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," "seek," "plans," "potential," "aim," and other similar words and expressions of the future or otherwise regarding the outlook for the Company's future business and financial performance and/or the performance of the financial services industry and economy in general. Forward-looking statements are based on the current beliefs and expectations of the Company's management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this document. Many of these factors are beyond the Company's ability to control or predict. The most recent factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the negative impact of 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, and other COVID-19 relief measures, uncertainty relating to calculation
of LIBOR and other regulatory responses to economic conditions;
? changes in political conditions or the legislative or regulatory environment;
? the adequacy of the level of our allowance for credit losses and the amount of
credit loss provisions required to replenish the allowance in future periods;
reduced earnings due to higher credit losses because our loans are concentrated
? by loan type, industry segment, borrower type, or location of the borrower or
collateral;
? changes in the interest rate environment which could reduce anticipated or
actual margins;
increased funding costs due to market illiquidity, increased competition for
? funding, higher interest rates, and increased regulatory requirements with
regard to funding;
results of examinations by our regulatory authorities, including the
? possibility that the regulatory authorities may, among other things, require us
to increase our allowance for credit losses through additional credit loss
provisions or write-down of our assets;
? the rate of delinquencies and amount of loans charged-off;
? the impact of our efforts to raise capital on our financial position,
liquidity, capital, and profitability;
risks and uncertainties relating to not successfully closing and integrating
? the currently contemplated or completed acquisitions within our currently
expected timeframe and other terms;
? significant increases in competition in the banking and financial services
industries;
? changes in the securities markets;
? loss of consumer confidence and economic disruptions resulting from national
disasters or terrorist activities;
? our ability to retain our existing customers, including our deposit
relationships;
? changes occurring in business conditions and inflation;
? changes in technology or risks to cybersecurity;
? changes in deposit flows;
? changes in accounting principles, policies, or guidelines, including the impact
of the new Current Expected Credit Losses ("CECL") standard;
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? our ability to maintain adequate internal control over financial reporting;
? risks related to the continued use, availability and reliability of LIBOR and
other "benchmark" rates; and
? other risks and uncertainties detailed from time to time in our filings with
the
We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in and the assumptions underlying our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved or the assumptions will be accurate. The Company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional information concerning these risks and uncertainties is contained in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2020 and in our other filings with theSecurities and Exchange Commission , available at theSEC's website, http://www.sec.gov. CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. Accounting policies considered critical to our financial results include the allowance for credit losses and related provision, income taxes, goodwill and business combinations. The most critical of these is the accounting policy related to the allowance for credit losses. The allowance is based in large measure upon management's evaluation of borrowers' abilities to make loan payments, local and national economic conditions, and other subjective factors. If any of these factors were to deteriorate, management would update its estimates and judgments which may require additional loss provisions. The Company's critical accounting policies are discussed in detail in Note B "Summary of Significant Accounting Policies" in the "Notes to the Consolidated Financial Statements" contained in Item 8 "Financial Statements and Supplementary Data" of the Company's 2020 Form 10-K. OnJanuary 1, 2021 , the Company adopted ASC 326, which changes the accounting for the allowance for credit losses. For a discussion of this new accounting policy, refer to Note 3 "Accounting Standards" to the Consolidated Financial Statements. As a result of the Company's immediate response to COVID-19, including loan modifications/payment deferral programs and the Paycheck Protection Program ("PPP"), the Company has elected to temporarily suspend the application of one provision 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 provides the Company with temporary relief from troubled debt restructurings, 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.
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CORONAVIRUS (COVID-19) IMPACT
In March 2020 , the World Health Organization recognized the novel Coronavirus
Disease 2019 as a pandemic. The spread of COVID-19 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 in the United States and globally. In response to the outbreak, federal
and state authorities in the U.S. introduced various measures to try to limit or
slow the spread of the virus, including travel restrictions, nonessential
business closures, stay-at-home orders, and strict social distancing and shelter
in place. These actions, together with responses to the pandemic by businesses
and individuals, 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 that Federal
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.
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 and direct energy. As of June 30,
2021 , the Company's aggregate outstanding exposure in these segments was $437.8
million , or 14.4% 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
provision expense to provide the required allowance reserve for this situation.
On March 27, 2020 , the CARES Act was signed into law. The CARES Act is a $2
trillion stimulus package that is intended to provide relief to U.S. businesses
and consumers struggling as a result of the pandemic. A provision in the CARES
Act includes a $349 billion fund for the creation of the PPP through the Small
Business Administration ("SBA") and Treasury Department . The PPP is intended to
provide loans to small businesses to pay their employees, rent, mortgage
interest, and utilities. The loans may be forgiven conditioned upon 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. On June 5, 2020 , President
Trump signed into law the Paycheck Protection Program Flexibility Act of 2020
("PPPFA") that amends the CARES Act. The PPPFA extended the covered period in
which to use PPP loans, extended the forgiveness period from eight weeks to a
maximum of 24 weeks and increased flexibility for small businesses that have had
issues with rehiring employees and attempting to fill vacant positions due to
COVID-19. The program reduced the proportion of proceeds that must be spent on
payroll costs from 75% to 60%. In addition, the PPPFA also extended the payment
deferral period for the PPP loans until the date when the amount of loan
forgiveness is determined and remitted to the lender. For PPP recipients who do
not apply for forgiveness, the loan deferral period is 10 months after the
applicable forgiveness period ends.
Section 4013 of the CARES Act, "Temporary Relief from Troubled Debt
Restructurings," provides banks the option to temporarily suspend certain
requirements under U.S. GAAP related to TDR for a limited period of time to
account for the effects of COVID-19. To qualify for Section 4013 of the CARES
Act, borrowers must have been current at December 31, 2019 . All modifications
are eligible as long as they are executed between March 1, 2020 and the earlier
of (i) December 31, 2020 , or (ii) the 60th day after the end of the COVID-19
national emergency declared by the President of the U.S. Loans that were current
as of December 31, 2019 are not TDRs. In addition, under guidance from the
federal banking agencies, other short-term modifications made on a good faith
basis in response to COVID-19 to borrowers who were current prior to any relief
are not TDRs under ASC 310-40, "Troubled Debt Restructuring by Creditors." These
modifications include short-term (e.g., up to six months) modifications such as
payment deferrals, fee waivers, extensions of repayment terms, or delays in
payment that are insignificant. Borrowers considered current are those that are
less than 30 days past due on their contractual payments at the time a
modification program is implemented. We began receiving requests from our
borrowers for loan and lease deferrals in March 2020 . Payment modifications
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.
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On December 27, 2020 , President Trump signed into law the Consolidated
Appropriations Act, 2021 (the "CAA"). The CAA, among other things, extends the
life of the PPP, effectively creating a second round of PPP loans for eligible
businesses. In January 2021 , we opened the lending portal and started processing
second draw PPP loan applications.
On March 11, 2021 , the American Rescue Plan Act of 2021 ("ARP") was signed into
law. The $1.9 trillion stimulus aid package builds upon many measures in the
CARES Act from March 2020 , and in the CAA from December 2020 .
As of June 30, 2021 , we have modified approximately 1,643 loans for $710.7
million , of which 1,391 loans for $582.3 million were modified to defer monthly
principal and interest payments and 252 loans for $128.4 million were modified
from monthly principal and interest payments to interest only. At June 30, 2021 ,
there were 4 loans for $4.9 million that were modified to defer principal and
interest payments and 19 loans for $30.0 million that were modified from monthly
principal and interest payments to interest only that were outstanding. As of
June 30, 2021 , we have approximately 2,210 PPP loans approved through the SBA
for $157.8 million outstanding.
OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
Second quarter 2021 compared to second quarter 2020
The Company reported net income available to common shareholders of$15.6 million for the three months endedJune 30, 2021 , compared with net income available to common shareholders of$16.9 million for the same period last year, a decrease of$1.3 million or 7.9%. For the second quarter of 2021, fully diluted earnings per share were$0.74 , compared to$0.79 for the second quarter of 2020. Operating net earnings, a non-GAAP financial measure, for the second quarter of 2021 totaled$15.6 million compared to$11.2 million for the second quarter of 2020, an increase of$4.4 million or 39.3%. Operating net earnings, which is a non-GAAP financial measure, for the second quarter of 2020 excludes merger-related costs of$1.8 million , net of tax, a bargain purchase gain related to the SWG acquisition of$7.0 million and a gain on sale of land of$463 thousand , net of tax. Operating earnings per share were$0.74 on a fully diluted basis for the second quarter 2021, compared to$0.52 for the same period in 2020, excluding the merger-related costs and gains described above. See reconciliation of non-GAAP financial measures provided below. Net interest income for the second quarter 2021 was$38.1 million , a decrease of$1.1 million or 2.9%, for the three months endedJune 30, 2021 , compared to$39.2 million for the same period in 2020. The decrease was due to interest income earned on a lower volume of loans and an overall reduction in the net interest margin. Fully tax equivalent ("FTE") net interest income, which is a non-GAAP measure, totaled$38.7 million and$39.8 million for the second quarter of 2021 and 2020, respectively. FTE net interest income, which is a non-GAAP measure, decreased$1.1 million in the prior year quarterly comparison due to decreased loan volume. Purchase accounting adjustments decreased$1.1 million for the second quarter comparisons. Second quarter 2021 FTE net interest margin, which is a non-GAAP measure, of 3.14% included 9 basis points related to purchase accounting adjustments compared to 3.63% for the same quarter in 2020, which included 21 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the net interest margin decreased 37 basis points in prior year quarterly comparison. See reconciliation of non-GAAP financial measures provided below. Non-interest income for the three months endedJune 30, 2021 was$8.8 million compared to$15.7 million for the same period in 2020, reflecting a decrease of$6.9 million or 43.7%. A majority of the decrease is related to the$7.0 million bargain purchase gain related to the SWG acquisition and the gain on the sale of land of$463 thousand , net of tax that occurred in 2020. Pre-tax, pre-provision operating earnings, a non-GAAP measure, decreased 9.4% to$19.4 million for the quarter-endedJune 30, 2021 as compared to$21.4 million for the second quarter of 2020. Pre-tax, pre-provision earnings, a non-GAAP measure, for the second quarter 2020 excludes acquisition charges, treasury awards, bargain purchase gain on the SWG acquisition and the gain on the sale of land. See reconciliation of non-GAAP financial measures provided below. 37 Table of Contents
Non-interest expense was$27.5 million for the three months endedJune 30, 2021 , a decrease of$618 thousand or 2.2%, when compared with the same period in 2020. Excluding the net decrease in acquisition charges of$2.3 million for the quarterly comparison, non-interest expense increased$1.7 million in the second quarter of 2021, as compared to second quarter of 2020. Investment securities totaled$1.303 billion , or 23.6% of total assets atJune 30, 2021 , versus$953.3 million , or 18.7% of total assets atJune 30, 2020 . The average balance of investment securities increased$313.7 million in prior year quarterly comparison, mostly as a result of the acquisition of SWG. The average tax equivalent yield on investment securities decreased 40 basis points to 2.2% from 2.6% in prior year quarterly comparison. The investment portfolio had a net unrealized gain of$25.6 million atJune 30, 2021 as compared to a net unrealized gain of$32.9 million atJune 30, 2020 . The FTE average yield on all earning assets, a non-GAAP measure, decreased 67 basis points in prior year quarterly comparison, from 4.2% for the second quarter of 2020 to 3.6% for the second quarter of 2021. Interest expense on average interest-bearing liabilities decreased 21 basis points from 0.7% for the second quarter of 2020 to 0.5% for the second quarter of 2021. Cost of all deposits averaged 28 basis points for the second quarter of 2021 compared to 52 basis points for the second quarter of 2020. See reconciliation of non-GAAP financial measures provided below.
First six months 2021 compared to first six months 2020
The Company reported net income available to common shareholders of$32.2 million for the six months endedJune 30, 2021 , compared to$25.3 million for the same period last year. Operating net earnings increased$12.1 million , or 60.3%, from$20.1 million atJune 30, 2020 to$32.2 million atJune 30, 2021 . Provision for loan losses decreased$14.7 million for the year-over-year comparison. Operating net earnings excludes merger-related costs of$2.4 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 endingJune 30, 2020 . Operating earnings per share were$1.52 on a fully diluted basis for six-month period endingJune 30, 2021 , compared to$1.00 for the same period in 2020, excluding the merger-related costs and income described above. See reconciliation of non-GAAP financial measures provided below. Net interest income increased to$4.0 million , or 5.5%, for the six months endedJune 30, 2021 , compared to$73.2 million for the same period in 2020. This increase was primarily due to interest earned on a high volume of loans and securities. Average earning assets atJune 30, 2021 , increased$900.7 million , or 22.8%, and average interest-bearing liabilities increased$864.0 million , or 23.4%, when compared toJune 30, 2020 . Non-interest income for the six months endedJune 30, 2021 , was$18.3 million compared to$22.2 million for the same period in 2020, reflecting an decrease of$3.9 million or 17.4%. Excluding the gains mentioned above, non-interest income increased$3.8 million in year-over-year comparison. Mortgage income increased$1.3 million and interchange fee income increased$1.4 million in the year-over-year comparison. The provision for credit losses was$0 for the six months endedJune 30, 2021 , compared with$14.7 million provision for loan losses for the same period in 2020. The allowance for credit losses of$32.5 million atJune 30, 2021 (approximately 1.1% of total loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. See "Allowance for Credit Losses" in Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation. Non-interest expense was$54.7 million for the six months endedJune 30, 2021 , an increase of$3.2 million or 6.2%, when compared with the same period in 2020. An increase of$3.0 million in salaries and employee benefits contributed to the increase.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE FIRST
The First represents the primary asset of the Company. The First reported total assets of$5.501 billion atJune 30, 2021 compared to$5.145 billion atDecember 31, 2020 , an increase of$355.7 million . Loans, including loans held for sale, decreased$99.0 million to$3.010 billion , or 3.2%, during the first six months of 2021. Deposits atJune 30, 2021 totaled$4.720 billion compared to$4.283 billion atDecember 31, 2020 . For the six months period endedJune 30, 2021 , The First reported net income of$36.4 million compared to$29.3 million for the six months endedJune 30, 2020 . Merger charges, net of tax, equaled$0 for the first six months of 2021 as compared to$2.4 million for the first six months of 2020. 38 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 decreased by$1.1 million , or 2.9%, for the second quarter of 2021 relative to the second quarter of 2020. The decrease was due to interest income earned on a lower volume of loans and a lower yield on interest bearing deposits. PPP loans totaled$157.8 million as ofJune 30, 2021 a decrease of$101.5 million or 39.1% when compared to the same period last year. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company's earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on nonaccrual status during the reporting period, and the recovery of interest on loans that had been on nonaccrual and were paid off, sold or returned to accrual status. The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages. Average Balances, Tax Equivalent Interest and Yields/Rates ($ in thousands) Three Months Ended June 30, 2021 June 30, 2020 Tax Tax Avg. Equivalent Yield/ Avg. Equivalent Yield/ Balance interest Rate Balance interest Rate Earning Assets: Taxable securities$ 853,180 $ 4,017 1.88 %$ 605,626 $ 3,439 2.27 % Tax exempt securities 367,074 2,554 2.78 % 300,922 2,340 3.11 % Total investment securities 1,220,254 6,571 2.15 % 906,548 5,779 2.55 % Interest bearing deposits in other banks 661,069 38 0.02 % 321,559 19 0.02 % Loans 3,042,785 37,275 4.90 % 3,156,524 40,593 5.14 % Total earning assets 4,924,108 43,884 3.56 % 4,384,631 46,391 4.23 % Other assets 534,423 528,989 Total assets$ 5,458,531 $ 4,913,620 Interest-bearing liabilities: Deposits$ 4,374,372 $ 3,315 0.30 %$ 3,746,535 $ 5,219 0.56 % Borrowed funds 3,355 52 6.20 % 116,270 224 0.77 % Subordinated debentures 144,591 1,821 5.04 % 80,736 1,176 5.83 % Total interest-bearing liabilities 4,522,318 5,188 0.46 % 3,943,541 6,619 0.67 % Other liabilities 288,363 362,952 Shareholders' equity 647,850 607,127 Total liabilities and shareholders' equity$ 5,458,531 $ 4,913,620 Net interest income$ 38,050 $ 39,180 Net interest margin 3.09 % 3.57 % Net interest income (FTE)*$ 38,696 3.11 %$ 39,772 3.56 % Net interest margin (FTE)* 3.14 % 3.63 % 39 Table of Contents ($in thousands) Six Months Ended June 30, 2021 June 30, 2020 Tax Tax Avg. Equivalent Yield/ Avg. Equivalent Yield/ Balance interest Rate Balance interest Rate Earning Assets: Taxable securities$ 777,054 $ 7,608 1.96 %$ 583,120 $ 7,383 2.53 % Tax exempt securities 367,197 5,144 2.80 % 262,567 4,161 3.17 % Total investment securities 1,144,251 12,752 2.23 % 845,687 11,544 2.73 % Interest bearing deposits in other banks 637,559 86 0.03 % 225,768 308 0.27 % Loans 3,069,815 76,888 5.01 % 2,879,431 76,598 5.32 % Total earning assets 4,851,625 89,726 3.70 % 3,950,886 88,450 4.48 % Other assets 546,608 501,170 Total assets$ 5,398,233 $ 4,452,056 Interest-bearing liabilities: Deposits$ 4,273,907 $ 7,164 0.34 %$ 3,394,533 $ 10,632 0.63 % Borrowed funds 51,482 340 1.32 % 130,768 1,141 1.75 % Subordinated debentures 144,590 3,642 5.04 % 80,716 2,379 5.89 % Total interest-bearing liabilities 4,469,979 11,146 0.50 % 3,606,017 14,152 0.78 % Other liabilities 281,859 268,821 Shareholders' equity 646,395 577,218 Total liabilities and shareholders' equity$ 5,398,233 $ 4,452,056 Net interest income$ 77,279 $ 73,245 Net interest margin 3.19 % 3.71 % Net interest income (FTE)*$ 78,580 3.20 %$ 74,298 3.69 % Net interest margin (FTE)* 3.24 % 3.76 %
* 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 six months ended
($ in thousands) Three Months Ended Six Months Ended EARNINGS STATEMENT 6/30/21 % of Total 6/30/20 % of Total 6/30/21 % of Total 6/30/20 % of Total
Non-interest income: Service charges on deposit accounts$ 1,756 19.9 %$ 1,597 10.2 %$ 3,516 19.2 %$ 3,511 15.8 % Mortgage fee income 2,372 26.9 % 2,646 16.9 % 5,534 30.2 % 4,213 19.0 % Interchange fee income 3,145 35.6 % 2,395 15.3 % 5,789 31.7 % 4,380 19.8 % Gain on securities, net 77 0.9 % 73 0.5 % 97 0.5 % 246 1.1 % Gain on acquisition - - % 7,023 44.7 % - - % 7,023 31.7 % Gain on sale of land - - % 620 3.9 % - - % 620 2.8 % Other 1,472 16.7 % 1,326 8.5 % 3,359 18.4 % 2,161 9.8 % Total non-interest income$ 8,822 100 %$ 15,680 100 %$ 18,295 100 %$ 22,154 100 % Non-interest expense: Salaries and employee benefits$ 16,036 58.5 %$ 15,866 56.5 %$ 32,091 58.7 %$ 29,094 56.4 % Occupancy expense 3,813 13.9 % 3,200 11.4 % 7,692 14.1 % 6,118 11.9 % FDIC premiums 499 1.8 % 237 0.8 % 993 1.8 % 384 0.7 % Marketing 39 0.1 % 25 0.1 % 199 0.4 % 239 0.5 % Amortization of core deposit intangibles 1,052 3.8 % 1,052 3.8 % 2,104 3.8 % 1,990 3.9 % Other professional services 1,049 3.8 % 984 3.5 % 1,983 3.6 % 1,858 3.6 % Other non-interest expense 4,964 18.1 % 4,411 15.7 % 9,655 17.6 % 8,790 17.1 % Acquisition and integration charges - - % 2,295 8.2 % - - % 3,035 5.9 % Total non-interest expense$ 27,452 100 %$ 28,070 100 %$ 54,717 100 %$ 51,508 100 % 41 Table of Contents 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$3.8 million or 19.7% of earnings before income taxes for the second quarter 2021, compared to$2.2 million or 11.7% of earnings before income taxes for the same period in 2020. The provision for the six months endedJune 30, 2021 was$8.6 million or 21.1% of earnings before income taxes compared to$3.9 million or 13.5% for the same period in 2020. The effective tax rate for 2020 includes any provisions related to the CARES Act that was signed into law onMarch 27, 2020 and the$7.0 million , non-taxable, bargain purchase gain related to the SWG acquisition. The CARES Act includes several significant provisions for corporations including increasing the amount of deductible interest under section 163(j) of the Internal Revenue Code of 1986, as amended, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss that corporations can use to offset income. BALANCE SHEET ANALYSIS EARNING ASSETS The Company's interest-earning assets are comprised of investments and loans, and the composition, growth characteristics, and credit quality of both are significant determinants of the Company's financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.
INVESTMENTS
The Company's investments can at any given time consist of debt securities and marketable equity securities (together, the "investment portfolio"), investments in the time deposits of other banks, surplus interest-earning balances in 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$1.281 billion , or 23.2% of total assets atJune 30, 2021 compared to$1.022 billion , or 19.8% of total assets atDecember 31, 2020 . There were no federal funds sold atJune 30, 2021 andDecember 31, 2020 ; and interest-bearing balances at other banks increased to$630.2 million atJune 30, 2021 from$424.9 million atDecember 31, 2020 . The Company's investment portfolio increased$253.3 million , or 24.1%, to a total fair market value of$1.303 billion atJune 30, 2021 compared toDecember 31, 2020 . The increase in the portfolio is related to purchases that were made in the first six months of 2021. The Company's investments are classified as "available-for-sale" to allow maximum flexibility with regard to interest rate risk and liquidity management. Refer to the tables shown in Note 9 - Securities to the Consolidated Financial Statements for information on the Company's amortized cost and fair market value of its investment portfolio by investment type. 42 Table of Contents LOAN PORTFOLIO Loans Held for Sale (LHFS) The Bank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and concurrently "locks in" with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the mortgage servicing rights being retained by the Bank. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors. Associated servicing rights are not retained. AtJune 30, 2021 , LHFS totaled$6.0 million , compared to$21.4 million atDecember 31, 2020 .
Loans Held for Investment (LHFI)
LHFI, net of deferred fees and costs, were$3.004 billion atJune 30, 2021 , a decrease of$83.6 million , or 2.7%, from$3.088 billion atDecember 31, 2020 . The Company experienced a decrease in the commercial, financial, and agriculture loan portfolio of$81.9 million related to PPP loans. As ofJune 30, 2021 , we have modified approximately 1,643 loans for$710.7 million , of which 1,391 loans for$582.3 million were modified to defer monthly principal and interest payments and 252 loans for$128.4 million were modified from monthly principal and interest payments to interest only. AtJune 30, 2021 , there were 4 loans for$4.9 million that were modified to defer principal and interest payments and 19 loans for$30.0 million that were modified from monthly principal and interest payments to interest only that were outstanding. As ofJune 30, 2021 , we have approximately 2,210 PPP loans approved through the SBA for$157.8 million outstanding. The following table presents the Company's composition of LHFI, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans
($ in
thousands):
June 30, 2021 (1) December 31, 2020
Percent Percent
Amount of Total Amount of TotalCommercial, financial and agriculture (2)$ 511,517 16.8 % $
579,443 18.6 % Commercial real estate 1,653,090 54.4 % 1,652,993 52.9 % Consumer real estate 833,889 27.5 % 850,206 27.2 % Consumer installment 38,236 1.3 % 41,036 1.3 % Total loans 3,036,732 100 % 3,123,678 100 % Allowance for credit losses (32,457) (35,820) Net loans$ 3,004,275 $ 3,087,858
Effective
legacy GAAP.
(2) Loan amount includes
30, 2021 and
Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes that the risk elements of its loan portfolio have been reduced through strategies that diversify the lending mix.
LOAN CONCENTRATIONS
Diversification within the loan portfolio is an important means of reducing inherent lending risk. As ofJune 30, 2021 , management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank's loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area. 43 Table of Contents NON-PERFORMING ASSETS
Non-performing assets ("NPAs") are comprised of loans for which the Company is
no longer accruing interest, and foreclosed assets including mobile homes and
other OREO. Loans are placed on nonaccrual status when they become ninety days
past due (principal and/or interest), unless the loans are adequately secured
and in the process of collection. Nonaccrual loans totaled $27.6 million at June
30, 2021 , a decrease of $6.1 million from December 31, 2020 .
Other real estate owned is carried at fair value, determined by an appraisal,
less estimated costs to sell. Other real estate owned totaled $3.5 million at
June 30, 2021 as compared to $5.8 million at December 31, 2020 .
A loan is classified as a restructured loan when the following two conditions
are present: first, the borrower is experiencing financial difficulty and
second, the creditor grants a concession it would not otherwise consider but for
the borrower's financial difficulty. At June 30, 2021 , the Bank had $21.5
million in loans that were classified as TDRs, of which $5.9 million were
performing as agreed with modified terms. At December 31, 2020 , the Bank had
$27.5 million in loans that were classified as TDRs of which $6.2 million were
performing as agreed with modified terms. TDRs may be classified as either
non-performing or performing loans depending on their accrual status. As of June
30, 2021 , $15.6 million in loans categorized as TDRs were classified as
non-performing as compared to $21.3 million at December 31, 2020 .
The following table presents comparative data for the Company's non-performing assets and performing TDRs as of the dates noted ($ in thousands):
6/30/21 (1)12/31/20 Nonaccrual Loans
Commercial, financial and agriculture $ 304
$ 2,418 Commercial real estate 19,071 22,887 Consumer real estate 8,212 8,434 Consumer installment 38 35 Total Nonaccrual Loans 27,625 33,774 Other real-estate owned 3,529 5,802 Total NPAs$ 31,154 $ 39,576 Performing TDRs$ 5,934 $ 6,201
Past due 90 days or more and still accruing$ 5,834
1.3 % 1.3 % Total nonaccrual loans as a % of total loans & leases net of unearned income
0.9 % 1.1 %
Effective
legacy GAAP.
NPAs totaled$31.2 million atJune 30, 2021 , compared to$39.6 million atDecember 31, 2020 , a decrease of$8.4 million . The ACL/total loans ratio was 1.1% atJune 30, 2021 , and the ALLL/total loans ratio was 1.2% atDecember 31, 2020 . The decrease in the ACL/total loans ratio is primarily attributable to the$3.8 million in net charge-offs recorded during the six months endedJune 30, 2021 . Total valuation accounting adjustments were$5.8 million on acquired loans atJune 30, 2021 . The ratio of annualized net charge-offs (recoveries) to total loans was 0.03% for the quarter endedJune 30, 2021 compared to 0.25% for the year endedDecember 31, 2020 . ALLOWANCE FOR CREDIT LOSSES OnJanuary 1, 2021 , the Company adopted the ASC 326. The FASB issued ASC 326 to replace the incurred loss model for loans and other financial assets with an expected loss model and requires consideration of a wider range of reasonable and supportable information to determine credit losses. In accordance with ASC 326 the Company has developed an ACL methodology effectiveJanuary 1, 2021 , which replaces its previous allowance for loan losses methodology. The ACL is a valuation account that is deducted from loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. 44 Table of Contents Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environment conditions, such as changes in unemployment rates, property values, or other relevant factors. Management may selectively apply external market data to subjectively adjust the Company's own loss history including index or peer data. Management evaluates the adequacy of the ACL quarterly and makes provisions for credit losses based on this evaluation. See Note 3 "Accounting Standards" for a complete description of the Company's methodology and the quantitative and qualitative factors included in the calculation. Upon the adoption of ASC 326, the Company recorded a$397 thousand increase to the ACL. AtJune 30, 2021 , the ACL was$32.5 million , or 1.1% of LHFI, a decrease of$3.4 million , or 9.4% when compared toDecember 31, 2020 . The decrease is related to charge-offs taken on several loans during the 2021 and was offset by a slight increase related to the ASC 326 transition entry. AtDecember 31, 2020 , the allowance for loan losses was approximately$35.8 million , which was 1.15% of LHFI. AtJune 30, 2021 , management believes the allowance is appropriate and should any of the factors considered by management in evaluating the appropriateness of the allowance for credit losses change, management's estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for credit losses.
The table that follows summarizes the activity in the allowance for credit
losses for the three and six months ended
Allowance for Credit Losses
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Balances: 6/30/21 6/30/20 6/30/21 6/30/20
Average LHFI outstanding during period: $ 3,042,785 $ 3,156,524 $ 3,069,815 $ 2,879,432
LHFI outstanding at end of period: 3,036,732 3,190,167 3,036,732 3,190,167
Allowance for Credit Losses:
Balance at beginning of period $ 32,663 $ 20,804 $ 35,820 $ 13,908
ASC 326 adoption adjustment - - 397 -
Provision charged to expense - 7,606 - 14,708
Charge-offs:
Commercial, financial and agriculture 490 165 1,476 264
Commercial real estate 166 63 3,007 396
Consumer real estate 124 87 263 96
Consumer installment 108 554 265 613
Total Charge-offs 888 869 5,011 1,369
Recoveries:Commercial, financial and agriculture 242
24 325 100 Commercial real estate 161 292 293 361 Consumer real estate 183 114 237 163 Consumer installment 96 93 396 193 Total Recoveries 682 523 1,251 817 Net loan charge offs (recoveries) 206 346 3,760 552 Balance at end of period$ 32,457 $ 28,064 $ 32,457 $ 28,064 RATIOS Net Charge-offs (recoveries) to average LHFI (annualized) 0.0 % 0.0 % 0.2 % 0.0 % ACL to LHFI at end of period 1.1 % 0.9 % 1.1 % 0.9 % Net Loan Charge-offs (recoveries) to PCL 0.0 % 4.6 % 0.0 % 3.8 % The Company recorded no provision for credit losses for the three and six months endedJune 30, 2021 , compared to$7.6 million for the three months endedJune 30, 2020 and$14.7 million for the six months endedJune 30, 2020 . The higher provision in 2020 was related to our estimates of probable incurred losses associated with COVID-19. The improved macroeconomic outlook for 2021 and the Company's ACL calculation under ASC 326 resulted in no further provision adjustment for the three and six months endedJune 30, 2021 . 45 Table of Contents
The following tables summarizes the ACL at
($ in thousands) June 30, 2021 December 31, 2020
Amount Amount
Commercial, financial and agriculture $ 3,910 $ 6,214
Commercial real estate 17,573 24,319
Consumer real estate 10,339 4,736
Consumer installment 635 551
Total $ 32,457 $ 35,820
ALLOWANCE FOR CREDIT LOSSES ON OBSC EXPOSURES
OnJanuary 1, 2021 , the Company adopted ASC 326. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on OBSC exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Upon adoption of ASC 326, the Company recorded an ACL on unfunded commitments of$718 thousand . The Company recorded no provision for credit losses on OBSC exposures for the three- and six-months period ended
June 30, 2021 . OTHER ASSETS The Company's balance of non-interest earning cash and due from banks was$132.3 million atJune 30, 2021 and$137.7 million atDecember 31, 2020 . The balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the level of cash maintained on hand at our branches, and our reserve requirement among other things, and is subject to significant fluctuation in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to and borrowings from correspondent banks, including 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 decreased$5.3 million due to a decrease in FHLB stock. The Company's net premises and equipment atJune 30, 2021 was$113.0 million and$114.8 million atDecember 31, 2020 ; a decrease of$1.8 million , or 1.6% for the first six months of 2021. Operating right-of-use assets atJune 30, 2021 , totaled$5.2 million compared to$6.0 million atDecember 31, 2020 , a decrease of$805 thousand . Financing right-of-use assets atJune 30, 2021 , totaled$2.5 million compared to$2.7 million atDecember 31, 2020 , a decrease of$123 thousand . Bank-owned life insurance atJune 30, 2021 totaled$86.9 million compared to$73.7 million atDecember 31, 2020 , an increase of$13.2 million . The majority of the increase was due to the purchase of$12.3 million in BOLI contracts in the first quarter of 2021.Goodwill atJune 30, 2021 remained unchanged at$156.9 million when compared toDecember 31, 2020 . Other intangible assets, consisting primarily of the Company's core deposit intangible ("CDI"), decreased by$2.1 million as ofJune 30, 2021 , as compared toDecember 31, 2020 .Goodwill and indefinite-lived intangible assets are tested for impairment at least annually, and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. AtJune 30, 2021 , management has determined that no impairment exists.
Other real estate owned decreased by
OFF-BALANCE SHEET ARRANGEMENTS
The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. Unused commitments to extend credit totaled$508.5 million atJune 30, 2021 and$466.2 million atDecember 31, 2020 , although it is not likely that all of those commitments will ultimately be
drawn
46
Table of Contents
down. Unused commitments represented approximately 16.7% of gross loans atJune 30, 2021 and 14.9% atDecember 31, 2020 . The Company also had undrawn similar standby letters of credit to customers totaling$12.8 million atJune 30, 2021 and$15.7 million atDecember 31, 2020 . The effect on the Company's revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the "Liquidity" section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments. For more information regarding the Company's off-balance sheet arrangements, see Note 7 - Financial Instruments with Off-Balance Risk to the Consolidated Financial Statements. In addition to unused commitments to provide credit, the Company is utilizing a$5.0 million letter of credit issued by the FHLB on the Company's behalf as ofJune 30, 2021 . That letter of credit is backed by loans which are pledged to the FHLB by the Company. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY
Liquidity management refers to the Company's ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by management on a monthly basis, with various scenarios applied to assess its ability to meet liquidity needs under adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored and we are focused on maintaining adequate liquidity resources to draw upon should unexpected needs arise. The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances through FHLB lines of credit, or solicit brokered deposits if deposits are not immediately obtainable from local sources. The net availability on lines of credit from the FHLB totaled$1.378 billion atJune 30, 2021 . Furthermore, funds can be obtained by drawing down the Company's correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cash for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As ofJune 30, 2021 , the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised$540.0 million of the Company's investment balances, compared to$513.2 million atDecember 31, 2020 . Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding federal funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since it utilizes a letter of credit from the FHLB rather than investment securities for certain pledging requirements.
The Company's liquidity ratio as of
June 30, 2021 Policy Maximum Policy ComplianceLoans to Deposits (including FHLB advances) 63.8 % 90.0 % In Policy Net Non-core Funding Dependency Ratio (12.1) % 20.0 % In Policy Fed Funds Purchased / Total Assets 0.0 %
10.0 % In Policy FHLB Advances / Total Assets 0.0 % 20.0 % In Policy FRB Advances / Total Assets 0.0 % 10.0 % In Policy
Pledged Securities toTotal Securities 62.6 %
90.0 % In Policy
Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.
As ofJune 30, 2021 , cash and cash equivalents were$762.5 million . In addition, loans and investment securities repricing or maturing within one year or less were approximately$637.8 million atJune 30, 2021 . Approximately$521.3 million in loan commitments could fund within the next three months and includes other commitments, primarily commercial and similar letters of credit, totaled$12.8 million atJune 30, 2021 . 47 Table of Contents 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, 2020 .
DEPOSITS
Deposits are another key balance sheet component impacting the Company's net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company's net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates for the six-month periods endedJune 30, 2021 and 2020 is included in the Average Balances, Tax Equivalent Interest and Yield/Rates tables appearing above, under the heading "Net Interest Income and Net Interest Margin." The Company implemented Deposit Reclassification at the beginning of 2020. This program reclassifies non-interest bearing deposits and NOW deposit balances to money market accounts. This program reduces our reserve balance required at theFederal Reserve Bank of Atlanta and provides additional funds for liquidity or lending. At quarter-endJune 30, 2021 ,$711.7 million in non-interest deposit balances and$837.9 million in NOW deposit accounts were reclassified as money market accounts. A distribution of the Company's deposits without reclassification showing the balance and percentage of total deposits by type is presented for the noted periods in the following table. Deposit Distribution June 30, 2021 December 31, 2020 Percent of Percent of ($ in thousands) Amount Total Amount Total
Non-interest bearing demand deposits$ 1,393,724 29.8 %
$ 1,185,980 28.1 % NOW accounts and Other 1,541,915 33.0 % 1,347,778 32.0 % Money Market accounts 767,256 16.4 % 705,357 16.7 % Savings accounts 442,110 9.5 % 395,116 9.4 %
Time Deposits of less than$250,000 404,437 8.7 % 218,418 5.2 % Time Deposits of$250,000 or more 124,470 2.6 %
362,631 8.6 %
Total deposits $ 4,673,912 100 % $ 4,215,280 100 %
As of June 30, 2021 , deposits increased by $458.6 million , or 10.9% to $4.674
billion from $4.215 billion at December 31, 2020 . Transaction account balances
were above normal as of June 30, 2021 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$114.6 million , or 44.2%, in the first six months of 2021, due to a decrease in notes payable of$110.2 million to the FHLB and$4.4 million to First Tennessee. As of June
30,
2021, junior subordinated
48
Table of Contents
debentures increased $19 thousand , net of issuance costs, to $144.6 million .
Subordinated debt is discussed more fully in the below Capital section of this
report.
LEASE LIABILITIES
As of June 30, 2021 , operating lease liabilities decreased $784 thousand , or
13.0% to $5.2 million from $6.0 million at December 31, 2020 . Finance lease
liabilities decreased $94 thousand , or 4.1% to $2.2 million from $2.3 million at
December 31, 2020 .
OTHER LIABILITIES
Other liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities decreased by$1.4 million , or 5.5%, during the first six months of 2021. As ofJune 30, 2021 , accrued interest payable decreased$307 thousand , or 14.4% to$1.8 million from$2.1 million atDecember 31, 2020 . Other accrued but unpaid expenses decreased$1.1 million , or 4.7% to$21.9 million atJune 30, 2021 .
CAPITAL
AtJune 30, 2021 , the Company had total shareholders' equity of$660.1 million , comprised of$21.7 million in common stock,$18.9 million in treasury stock,$457.4 million in surplus,$180.8 million in undivided profits and$19.1 million in accumulated comprehensive income on available-for-sale securities. Total shareholders' equity at the end of 2020 was$644.8 million . The increase of$15.2 million , or 2.4%, in shareholders' equity during the first six months of 2021 is primarily comprised of capital added through net earnings of$32.2 million , and offset by$6.7 million decrease in accumulated comprehensive income for available-for-sale securities, treasury stock acquired of$5.2 million and$5.7 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 could from time to time repurchase up to$15 million of shares of its common stock in any manner determined appropriate by the Company's management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, was determined by management at its discretion and will depend on a number of factors, including the market price of the Company's common stock, general market and economic conditions, and applicable legal and regulatory requirements. The renewed share repurchase program expired onDecember 31, 2020 , The Company repurchased 289,302 shares in 2020 pursuant to a previous share repurchase program. OnDecember 16, 2020 , the Company announced that its Board of Directors has authorized a share repurchase program (the "Repurchase Program"), pursuant to which the Company may purchase up to an aggregate of$30 million in shares of the Company's issued and outstanding common stock. Under the program, the Company may, but is not required to, from time to time repurchase up$30 million of shares of its own common stock in any manner determined appropriate by the Company's management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company's common stock, general market and economic conditions, and applicable legal and regulatory requirements. The Repurchase Program will have an expiration date ofDecember 31, 2021 . The Company repurchased 165,623 shares for$5.2 million under the Repurchase Program in the first quarter of 2021. The Company uses a variety of measures to evaluate its capital adequacy, including risk-based capital and leverage ratios that are calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be "advanced approaches" institutions, the Company has elected to opt out of the requirement of the standards initially adopted by 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 June 30, December 31, Required to be Regulatory Capital Ratios The First, A National Banking Association 2021 2020 Well Capitalized Common Equity Tier 1 Capital Ratio 16.6 % 15.8 % 6.5 % 49 Table of Contents Tier 1 Capital Ratio 16.6 % 15.8 % 8.0 % Total Capital Ratio 17.6 % 16.9 % 10.0 % Tier 1 Leverage Ratio 10.5 % 10.4 % 5.0 % Minimum June 30, December 31, Required to be Regulatory Capital Ratios The First Bancshares, Inc. 2021 2020 Well Capitalized Common Equity Tier 1 Capital Ratio* 13.9 %
13.5 % N/A Tier 1 Capital Ratio** 14.4 % 14.0 % N/A Total Capital Ratio 19.2 % 19.1 % N/A Tier 1 Leverage Ratio 9.0 % 9.2 % N/A
* The numerator does not include Preferred Stock and Trust Preferred.
** The numerator includes Trust Preferred.
Our capital ratios remain very strong relative to the median for peer financial institutions, and atJune 30, 2021 were well above the threshold for the Company and the Bank to be classified as "well capitalized," the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. Basel III rules require a "capital conservation buffer" for both the Company and the Bank. The capital conservation buffer is subject to a three-year phase-in period that beganJanuary 1, 2016 and was fully phased-in onJanuary 1, 2019 at 2.5%. Under this guidance banking institutions with a CETI, Tier 1Capital Ratio and Total Risk Based Capital above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall. As ofJune 30, 2021 , management believes that each of the Bank and the Company met all capital adequacy requirements to which they are subject. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.
Total consolidated equity capital at
OnJune 30, 2006 , The Company issued$4.1 million of floating rate junior subordinated deferrable interest debentures toThe First Bancshares Statutory Trust 2 ("Trust 2") in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. Trust 2 issued$4.0 million of Trust Preferred Securities ("TPSs") to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of Trust 2's obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate ("LIBOR") plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. OnJuly 27, 2007 , The Company issued$6.2 million of floating rate junior subordinated deferrable interest debentures toThe First Bancshares Statutory Trust 3 ("Trust 3") in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued$6.0 million of TPSs to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 3's obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In 2018, the Company acquiredFMB's Capital Trust 1 ("Trust 1"), which consisted of$6.1 million of floating rate junior subordinated deferrable interest debentures in which the Company owns all of the common equity. The debentures are the sole asset of Trust 1. Trust 1 issued$6.0 million of TPSs to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 1's obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the 50 Table of Contents
debentures in 2033. Interest on the preferred securities is the three-month LIBOR plus 2.85% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.
In accordance with the provisions of ASC 810, Consolidation, the trusts are not included in the consolidated financial statements.
Subordinated Notes
On
The Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are not subject to redemption at the option of the holder. Principal and interest on the Notes are subject to acceleration only in limited circumstances. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company's current and future senior indebtedness, and each Note is pari passu in right to payment with respect to the other Notes. OnSeptember 25, 2020 , The Company entered into a Subordinated Note Purchase Agreement with certain qualified institutional buyers pursuant to which the Company sold and issued$65.0 million in aggregate principal amount of its 4.25% Fixed to Floating Rate Subordinated Notes due 2030. The Notes are unsecured and have a ten-year term, maturingOctober 1, 2030 , and will bear interest at a fixed annual rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate (which is expected to be the Three-Month Term Secured Overnight Financing Rate ("SOFR") plus 412.6 basis points, payable quarterly in arrears. As provided in the Notes, under specified conditions the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than Three-Month Term SOFR. The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or afterOctober 1, 2025 , and to redeem the Notes at any time in whole upon certain other specified events. The Company had$144.6 million of subordinated debt, net of deferred issuance costs$2.2 million and unamortized fair value mark$817 thousand , atJune 30, 2021 , compared to$144.6 million , net of deferred issuance costs$2.2 million and unamortized fair value mark$700 thousand , atDecember 31, 2020 . 51 Table of Contents
Reconciliation of Non-GAAP Financial Measures
Our accounting and reporting policies conform to generally accepted accounting
principles ("GAAP") in the United States and prevailing practices in the banking
industry. However, certain non-GAAP measures are used by management to
supplement the evaluation of our performance. This Quarterly Report on Form 10-Q
includes operating net earnings; diluted operating earnings per share; net
interest income, FTE; pre-tax, pre-provision operating earnings; total interest
income, FTE; interest income investment securities, FTE and certain 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. Operating net earnings excludes acquisition charges, gain on
acquisition and sale of land. Pre-tax, pre-provision operating earnings excludes
acquisition charges. 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 Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2021 2020 2021 2020
Net income available to common shareholders
- 2,295 - 3,035
Tax on acquisition charges - (518) - (683)
Gain on acquisition and sale of land - (7,643) - (7,643)
Tax on gain from the sale of land - 157 - 157
Net earnings available to common
shareholders, operating $ 15,600 $ 11,234 $ 32,244 $ 20,120 Diluted Operating Earnings per Share
($ in thousands) Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2021 2020 2021 2020Diluted earnings per share $ 0.74 $ 0.79$ 1.52 $ 1.25 Effect of acquisition charges - 0.11 - 0.15 Tax on acquisition charges - (0.03) - (0.03) Effect of bargain purchase gain and gain on sale of land - (0.36) - (0.38) Tax on gain on sale of land - 0.01 - 0.01 Diluted earnings per share, operating $ 0.74 $
0.52$ 1.52 $ 1.00 52 Table of Contents
Net Interest Income, Fully Tax Equivalent
($ in thousands) Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020Net interest income$ 38,050 $ 39,180 $ 77,279 $ 73,245 Tax exempt investment income (1,908) (1,748) (3,843) (3,108) Taxable investment income 2,554 2,340 5,144 4,161 Net interest income, FTE$ 38,696 $ 39,772 $ 78,580 $ 74,298 Average earning assets$ 4,924,108 $ 4,384,631 $ 4,851,625 $ 3,950,886 Net interest margin, FTE 3.14 % 3.63 % 3.24 % 3.76 %
Pre-Tax Pre-Provision Operating Earnings
($ in thousands) Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Earnings before income taxes $ 19,420 $ 19,184 $ 40,857 $ 29,183
Acquisition charges - 2,295 - 3,036
Provision for credit losses - 7,606 - 14,708
Treasury awards and gains - (7,643) - (7,643)
Pre-Tax, Pre-Provision Operating Earnings
Total Interest Income, Fully Tax Equivalent
($ in thousands) Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020Total interest income$ 43,238 $ 45,799 $ 88,425 $ 87,397 Tax-exempt investment income (1,908) (1,748) (3,843) (3,108) Taxable investment income 2,554 2,340 5,144 4,161 Total interest income, FTE$ 43,884 $ 46,391 $ 89,726 $ 88,450
Yield on average earning assets, FTE 3.56 % 4.23
% 3.70 % 4.48 %
($ in thousands) Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Interest income investment securities $ 5,925 $ 5,187 $ 11,451 $ 10,491
Tax-exempt investment income (1,908) (1,748) (3,843) (3,108)
Taxable investment income 2,554 2,340 5,144 4,161
Interest income investment securities, FTE
Average investment securities$ 1,220,254 $
906,548
Yield on investment securities, FTE 2.15 % 2.55 % 2.23 % 2.73 %
53
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