Statements for information on the Company's amortized cost and fair market value of its investment portfolio by investment type.
LOAN AND LEASE PORTFOLIO
The Company's gross loans and leases, excluding the associated allowance for loan losses and including loans held for sale, totaled$3.178 billion atSeptember 30, 2020 , an increase of$567.2 million , or 21.7%, fromDecember 31, 2019 . The acquisition of SWG accounted for approximately$392.3 million , net of fair value marks, of the increase. The Company also saw an increase in the commercial, financial, and agriculture loan portfolio of$260.2 million related to PPP loans. As ofSeptember 30, 2020 , we have modified approximately 1,610 loans for$709.6 million , of which 1,386 loans for$564.0 million were modified to defer monthly principal and interest payments and 224 loans for$145.6 were modified from monthly principal and interest payments to interest only. As ofSeptember 30, 2020 we have approximately 3,230 loans approved through the SBA for$260.2
million.
43
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The following table shows the composition of the loan portfolio by category ($
in thousands):
Composition of Loan Portfolio
September 30, 2020 December 31, 2019
Percent Percent
Amount of Total Amount of Total
Loans held for sale $ 22,482 0.8 % $ 10,810 0.4 %Commercial, financial and agricultural 576,812 18.1 %
332,600 12.7 % Real estate - commercial 1,191,513 37.5 % 1,028,012 39.4 % Real estate - residential 999,381 31.4 % 814,282 31.2 % Real estate -construction 330,070 10.4 % 359,195 13.8 % Lease financing receivable 2,478 0.1 % 3,095 0.1 %
Obligations of states and subdivisions 13,345 0.4 %
20,716 0.8 % Consumer and other 42,333 1.3 % 42,458 1.6 % Total loans 3,178,414 100 % 2,611,168 100 % Allowance for loan losses (34,256) (13,908) Net loans$ 3,144,158 $ 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. AtSeptember 30, 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$37.3 million atSeptember 30, 2020 , an decrease of$1.5 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$5.2 million atSeptember 30, 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. AtSeptember 30, 2020 , the Bank had$30.2 million in loans that were classified as TDRs, of which$6.5 million were performing as agreed with modified terms. AtDecember 31, 2019 , the Bank had$32.0 million in loans that were classified as TDRs 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 ofSeptember 30, 2020 ,$23.7 million in loans categorized as TDRs were classified as non-performing as compared to$25.1 million atDecember 31, 2019 . 44 Table of Contents
The following table, which includes PCI loans, presents comparative data for the Company's non-performing assets and performing TDRs as of the dates noted:
($ in thousands) 9/30/20 12/31/19 Nonaccrual Loans Real Estate:
1-4 Family residential construction $ - $ - Other Construction/land 2,083
1,548
1-4 family residential revolving/open-end 795
998
1-4 family residential closed-end 8,562
8,986
Nonfarm, nonresidential, owner-occupied 19,132
20,157
Nonfarm, nonresidential, other nonfarm nonresidential 3,717
4,647
Total Real Estate 34,289 36,336
Commercial and industrial 2,971 2,234
Loans to individuals - other 40 265
Total Nonaccrual Loans 37,300 38,835
Other real-estate owned 5,202 7,299
Total Non-performing Assets $ 42,502 $ 46,134
Performing TDRs $ 6,544
1.35 % 1.77 % Total nonaccrual loans as a % of total loans & leases net of unearned income
1.18 % 1.49 %
Non-performing assets totaled$42.5 million atSeptember 30, 2020 , compared to$46.1 million atDecember 31, 2019 , a decrease of$3.6 million . The ALLL/total loans ratio was 1.09% atSeptember 30, 2020 , and 0.53% atDecember 31, 2019 . The increase in the ALLL/total loans ratio is primarily attributable to an increase in the ALLL due to concerns with the anticipated economic effects of COVID-19, as discussed under the heading "Allowance for Loan and Lease Losses" below.
Total valuation accounting adjustments total
The ratio of annualized net charge-offs (recoveries) to total loans was 0.09% for the quarter endedSeptember 30, 2020 compared to (0.002)% atDecember 31, 2019 .
The following table represents the Company's impaired loans, excluding PCI loans, as of the dates noted:
($ in thousands) September 30, December 31,
2020 2019
Impaired Loans:
Impaired loans without a valuation allowance $ 13,748 $ 14,178
Impaired loans with a valuation allowance 16,014 15,761
Total impaired loans $ 29,762 $ 29,939
Allowance for loan losses on impaired loans at period end 6,294 4,424
Total nonaccrual loans $ 26,878 $ 29,939
Past due 90 days or more and still accruing 2,396 2,715
Average investment in impaired loans 29,711 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
45
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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. 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. AtSeptember 30, 2020 , the consolidated allowance for loan losses was approximately$34.3 million , or 1.09% 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 first quarter of 2020, theWorld Health Organization declared the spread of 46 Table of Contents the COVID-19 virus to be a global pandemic. That has caused significant disruptions to theU.S. economy across all industries. With the number of diagnosed cases of the virus rising during the second and third quarters, it is still impossible to foresee how long the pandemic will last and what effect it will have on the economy, or to what extent this crisis will impact the Company. All available industry statistics and trends, as well as internal tracking of loan repayment ability and payment forgiveness across the portfolio is being analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration. This ongoing analysis of the possibility of increasing credit losses resulted in the need for a provision expense similar to what was taken in the first quarter that will continue to provide an adequate 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$21.6 million for the nine months endedSeptember 30, 2020 ,$3.7 million for the year endedDecember 31, 2019 and$2.9 million for the nine months endedSeptember 30, 2019 . The overall allowance for loan losses results from consistent application of our loan loss reserve methodology as described above. AtSeptember 30, 2020 , management believes the allowance is appropriate and has been derived from consistent application of our methodology. Should any of the factors considered by management in evaluating the appropriateness of the allowance for loan losses change, management's estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for loan losses. 47 Table of Contents
The table that follows summarizes the activity in the allowance for loan and lease losses for the noted periods ($ in thousands):
Allowance for Loan and Lease Losses
Three Months Three Months Nine Months Nine Months For the Year
Ended Ended Ended Ended Ended
Balances: 9/30/20 9/30/19 9/30/20 9/30/19 12/31/19
Average gross loans & leases outstanding
during
period: $ 3,165,653 $
2,343,392
3,178,414 2,361,090 3,178,414 2,361,090 2,611,168 Allowance for Loan and Lease Losses: Balance at beginning of period
$ 28,064 $
12,091
6,921 974 21,628 2,888 3,738
Charge-offs:
Real Estate- 1-4 family residential construction - - - - - Other construction/land - - 13 - - 1-4 family revolving, open-ended 30 54 117 54 54 1-4 family closed-end 25 - 34 108 109 Nonfarm, nonresidential, owner-occupied 769
54 1,152 54 54Total Real Estate 824 108 1,316 216 217 Commercial and industrial 78 17 342 23 141 Credit cards - 10 - 10 33 Automobile loans 1 14 226 25 48 Loans to individuals - other 19 52 140 108 - All other loans 12 - 279 - 225 Total 934 201 2,303 382 664 Recoveries: Real Estate-
1-4 family residential construction - - 24 - - Other construction/land 8 8 24 22 129 1-4 family revolving, open-ended 2 7 28 17 19 1-4 family closed-end 15 54 128 139 221 Nonfarm, nonresidential, owner-occupied 10
3 355 9 13Total Real Estate 35 72 559 187 382 Commercial and industrial 37 24 137 51 85 Credit cards - 2 - 3 3 Automobile loans 3 11 46 33 40 Loans to individuals - other 74 28 116 58 72 All other loans 56 42 165 140 187 Total 205 179 1,023 472 769
Net loan charge offs (recoveries) 729
22 1,280 (90) (105) Balance at end of period$ 34,256 $ 13,043 $ 34,256 $ 13,043 $ 13,908 RATIOS Net Charge-offs (recoveries) to average loans & leases (annualized) 0.09 % 0.004 % 0.05 % (0.005) % (0.004) % Allowance for loan losses to gross loans & leases at end of period 1.09 % 0.56 % 1.09 % 0.56 % 0.53 % Net Loan Charge-offs (recoveries) to provision for loan losses 10.53 % 2.26 % 5.92 % (3.12) % (2.81) % 48 Table of Contents 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 atSeptember 30, 2020 andDecember 31, 2019 . Allocation of the Allowance for Loan Losses ($ in thousands) September 30, 2020 % of loans in each category Amount to total loans Commercial, financial and agriculture$ 5,774 18.6 % Commercial real estate 23,146 62.3 % Consumer real estate 4,780 17.6 % Installment and other 556 1.5 % Unallocated - - Total$ 34,256 100 % ($ in thousands) December 31, 2019 % of loans in each category Amount to total loans Commercial, 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$131.9 million atSeptember 30, 2020 and$89.7 million atDecember 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 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$771 thousand due to an increase inFederal Reserve stock. The Company's net premises and equipment atSeptember 30, 2020 was$124.9 million and$105.0 million atDecember 31, 2019 ; an increase of$19.9 million , or 19.0% for the first nine months of 2020. The increase is attributed to the recording of$4.2 million in right-of-use assets and$18.6 million of acquired premises and equipment related to the SWG acquisition. Bank-owned life insurance atSeptember 30, 2020 totaled$73.4 million compared to$59.6 million atDecember 31, 2019 , an increase of$13.8 million . The increase was due to the purchase of$5.8 million in BOLI contracts in the second quarter of 2020 and$7.0 million in BOLI contracts acquired in the SWG acquisition.Goodwill atSeptember 30, 2020 remained unchanged at$158.6 million when compared toDecember 31, 2019 . Other intangible assets, consisting primarily of the Company's core deposit intangible ("CDI"), increased by$1.5 million as ofSeptember 30, 2020 , as compared toDecember 31, 2019 . The Company recorded$4.6 million in CDI related to the SWG acquisition and recognized CDI amortization expense of$3.1 million during the nine months endedSeptember 30, 2020 .Goodwill and indefinite-lived intangible assets are tested for impairment at least annually, and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. During the first quarter of 2020, management determined that the deterioration in the general economic conditions as a result of the COVID-19 pandemic represented a triggering 49 Table of Contents event prompting an evaluation of goodwill impairment. Based on the analyses performed in the first quarter of 2020, we determined that goodwill was not impaired. Due to the ongoing economic uncertainty present at the end of the second quarter, the Company prepared a Step 1 goodwill impairment analysis as ofJune 30, 2020 . In testing goodwill for impairment, the Company compared the estimated fair value of its reporting unit to its carrying amount, including goodwill. The estimated fair value of the reporting unit exceeded its book value. 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. In addition, in future periods the Company will be required to evaluate the impact of COVID-19 on the carrying value of certain of its assets, including goodwill, and to conduct impairments tests on those assets, which may result in impairment charges on these assets in future periods that could be material.
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$442.3 million atSeptember 30, 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 13.9% of gross loans atSeptember 30, 2020 and 15.8% atDecember 31, 2019 . The Company also had undrawn similar standby letters of credit to customers totaling$17.2 million atSeptember 30, 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 ofSeptember 30, 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 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$1.175 billion atSeptember 30, 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 ofSeptember 30, 2020 , the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised$404.3 million of the Company's investment balances, compared to$348.3 million atDecember 31, 2019 . 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$100.0 million atSeptember 30, 2020 . 50 Table of Contents
The Company's liquidity ratio as of
Policy Policy
September 30, 2020 Maximum ComplianceLoans to Deposits (including FHLB advances) 71.3 % 90.0 % In Policy Net Non-core Funding Dependency Ratio (5.0) % 20.0 % In Policy Fed Funds Purchased / Total Assets 0.0 %
10.0 % In Policy FHLB Advances / Total Assets 2.2 % 20.0 % In Policy FRB Advances / Total Assets 0.0 % 10.0 % In Policy
Pledged Securities toTotal Securities 62.2 %
90.0 % In Policy
Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.
As ofSeptember 30, 2020 , cash and cash equivalents were$603.7 million . In addition, loans and investment securities repricing or maturing within one year or less were approximately$649.4 million atSeptember 30, 2020 . Approximately$442.3 million in loan commitments could fund within the next three months and other commitments, primarily commercial and similar letters of credit, totaled$17.2 million atSeptember 30, 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 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, 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 endedSeptember 30, 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 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-endSeptember 30, 2020 ,$712.8 million in non-interest deposit balances and$677.3 million in NOW deposit 51 Table of Contents
accounts were reclassified as money market accounts. A distribution of the
Company's deposits without reclassification showing the balance and percentage
of total deposits by type is presented for the noted periods in the following
table.
Deposit Distribution September 30, 2020 December 31, 2019
Percent of Percent of
($ in thousands) Amount Total Amount TotalNon-interest bearing demand deposits$ 1,195,042 28.3 % $
723,208 23.5 % NOW accounts and Other 1,335,798 31.6 % 941,598 30.7 % Money Market accounts 687,292 16.3 % 462,810 15.0 % Savings accounts 379,061 8.9 % 287,200 9.3 %
Time Deposits of less than$250,000 473,265 11.2 % 479,386 15.6 % Time Deposits of$250,000 or more 158,756 3.7
182,331 5.9 % Total deposits$ 4,229,214 100 %$ 3,076,533 100 %
As ofSeptember 30, 2020 , deposits increased by$1.153 billion , or 37.5% to$4.229 billion from$3.077 billion atDecember 31, 2019 . The acquisition of SWG accounted for approximately$476.1 million , including fair value marks, or 41.3% of the increase. Transaction account balances were above normal as ofSeptember 30, 2020 due to PPP loan proceeds.
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$34.5 million , or 11.7%, in the first nine months of 2020, due in part to a decrease in notes payable to the FHLB. As ofSeptember 30, 2020 , junior subordinated debentures increased$64.0 million , net of issuance costs, or 79.4% to$144.7 million from$80.7 million atDecember 31, 2019 . The Company issued$65.0 million in aggregate principal amount of subordinated debt onSeptember 25, 2020 .
Subordinated debt is discussed more fully in the below Capital section of this report.
OTHER LIABILITIES Other liabilities are principally comprised of accrued interest payable, lease liabilities and other accrued but unpaid expenses. Other liabilities increased by$9.4 million , or 35.1%, during the first nine months of 2020. The increase in other liabilities is primarily due to$3.8 million in leases added during 2020 and$5.0 million increase in deferred taxes. For more information regarding the Company's leases, see Note 12 - Leases to the Consolidated Financial Statements.
CAPITAL
AtSeptember 30, 2020 , the Company had total shareholders' equity of$638.4 million , comprised of$21.6 million in common stock,$5.7 million in treasury stock,$456.2 million in surplus,$141.5 million in undivided profits and$24.8 million in accumulated comprehensive income on available-for-sale securities. Total shareholders' equity at the end of 2019 was$543.7 million . The increase of$94.7 million , or 17.4%, in shareholders' equity during the first nine months of 2020 is comprised of capital added through net earnings of$37.2 million , a$14.7 million increase in accumulated comprehensive income for available-for-sale securities and 2.5 million shares of common stock issued for the purchase of SWG, offset by$6.2 million in cash dividends paid. OnMay 7, 2020 , the Company announced the renewal of its share repurchase program that previously expired onDecember 31, 2019 . Under the program, the Company may, but is not required to, from time to time repurchase up to$15 million of shares of its common stock in any manner determined appropriate by the Company's management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company's common stock, general market and 52 Table of Contents
economic conditions, and applicable legal and regulatory requirements. The
renewed share repurchase program has an expiration date of
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 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 September 30, December 31, Required to be Regulatory Capital Ratios The First, A National Banking Association 2020 2019 Well 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 16.5 % 15.6 % 10.0 %
Tier 1 Leverage Ratio 10.2 % 11.8 % 5.0 %
Minimum
September 30, December 31, Required to be
Regulatory Capital Ratios The First Bancshares, Inc. 2020 2019 Well Capitalized
Common Equity Tier 1 Capital Ratio* 13.4 %
12.5 % N/A
Tier 1 Capital Ratio** 13.9 % 13.0 % N/A
Total Capital Ratio 19.0 % 15.8 % N/A
Tier 1 Leverage Ratio 9.1 % 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 atSeptember 30, 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. The Company has elected to delay its adoption of ASU 2016-13, as provided by the CARES Act, until the date on which the national emergency related to the COVID-19 outbreak is terminated orDecember 31, 2020 whichever occurs first. 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 utilize the five-year CECL transition. As ofSeptember 30, 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 atSeptember 30, 2020 was$638.4 million , or approximately 12.4% of total assets. The Company currently has adequate capital to meet the minimum capital requirements for all regulatory agencies. 53 Table of Contents 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 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 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 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. 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.
Reconciliation of Non-GAAP Financial Measures
Our accounting and reporting policies conform to generally accepted accounting
principles ("GAAP") in the United States and prevailing practices in the banking
industry. However, certain non-GAAP measures are used by management to
supplement the evaluation of our performance. This Quarterly Report on Form 10-Q
includes operating net earnings; diluted operating earnings per share;net
interest income, FTE; pre-tax, pre-provision operating earnings; total interest
income, FTE; interest income investment
54
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securities, FTE and certain rations 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 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. Pre-tax,
pre-provision operating earnings excludes acquisition charges, treasury awards,
bargain purchase gains and sale of land. 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 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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Net income available to common shareholders
238 705 3,273 3,975
Tax on acquisition charges (61) (152) (743) (887)
Gain on acquisition and sale of land - - (7,643) -
Tax on gain from the sale of land - - 157 - Treasury awards - - - (233) Tax on Treasury awards - - - 59 Net earnings available to common shareholders, operating$ 12,094 $ 12,825 $ 32,215 $ 34,804
Diluted Operating Earnings per Share
($ in thousands) Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019Diluted earnings per share 0.55 0.71 1.80 1.90 Effect of acquisition charges 0.01 0.04 0.16 0.24 Tax on acquisition charges - (0.01) (0.03) (0.06) Effect of gain on acquisition and gain on land - - (0.38) - Tax on gain from the sale of land -
- 0.01 -
Effect of Treasury Awards - - - (0.01)
Tax on Treasury Awards - - - -Diluted earnings per share, operating $ 0.56 $
0.74 $ 1.56 $ 2.07
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Net Interest Income, Fully Tax Equivalent
($ in thousands) Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Net interest income $ 39,973 $ 30,459 $ 113,217 $ 88,362
Tax exempt investment income (1,877) (828) (4,985) (2,376)
Taxable investment income 2,513 1,108 6,674 3,181
Net interest income, FTE $ 40,609 $ 30,739 $ 114,906 $ 89,167
Average earning assets $ 4,537,157 $ 3,036,491 $ 4,147,736 $ 2,968,158
Net interest margin, FTE 3.58 % 4.05 % 3.69 % 4.01 %
Pre-Tax Pre-Provision Operating Earnings
($ in thousands) Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Earnings before income taxes $ 14,910 $ 15,763 $ 44,092 $ 41,238
Acquisition charges 238 705 3,273 3,975
Provision for loan losses 6,921 974 21,628 2,888
Treasury Awards and gains - - (7,643) (233)
Pre-Tax, Pre-Provision Operating Earnings
Total Interest Income, Fully Tax Equivalent
($ in thousands) Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Total interest income $ 46,337 $ 37,241 $ 133,734 $ 108,086
Tax-exempt investment income (1,877) (828) (4,985) (2,375)
Taxable investment income 2,513 1,108 6,674 3,179
Total interest income, FTE $ 46,973 $ 37,521 $ 135,423 $ 108,890 Yield on average earnings assets, FTE 4.14 %
4.94 % 4.35 % 4.89 %
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($ in thousands) Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
Interest income investment securities$ 5,309 $
4,752$ 15,800 $ 14,111 Tax-exempt investment income (1,877) (828) (4,985) (2,375) Taxable investment income 2,513 1,108 6,674 3,179
Interest income investment securities, FTE
Average investment securities$ 957,718 $
621,934
Yield on investment securities, FTE 2.48 % 3.24 % 2.64 % 3.32 %
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