Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED

(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017

2022

OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number: 000-22507

THE FIRST BANCshARES,BANCSHARES, INC.

(Exact name of Registrantregistrant as specified in its charter)

Mississippi64-0862173
Mississippi64-0862173
(State of Incorporation)(IRS Employer Identification No)

6480 U.S. Highway 98 West, Suite A, Hattiesburg, Mississippi 39402

(Address of principal executive offices)           (Zip Code)

6480 U.S. Highway 98 West, Suite A, Hattiesburg, Mississippi39402
(Address of principal executive offices)(Zip Code)
(601) 268-8998

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00FBMSThe Nasdaq Stock Market
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þNo ¨

o

Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þNo ¨

o

Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.

See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filerþ
Non-accelerated filer¨Smaller Reporting Company¨
(Do not check if a smaller reporting company)Emerging growth company

Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨o    No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $1.00 par value, 9,179,90125,277,502 shares issued and 11,192,40124,027,895 outstanding as of November 3, 2017.

2, 2022.

Auditor Firm PCAOB ID: 686Auditor Name: FORVIS, LLPAuditor Location: Jackson, MS



The First Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2022
Index
2

PART I - FINANCIAL INFORMATION

ITEM NO. 1-1. FINANCIAL STATEMENTS

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ In Thousands)

  (Unaudited)  (Audited) 
  September 30,  December 31, 
  2017  2016 
         
ASSETS        
Cash and due from banks $63,668  $31,719 
Interest-bearing deposits with banks  29,649   29,975 
Federal funds sold  -   425 
         
Total cash and cash equivalents  93,317   62,119 
         
Securities held-to-maturity, at amortized cost  6,000   6,000 
Securities available-for-sale, at fair value  353,035   243,206 
Other securities  9,556   6,593 
         
Total securities  368,591   255,799 
         
Loans held for sale  4,588   5,880 
Loans  1,198,193   867,054 
Allowance for loan losses  (8,175)  (7,510)
         
Loans, net  1,190,018   859,544 
         
Premises and equipment  46,203   34,624 
Interest receivable  5,787   4,358 
Cash surrender value of bank-owned life insurance  26,367   21,250 
Goodwill  20,443   13,776 
Other real estate owned  7,855   6,008 
Other assets  24,807   14,009 
         
TOTAL ASSETS $1,787,976  $1,277,367 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
LIABILITIES:        
Deposits:        
Noninterest-bearing $308,050  $202,478 
Interest-bearing  1,199,941   836,713 
         
TOTAL DEPOSITS  1,507,991   1,039,191 
         
Interest payable  274   306 
Borrowed funds  94,321   69,000 
Subordinated debentures  10,310   10,310 
Other liabilities  8,100   4,033 
         
TOTAL LIABILITIES  1,620,996   1,122,840 
         
STOCKHOLDERS’ EQUITY:        
Common stock, par value $1 per share, 20,000,000 shares authorized; 9,179,901 shares issued at September 30, 2017, and 9,017,891 shares issued at December 31, 2016, respectively  9,180   9,018 
Additional paid-in capital  104,965   102,574 
Retained earnings  51,649   44,477 
Accumulated other comprehensive income (loss)  1,650   (1,078)
Treasury stock, at cost, 26,494 shares at Sept. 30, 2017 and at December 31, 2016  (464)  (464)
         
TOTAL STOCKHOLDERS’ EQUITY  166,980   154,527 
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $1,787,976  $1,277,367 

in thousands)

(Unaudited)
September 30,
2022
December 31,
2021
ASSETS
Cash and due from banks$71,555 $115,232 
Interest-bearing deposits with banks92,286 804,481 
Total cash and cash equivalents163,841 919,713 
Securities available-for-sale, at fair value (amortized cost: $1,596,290 - 2022; $1,741,153 - 2021; allowance for credit losses: $0)1,379,410 1,751,832 
Securities held to maturity, net of allowance for credit losses of $0 (fair value: $532,688 - 2022; $0 - 2021)593,553 — 
Other securities31,060 22,226 
Total securities2,004,023 1,774,058 
Loans held for sale2,225 7,678 
Loans held for investment3,719,388 2,959,553 
Allowance for credit losses(38,356)(30,742)
Net loans held for investment3,681,032 2,928,811 
Interest receivable24,570 23,256 
Premises and equipment140,533 125,959 
Operating lease right-of-use assets7,901 4,095 
Finance lease right-of-use assets2,046 2,394 
Cash surrender value of bank-owned life insurance95,351 87,420 
Goodwill178,764 156,663 
Other real estate owned10,328 2,565 
Other assets144,234 44,802 
Total assets$6,454,848 $6,077,414 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Liabilities:
Deposits:  
Noninterest-bearing$1,770,848 $1,550,381 
Interest-bearing3,780,450 3,676,403 
Total deposits5,551,298 5,226,784 
Interest payable1,365 1,711 
Borrowed funds90,000 — 
Subordinated debentures144,952 144,726 
Operating lease liabilities8,092 4,192 
Finance lease liabilities1,962 2,094 
Allowance for credit losses on off-balance sheet credit exposures1,220 1,070 
Other liabilities34,488 20,665 
Total liabilities5,833,377 5,401,242 
Shareholders’ equity:  
Common stock, par value $1 per share, 40,000,000 shares authorized; 25,277,727 shares issued at September 30, 2022, and 21,668,644 shares issued at December 31, 2021, respectively25,278 21,669 
Additional paid-in capital558,181 459,228 
Retained earnings241,132 206,228 
Accumulated other comprehensive (loss) income(162,009)7,978 
Treasury stock, at cost, 1,249,607 shares at September 30, 2022 and 649,607 shares at December 31, 2021(41,111)(18,931)
Total shareholders’ equity621,471 676,172 
Total liabilities and shareholders’ equity$6,454,848 $6,077,414 
See Notes to Consolidated Financial Statements

2

3


THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

($ In Thousands,in thousands, except earnings and dividends per share)

  (Unaudited)  (Unaudited) 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
             
INTEREST INCOME:                
Interest and fees on loans $14,412  $9,798  $42,083  $28,146 
Interest and dividends on securities:                
Taxable interest and dividends  1,600   982   4,742   3,110 
Tax exempt interest  579   464   1,764   1,398 
Interest on federal funds sold  117   25   337   82 
                 
TOTAL INTEREST INCOME  16,708   11,269   48,926   32,736 
                 
INTEREST EXPENSE:                
Interest on deposits  1,375   962   3,836   2,476 
Interest on borrowed funds  398   240   1,151   663 
                 
TOTAL INTEREST EXPENSE  1,773   1,202   4,987   3,139 
                 
NET INTEREST INCOME  14,935   10,067   43,939   29,597 
                 
PROVISION FOR LOAN LOSSES  90   143   384   538 
                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  14,845   9,924   43,555   29,059 
                 
OTHER INCOME:                
Service charges on deposit accounts  902   606   2,692   1,847 
Other service charges and fees  2,756   2,493   8,115   6,695 
TOTAL OTHER INCOME  3,658   3,099   10,807   8,542 
                 
OTHER EXPENSES:                
Salaries and employee benefits  7,328   5,645   23,070   16,194 
Occupancy and equipment  1,390   1,209   4,108   3,392 
Acquisition and integration charges  48   -   6,327   - 
Other  3,122   2,562   9,551   7,144 
                 
TOTAL OTHER EXPENSES  11,888   9,416   43,056   26,730 
                 
INCOME BEFORE INCOME TAXES  6,615   3,607   11,306   10,871 
                 
INCOME TAXES  1,901   1,049   3,104   3,060 
                 
NET INCOME  4,714   2,558   8,202   7,811 
                 
PREFERRED STOCK ACCRETION AND DIVIDENDS  -   86   -   257 
                 
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $4,714  $2,472  $8,202  $7,554 
                 
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:                
BASIC $0.52  $0.46  $0.90  $1.39 
DILUTED  0.51   0.45   0.89   1.38 
DIVIDENDS PER SHARE – COMMON  0.0375   0.0375   0.1125   0.1125 

(Unaudited)(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Interest and dividend income:
Interest and fees on loans$42,274 $37,480 $111,091 $114,368 
Interest and dividends on securities:
Taxable interest and dividends8,723 5,033 23,247 12,641 
Tax exempt interest2,875 1,905 8,077 5,748 
Interest on federal funds sold and interest-bearing deposits in other banks17 47 103 
Total interest income53,874 44,435 142,462 132,860 
Interest expense:
Interest on deposits2,748 2,588 6,937 9,752 
Interest on borrowed funds1,978 1,819 5,638 5,801 
Total interest expense4,726 4,407 12,575 15,553 
Net interest income49,148 40,028 129,887 117,307 
Provision for credit losses, LHFI4,300 — 4,750 — 
Provision for credit losses, OBSC exposures— — 150 — 
Net interest income after provision for credit losses44,848 40,028 124,987 117,307 
Non-interest income:
Service charges on deposit accounts2,219 1,846 6,297 5,363 
(Loss) gain on securities11 (82)107 
Gain on acquisition— — 281 — 
Government awards/grants— 1,826 873 1,826 
BOLI death proceeds— — 1,630 — 
(Loss) gain on sale of premises and equipment— (397)(114)(383)
Other6,802 6,300 19,958 20,968 
Total non-interest income9,022 9,586 28,843 27,881 
Non-interest expense:
Salaries and employee benefits19,099 16,246 53,135 48,337 
Occupancy and equipment3,826 3,922 11,530 11,614 
Acquisition expense/charter conversion3,640 5,220 
Other9,338 8,880 25,563 23,814 
Total non-interest expense35,903 29,053 95,448 83,770 
Income before income taxes17,967 20,561 58,382 61,418 
Income tax expense3,924 4,429 11,758 13,042 
Net income$14,043 $16,132 $46,624 $48,376 
Basic earnings per share$0.61 $0.77 $2.18 $2.30 
Diluted earnings per share0.61 0.76 2.17 2.28 
See Notes to Consolidated Financial Statements

3

4


THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(LOSS)

($ In Thousands)

  (Unaudited)  (Unaudited) 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
             
Net income per consolidated statements of income $4,714  $2,558  $8,202  $7,811 
Other Comprehensive Income:                
Unrealized holding gains/ (losses) arising during period on available-for-sale securities  (865)  189   4,391   3,016 
Less reclassification adjustment for gains included in net income  -   (129)  -   (129)
Unrealized holding gains/ (losses) arising during period on available- for-sale securities  (865)  60   4,391   2,887 
Unrealized holding gains/ (losses) on loans held for sale  42   (85)  45   1 
Income tax benefit(expense)  322   13   (1,708)  (982)
Other comprehensive income (loss)  (501)  (12)  2,728   1,906 
Comprehensive Income $4,213  $2,546  $10,930  $9,717 

in thousands)

(Unaudited)(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Net income$14,043 $16,132 $46,624 $48,376 
Other comprehensive income (loss):  
Unrealized holding (losses) gains arising during the period on available-for-sale securities(67,785)(7,306)(227,641)(16,204)
Reclassification adjustment for losses (gains) included in net income(1)(11)82 (107)
Unrealized holding (losses) gains arising during the period on available-for-sale securities(67,786)(7,317)(227,559)(16,311)
Income tax (expense) benefit17,150 1,852 57,572 4,127 
Other comprehensive income (loss)(50,636)(5,465)(169,987)(12,184)
Comprehensive income (loss)$(36,593)$10,667 $(123,363)$36,192 
See Notes to Consolidated Financial Statements

4

5


THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’SHAREHOLDERS’ EQUITY

($ In Thousands,in thousands except per share data, unaudited)

  

Common

Stock

  

Preferred

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income(Loss)

  

Treasury

Stock

  Total 
                      
Balance, January 1, 2016 $5,403  $17,123  $44,650  $35,625  $1,099  $(464) $103,436 
Net income  -   -   -   7,811   -   -   7,811 
Other comprehensive income  -   -   -   -   1,906   -   1,906 
Dividends on preferred stock  -   -   -   (257)  -   -   (257)
Dividends on common stock, $0.1125 per share  -   -   -   (611)  -   -   (611)
Issuance of preferred shares              (25)          (25)
Repurchase of restricted stock for payment of taxes  (9)  -   (167)  -   -   -   (176)
Restricted stock grant  61   -   (61)  -   -   -   - 
Compensation expense  -   -   574   -   -   -   574 
Balance, Sept. 30, 2016 $5,455  $17,123  $44,996  $42,543  $3,005  $(464) $112,658 
                             
Balance, January 1, 2017 $9,018  $-  $102,574  $44,477  $(1,078) $(464) $154,527 
Net income  -   -   -   8,202   -   -   8,202 
Other comprehensive income  -   -   -   -   2,728   -   2,728 
Dividends on common stock, $0.1125 per share  -   -   -   (1,030)  -   -   (1,030)
Issuance of 89,591 common shares for GCCB acquisition  89   -   2,160   -   -   -   2,249 
Repurchase of restricted stock for payment of taxes  (12)  -   (318)  -   -   -   (330)
Restricted stock grant  85   -   (85)  -   -   -   - 
Compensation expense  -   -   634   -   -   -   634 
Balance, Sept. 30, 2017 $9,180  $-  $104,965  $51,649  $1,650  $(464) $166,980 


Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury StockTotal
SharesAmountSharesAmount
Balance, January 1, 202121,598,993 $21,599 $456,919 $154,241 $25,816 (483,984)$(13,760)$644,815 
Net income— — — 16,644 — — — 16,644 
Common stock repurchased— — — — — (165,623)(5,171)(5,171)
Other comprehensive loss— — — — (9,615)— — (9,615)
Dividends on common stock, $0.13 per share— — — (2,723)— — — (2,723)
Issuance of restricted stock grants84,578 85 (85)— — — — — 
Restricted stock grants forfeited(500)(1)— — — — — 
Repurchase of restricted stock for payment of taxes(14,720)(15)(426)— — — — (441)
    Compensation expense— — 440 — — — — 440 
Balance, March 31, 202121,668,351 21,668 456,849 168,162 16,201 (649,607)(18,931)643,949 
Net income— — — 15,600 — — — 15,600 
Other comprehensive income— — — — 2,896 — — 2,896 
Dividends on common stock, $0.14 per share— — — (2,942)— — — (2,942)
Issuance of restricted stock grants3,000 (3)— — — — — 
Restricted stock grants forfeited(1,021)(1)— — — — — 
    Compensation expense— — 549 — — — — 549 
Balance, June 30, 202121,670,330 21,670 457,396 180,820 19,097 (649,607)(18,931)660,052 
Net income— — — 16,132 — — — 16,132 
Other comprehensive income— — — — (5,465)— — (5,465)
Dividends on common stock, $0.15 per share— — — (3,152)— — — (3,152)
Restricted stock grants forfeited(500)— — — — — — — 
Repurchase of restricted stock for payment of taxes(326)— (12)— — — — (12)
 Compensation expense— — 1,128 — — — — 1,128 
Balance, September 30, 202121,669,504 $21,670 $458,512 $193,800 $13,632 (649,607)$(18,931)$668,683 
6

THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY CONTINUED
($ in thousands except per share data, unaudited)
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury StockTotal
SharesAmountSharesAmount
Balance, January 1, 202221,668,644 $21,669 $459,228 $206,228 $7,978 (649,607)$(18,931)$676,172 
Net income— — — 16,829 — — — 16,829 
Common stock repurchased— — — — — (600,000)(22,180)(22,180)
Other comprehensive loss— — — — (76,825)— — (76,825)
Dividends on common stock, $0.17 per share— — — (3,468)— — — (3,468)
Issuance of restricted stock grants82,123 82 (82)— — — — — 
Restricted stock grants forfeited(1,000)(1)— — — — — 
Repurchase of restricted stock for payment of taxes(15,330)(16)(538)— — — — (554)
    Compensation expense— — 466 — — — — 466 
Balance, March 31, 202221,734,437 21,734 459,075 219,589 (68,847)(1,249,607)(41,111)590,440 
Net income— — — 15,753 — — — 15,753 
Other comprehensive loss— — — — (42,526)— — (42,526)
Dividends on common stock, $0.18 per share— — — (3,688)— — — (3,688)
Issuance of restricted stock grants47,827 48 (48)— — — — — 
Restricted stock grants forfeited(1,000)(1)— — — — — 
Repurchase of restricted stock for payment of taxes(2,533)(2)(71)— — — — (73)
Compensation expense— — 546 — — — — 546 
Balance, June 30, 202221,778,731 21,779 459,503 231,654 (111,373)(1,249,607)(41,111)560,452 
Net income— — — 14,043 — — — 14,043 
Other comprehensive loss— — — — (50,636)— — (50,636)
Dividends on common stock, $0.19 per share— — — (4,565)— — — (4,565)
Issuance of common shares for BBI acquisition3,498,936 3,499 97,970 — — — — 101,469 
Issuance of restricted stock grants60 — — — — — — — 
Compensation expense— — 708 — — — — 708 
Balance, September 30, 202225,277,727 $25,278 $558,181 $241,132 $(162,009)(1,249,607)$(41,111)$621,471 
See Notes to Consolidated Financial Statements

5

7


THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ In Thousands)

  (Unaudited) 
  Nine Months Ended 
  September 30, 
  2017  2016 
CASH FLOWS FROM OPERATING ACTIVITIES:        
NET INCOME $8,202  $7,811 
Adjustments to reconcile net income to net cash provided by operating activities:        
Gain on sale of securities  -   (129)
Depreciation, amortization and accretion  3,455   2,520 
Provision for loan losses  384   538 
Loss on sale/writedown of ORE  743   111 
Restricted stock expense  634   573 
Increase in cash value of life insurance  (532)  (384)
Federal Home Loan Bank stock dividends  (54)  (27)
Changes in:        
Interest receivable  256   (61)
Loans held for sale, net  1,336   (5,462)
Interest payable  (50)  29 
Other, net  1,738   (2,882)
NET CASH PROVIDED BY OPERATING ACTIVITIES  16,112   2,637 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Maturities, calls and paydowns of available-for-sale and held-to-maturity securities  51,879   37,141 
Purchases of available-for-sale securities  (67,646)  (30,294)
Net purchases of other securities  (1,796)  (1,433)
Net increase in loans  (94,210)  (84,019)
Net increase in premises and equipment  (4,237)  (1,055)
Purchase of bank-owned life insurance  (469)  (5,850)
Proceeds from sale of other real estate owned  5,759   - 
Cash received in excess of cash paid for acquisitions  3,413   - 
NET CASH USED IN INVESTING ACTIVITIES  (107,307)  (85,510)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Increase in deposits  113,313   155,094 
Net increase (decrease) in borrowed funds  10,415   (42,321)
Dividends paid on common stock  (1,005)  (587)
Dividends paid on preferred stock  -   (257)
Repurchase of restricted stock for payment of taxes  (330)  (176)
Issuance of preferred shares  -   (25)
NET CASH PROVIDED BY FINANCING ACTIVITIES  122,393   111,728 
         
NET INCREASE IN CASH  31,198   28,855 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  62,119   41,259 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $93,317  $70,114 
         
SUPPLEMENTAL DISCLOSURES:        
         
CASH PAYMENTS FOR INTEREST  5,181   3,110 
CASH PAYMENTS FOR INCOME TAXES  667   4,277 
LOANS TRANSFERRED TO OTHER REAL ESTATE  836   2,498 
ISSUANCE OF RESTRICTED STOCK GRANTS  85   61 
STOCK ISSUED IN CONNECTION WITH GULF COAST COMMUNITY BANK ACQUISITION  2,249   - 

in thousands)

(Unaudited)
Nine Months Ended
September 30,
20222021
Cash flows from operating activities:
Net income$46,624 $48,376 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion5,549 10,453 
Provision for credit loss4,900 — 
Loss on sale or writedown of ORE252 778 
Securities loss (gain)82 (107)
Acquisition gain(281)— 
Loss (gain) on disposal of premises and equipment114 383 
Restricted stock expense1,720 2,117 
Increase in cash value of life insurance(1,576)(1,407)
Federal Home Loan Bank stock dividends(8)(26)
Residential loans originated and held for sale(113,058)(182,371)
Proceeds from sale of residential loans held for sale118,511 195,263 
Changes in:
Interest receivable166 3,200 
Interest payable(346)(758)
Operating lease liability3,900 (1,696)
Other, net1,844 2,667 
Net cash provided by operating activities68,393 76,872 
Cash flows from investing activities:  
Maturities, calls and paydowns of available-for-sale and held-to-maturity securities157,181 174,987 
Proceeds from sales of securities available-for-sale21,069 — 
Purchases of available-for-sale and held-to-maturity securities(609,218)(636,825)
Purchases of other securities(8,580)5,276 
Proceeds from other securities1,237 — 
Net (increase) decrease in loans(273,335)160,700 
Net changes in premises and equipment(5,756)(6,448)
Proceeds from sale of other real estate owned2,260 4,221 
Proceeds from the sale of land712 — 
Bank-owned life insurance – death proceeds1,630 — 
Purchase of bank-owned life insurance— (12,330)
Cash received in excess of cash paid for acquisitions23,939 — 
Net cash used in investing activities(688,861)(310,419)
Cash flows from financing activities:  
(Decrease) increase in deposits(165,921)457,443 
Proceeds from borrowed funds270,001 24,025 
Repayments of borrowed funds(205,001)(138,672)
Principal payments on finance lease liabilities(132)(141)
Dividends paid on common stock(11,544)(8,682)
Cash paid to repurchase common stock(22,180)(5,171)
Payment of subordinated debt issuance costs— (60)
Repurchase of restricted stock for payment of taxes(627)(453)
Net cash provided by (used in) financing activities(135,404)328,289 
Net change in cash and cash equivalents(755,872)94,742 
Beginning cash and cash equivalents919,713 562,554 
Ending cash and cash equivalents$163,841 $657,296 
8

THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
($ in thousands)


(Unaudited)
Nine Months Ended
September 30,
20222021
Supplemental disclosures:  
Loans transferred to other real estate1,490 1,780 
Issuance of restricted stock grants130 86 
Dividends on restricted stock grants176 135 
Stock issued in connection with BBI acquisition101,469 — 
Lease liabilities arising from obtaining right-of-use assets600 14 
Lease liabilities arising from BBI acquisition5,437 — 
See Notes to Consolidated Financial Statements

6

9


THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

2022

NOTE 1 BASIS OF PRESENTATION

Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2017,2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company'sCompany’s Form 10-K for the fiscal year ended December 31, 2016.

2021.

NOTE 2 SUMMARY OF ORGANIZATION

The First Bancshares, Inc., Hattiesburg, Mississippi (the "Company"“Company”), was incorporated June 23, 1995, under the laws of the State of Mississippi for the purpose of operating as a bank holding company. The Company’s primary asset is its interest in its wholly-owned subsidiary, The First Bank (the “Bank” or “The First”).
On January 15, 2022, the Bank, then named The First, A National Banking Association, (the “Bank”).

converted from a national banking association to a Mississippi state-chartered bank and changed its name to The First Bank. The First Bank is a member of the Federal Reserve System through the Federal Reserve Bank of Atlanta. The charter conversion and name change are expected to have only a minimal impact on the Bank’s clients, and deposits will continue to be insured by the Federal Deposit Insurance Corporation up to the applicable limits.

At September 30, 2017,2022, the Company had approximately $1.8$6.455 billion in assets, $1.2$3.681 billion in net loans $1.5held for investment (“LHFI”), $5.551 billion in deposits, and $167.0$621.5 million in stockholders'shareholders' equity. For the nine months ended September 30, 2017,2022, the Company reported net income of $8.2$46.6 million. After tax merger related costs
On February 25, 2022, the Company paid a cash dividend in the amount of $3.9 million were expensed during the nine months ended September 30, 2017.

In each$0.17 per share to shareholders of record as of the first, second, and third quartersclose of 2017,business on February 10, 2022. On May 25, 2022, the Company declared and paid a cash dividend in the amount of $0.18 per share to shareholders of record as of the close of business on May 10, 2022. On July 27, 2022, the Company announced that its Board of Directors declared a cash dividend of $.0375$0.19 per share to be paid on its common share.

stock on August 25, 2022 to shareholders of record as of the close of business on August 8, 2022. On August 25, 2022, the Company announced that its Board of Directors declared a cash dividend of $0.20 per share to be paid on its common stock on November 25, 2022 to shareholders of record as of the close of business on November 8, 2022.

NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS

STANDARDS

Effect of Recently Adopted Accounting Standards
In May 2017, theNovember 2021, FASB issued ASUAccounting Standard Update (“ASU”) No. 2017-09, “Stock Compensation, Scope of Modification Accounting.2021-10, Government Assistance (Topic 832): “Disclosures by Business Entities about Government Assistance. ASU 2017-09 clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if any change in the value, vesting conditions or classification of the award occurs. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU 2017-09 is not These amendments are expected to increase transparency in financial reporting by requiring business entities to disclose information about certain types of government assistance they receive. The Company adopted ASU 2021-10 effective January 1, 2022. Adoption of ASU 2021-10 did not have a material impact onto the Company’s Consolidated Financial Statements.

7
consolidated financial statements.

New Accounting Standards That Have Not Yet Been Adopted

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Currently, entities generally amortize the premium as an adjustment of yield over the contractual life of the security. The ASU does not change the accounting for purchased callable debt securities held at a discount as the discount will continue to be accreted to maturity. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which ASU 2017-08 is adopted. The Company is currently evaluating the provisions of ASU 2017-08 to determine the potential impact the new standard will have on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04,“Simplifying the Test for Goodwill Impairment.”ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is currently assessing the impact of ASU 2017-04 on its Consolidated Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15,“Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. ASU 2016-15 is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In June 2016,2020, the Financial Accounting Standards Board (FASB)(“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (ASC 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or

10

another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.
In October 2021, FASB issued ASU No. 2016-13, “2021-08, Business Combination (Topic 805): “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendment improves comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. This ASU is effective for the Company after December 15, 2022. The Company is assessing ASU 2021-08 and its impact on the Company’s consolidated financial statements.
In March 2022, FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”(ASU 2016-13). ASU 2016-13 requiresTroubled Debt Restructurings and Vintage Disclosures.” These amendments eliminate the TDR recognition and measurement guidance and instead require that an entity evaluate whether the modification represents a new impairment model known asloan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investment in leases within the current expected credit loss (“CECL”)scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which significantly changesrequires that an entity disclose the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost (2) requiring entities to record an allowance forbasis of financing receivables by credit losses related to available-for-sale debt securities rather than a direct write-downquality indicator and class of the carrying amountfinancing receivable by year of the investments, as is required by the other-than-temporary-impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans.origination. This ASU 2016-13 is effective for interim and annual reporting periods beginningthe Company after December 15, 2019, although early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-13 on its Consolidated Financial Statements.

8

In February 2016, the FASB issued ASU NO. 2016-02 “Leases (Topic 842).”ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If neither risks and rewards nor control is conveyed, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted.2022. The Company is assessing ASU 2022-02 and its impact on the impact of ASU 2016-02 on its accounting and disclosures.

Company’s consolidated financial statements.

NOTE 4 – BUSINESS COMBINATIONS

Acquisitions

Iberville Bank

Beach Bancorp, Inc.
On JanuaryAugust 1, 2017,2022, the Company completed its acquisition of 100%Beach Bancorp, Inc. ("BBI"), pursuant to an Agreement and Plan of Merger dated April 26, 2022 by and between the Company and BBI (the "BBI Merger Agreement"). Upon the completion of the common stockmerger of IbervilleBBI with and into the Company, Beach Bank, Plaquemine, Louisiana, from A. Wilbert’s Sons Lumber and Shingle Co. (“Iberville Parent”), and immediately thereafter merged Iberville Bank (“Iberville”), theBBI's wholly-owned subsidiary, of Iberville Parent,was merged with and into The First.First Bank. Under the terms of the BBI Merger Agreement, each share of BBI common stock and each share of BBI preferred stock was converted into the right to receive 0.1711 of a share of Company common stock (the "BBI Exchange Ratio"), and all stock options awarded under the BBI equity plans were converted automatically into an option to purchase shares of Company common stock on the same terms and conditions as applicable to each such BBI option as in effect immediately prior to the effective time, with the number of shares underlying each such option and the applicable exercise price adjusted based on the BBI Exchange Ratio. The BBI merger provides the opportunity for the Company to expand its operations in the Florida panhandle and enter the Tampa market. The Company paid a totalconsideration of $31.1approximately $101.5 million in cash. Approximately $2.5 millionto the former BBI shareholders including 3,498,936 shares of the Company's common stock and approximately $1 thousand in cash in lieu of fractional shares, and also assumed options entitling the owners thereof to purchase price is being held in escrow as contingency for flood-related losses inan additional 310,427 shares of the loan portfolio that may be incurred due to flooding in Iberville’s market area in the fall of 2016.

Company's common stock.

In connection with the acquisition of BBI, the Company recorded approximately $5.6$21.8 million of goodwill and $2.7$9.8 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible iswill be amortized to be expensedexpense over 10 years.

The Company acquired Iberville’s $149.4also incurred $1.3 million loan portfolio at an estimated fair value discount of $0.8 million. The discount represents expectedprovision for credit losses adjusted for market interest rates and liquidity adjustments.

on credit marks from the loans acquired from Beach Bank.

Expenses associated with the BBI acquisition were $3.5$2.3 million and $2.9 million for the three months and nine monthmonths period ended September 30, 2017.2022, respectively. These costs included system conversion and integrating operations charges as well asassociated with legal and consulting expenses, which have been expensed as incurred.

The preliminary amounts of theassets acquired identifiable assets and liabilities asassumed and consideration paid in the acquisition were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date wereof the acquisition. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to
11

provisional amounts that are identified during the measurement period, which will run through August 1, 2023 in respect of the acquisition, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as follows:

($ In Thousands)   
Purchase price:    
Cash $31,100 
Total purchase price  31,100 
     
Identifiable assets:    
Cash and due from banks  28,789 
Investments  78,613 
Loans  148,516 
Core deposit intangible  2,688 
Personal and real property  4,603 
Other assets  9,330 
Total assets  272,539 
     
Liabilities and equity:    
Deposits  243,656 
Borrowed funds  456 
Other liabilities  2,928 
Total liabilities  247,040 
Net assets acquired  25,499 
Goodwill resulting from acquisition $5,601 

9

Valuationa result of changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments have been made to securities, personal and real property, andon loans, core deposit intangible since initially reported.

The outstanding principal balance and the carrying amount of these loans included indeferred income tax assets resulting from the consolidated balance sheet at September 30, 2017, are as follows ($ In Thousands):

Outstanding principal balance $132,277 
Carrying amount  131,535 

acquisition.

The following unaudited supplemental pro forma information is presented to showtable summarizes the Company’s estimated results assuming Iberville was acquired as of January 1, 2016. These unaudited pro forma results are not necessarily indicativeprovisional fair values of the operating results thatassets acquired and liabilities assumed and the Company would have achieved had itgoodwill generated from the transaction ($ in thousands):
Purchase price:
Cash and stock$101,470 
Total purchase price101,470 
Identifiable assets:
Cash$23,939 
Investments22,907 
Loans482,903 
Other real estate8,797 
Bank owned life insurance10,092 
Core deposit intangible9,791 
Personal and real property13,825 
Deferred tax asset28,105 
Other assets9,649 
Total assets610,008 
Liabilities and equity:
Deposits490,588 
Borrowings25,000 
Other liabilities14,772 
Total liabilities530,360 
Net assets acquired79,648 
Goodwill$21,822 
Cadence Bank Branches
On December 3, 2021, The First completed theits acquisition as of January 1, 2016 and should not be considered as representative of future operating results. Pro forma information for 2017 is not necessary because Ibervilleseven Cadence Bank, is includedN.A. (“Cadence”) branches in the Company’s results for the entire nine and three months ended September 30, 2017.

 For the Three  For the Nine 
($ In Thousands) Months Ended  Months Ended 
Performance Measures (pro forma, unaudited) Sept. 30, 2016  Sept. 30, 2016 
       
Net interest income $12,428  $36,479 
Net income available to common shareholders  2,667   8,366 
Diluted earnings per common share  0.49   1.53 

Gulf Coast Community Bank

Also on January 1, 2017, the Company completed the merger of Gulf Coast Community Bank (“GCCB”Northeast Mississippi (the “Cadence Branches”), Pensacola, Florida, with and into The First. The Company issued to GCCB’s shareholders shares of the Company’s common stock which, for purposes of the GCCB acquisition, were valued through averaging the trading price of the Company’s common stock price over a 30 day trading period ending on the fifth business day prior to the closing of the acquisition. Fractional shares were acquired with cash. The consideration was approximately $2.3 million.

. In connection with the acquisition of the Cadence Branches, The First assumed $410.2 million in deposits, acquired $40.3 million in loans at fair value, acquired certain assets associated with the Cadence Branches at their book value, and paid a deposit premium of $1.0 million to Cadence. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

In connection with the acquisition of the Cadence Branches, the Company recorded approximately $1.1a $1.6 million of goodwillbargain purchase gain and $1.0$2.9 million of core deposit intangible. The bargain purchase gain was generated as a result of the estimated fair value of net assets acquired exceeding the merger consideration, based on provisional fair values. The bargain purchase gain is considered non-taxable for income taxes purposes. The core deposit intangible iswill be amortized to be expensedexpense over 10 years.

The Company acquired GCCB’s $91.0 million loan portfolio at a fair value discountalso incurred $370 thousand of approximately $2.2 million. The discount represents expectedprovision for credit losses adjusted for market interest rates and liquidity adjustments.

on credit marks from the loans acquired.

Expenses associated with the branch acquisition of the Cadence Branches were $2.8 million$142 thousand and $604 thousand for the three months and nine monthmonths period ended September 30, 2017.2022, respectively. These costs included systems conversion and integrating operations charges as well asassociated with legal and consulting expenses, which have been expensed as incurred.

10

12


The preliminary amountsassets acquired and liabilities assumed and consideration paid in the acquisition of the acquired identifiable assets and liabilities asCadence Branches were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date wereof the acquisition. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which will run through December 3, 2022 in respect of the Cadence Branches, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as follows:

($ In Thousands)   
Purchase price:    
Cash and stock $2,258 
Total purchase price  2,258 
     
Identifiable assets:    
Cash and due from banks  5,733 
Investments  13,805 
Loans  88,801 
Core deposit intangible  953 
Personal and real property  4,739 
Other real estate  7,393 
Deferred tax asset  6,693 
Other assets  468 
Total assets  128,585 
     
Liabilities and equity:    
Deposits  111,993 
Borrowed funds  14,450 
Other liabilities  950 
Total liabilities  127,393 
Net assets acquired  1,192 
Goodwill resulting from acquisition  1,066 

Valuationa result of changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments have been made to securities,on loans, core deposit intangible and other real estate since initially reported. Also,the deferred income tax assets resulting from the acquisition.

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed and the goodwill (bargain purchase gain) generated from the transaction ($ in thousands):
Purchase price:
Cash$1,000 
Total purchase price1,000 
Identifiable assets:
Cash$359,916 
Loans40,262 
Core deposit intangible2,890 
Personal and real property9,675 
Other assets135 
Total assets412,878 
Liabilities and equity:
Deposits410,171 
Other liabilities126 
Total liabilities410,297 
Net assets acquired2,581 
Bargain purchase gain$(1,581)
Supplemental Pro Forma Information
The following table presents certain amounts havesupplemental pro forma information, for illustrative purposes only, for the nine months ended September 30, 2022 and 2021 as if the Cadence and BBI acquisitions had occurred on January 1, 2021. The pro forma financial information is not necessarily indicative of the results of operations had the acquisitions been reclassifiedeffective as of this date.
($ in thousands)(unaudited)(unaudited)
Nine Months Ended
September 30, 2022
Nine Months Ended
September 30, 2021
Net interest income$140,551 $129,439 
Non-interest income33,710 45,114 
Total revenue174,261 174,553 
Income before income taxes69,123 63,787 
Supplemental pro-forma earnings were adjusted to conformexclude acquisition costs incurred. The Company’s operating results for the nine months ended September 30, 2022, include the operating results of the acquired assets and assumed liabilities of the above mentioned acquisitions subsequent to the classificationsacquisition date.
13

NOTE 5 – PREFERRED STOCK AND WARRANT

On December 6, 2016, the Company repurchased all 17,123 shares of its CDCI Preferred Shares at fair market value $15,925,000, which equated to a discount of 7% to par, or $1,198,000.

NOTE 6 — EARNINGS APPLICABLE TO COMMON STOCKHOLDERS

SHAREHOLDERS

Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock outstanding, such as restricted stock grants.

  For the Three Months Ended 
  September 30, 2017 
  Net Income  Shares  Per 
  (Numerator)  (Denominator)  Share Data 
          
Basic per share $4,714,000   9,152,674  $0.52 
             
Effect of dilutive shares:            
Restricted stock grants      71,807     
             
Diluted per share $4,714,000   9,224,481  $0.51 

11
There were no anti-dilutive common stock equivalents excluded in the calculations.

The following tables disclose the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common shareholders ($ in thousands, except per share amount):

  For the Nine Months Ended 
  September 30, 2017 
  Net Income  Shares  Per 
  (Numerator)  (Denominator)  Share Data 
          
Basic per share $8,202,000   9,140,375  $0.90 
             
Effect of dilutive shares:            
Restricted stock grants      71,807     
             
Diluted per share $8,202,000   9,212,182  $0.89 

  For the Three Months Ended 
  September 30, 2016 
  Net Income  Shares  Per 
  (Numerator)  (Denominator)  Share Data 
          
Basic per share $2,472,000   5,429,349  $0.46 
             
Effect of dilutive shares:            
Restricted stock grants      50,218     
             
Diluted per share $2,472,000   5,479,567  $0.45 

  For the Nine Months Ended 
  September 30, 2016 
  Net Income  Shares  Per 
  (Numerator)  (Denominator)  Share Data 
          
Basic per share $7,554,000   5,425,567  $1.39 
             
Effect of dilutive shares:            
Restricted stock grants      50,218     
             
Diluted per share $7,554,000   5,475,785  $1.38 

Three Months Ended
September 30, 2022
Three Months Ended
September 30, 2021
Net Income
(Numerator)
Shares
(Denominator)
Per
Share Data
Net Income
(Numerator)
Shares
(Denominator)
Per
Share Data
Basic earnings per share$14,043 22,861,795 $0.61 $16,132 21,020,128 $0.77 
Effect of dilutive shares:
Restricted stock grants 117,734 190,763 
Diluted earnings per share$14,043 22,979,529 $0.61 $16,132 21,210,891 $0.76 
For the Nine Months Ended
September 30, 2022
For the Nine Months Ended
September 30, 2021
Net Income
(Numerator)
Shares
(Denominator)
Per
Share Data
Net Income
(Numerator)
Shares
(Denominator)
Per
Share Data
Basic earnings per share$46,624 21,355,731 $2.18 $48,376 21,015,996 $2.30 
Effect of dilutive shares:
Restricted stock grants111,397 186,661 
Diluted earnings per share$46,624 21,467,128 $2.17 $48,376 21,202,657 $2.28 
The Company granted 73,82782,123 shares and 84,578 shares of restricted stock in the first quarter of 2017, 9,7092022 and 2021, respectively. The Company granted 47,827 shares duringand 3,000 shares of restricted stock in the second quarter of 2017,2022 and 7502021, respectively. The Company granted 60 shares duringand 0 shares of restricted stock in the third quarter of 2017.

2022 and 2021, respectively.

NOTE 76 – COMPREHENSIVE INCOME

As presented in the Consolidated Statements of Comprehensive Income (Loss), comprehensive income includes net income and other comprehensive income. The Company’s sources of other comprehensive income are unrealized gains and losses on available-for-sale investment securities, and loans held for sale. Gains or losses on investment securities that were realized and reflected in net incomewhich are also recognized as separate components of the current period, which had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose, are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.

12
equity.

14

NOTE 87 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEETOFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance-sheetoff-balance sheet risk in the normal course of business to meet the financing needs of its customers. At September 30, 2017,2022, and December 31, 2016,2021 these financial instruments consisted of the following:

($ In Thousands) September 30, 2017  December 31, 2016 
Commitments to extend credit $265,233  $220,252 
Standby letters of credit  8,204   1,742 
($ in thousands)September 30, 2022December 31, 2021
Fixed Rate
Variable RateFixed RateVariable Rate
Commitments to make loans$85,066 $11,113 $80,760 $23,946 
Unused lines of credit219,118 314,864 213,332 309,791 
Standby letters of credit4,470 10,079 2,586 9,737 
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 1.0% to 18.0% and maturities ranging from approximately 1 year to 30 years.
ALLOWANCE FOR CREDIT LOSSES (“ACL”) ON OFF BALANCE SHEET CREDIT (“OBSC”) Exposures
The Company maintains a separate ACL on OBSC exposures, including unfunded commitments and letters of credit, which is included on the accompanying consolidated balance sheet as of September 30, 2022 and December 31, 2021. The ACL on OBSC exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Changes in the ACL on OBSC exposures were as follows for the presented periods:
($ in thousands)Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Balance at beginning of period$1,220$718$1,070 $— 
Adoption of ASU 326— 718 
Credit loss expense related to OBSC exposures150 — 
Balance at end of period$1,220$718$1,220 $718 
Adjustments to the ACL on OBSC exposures are recorded to provision for credit losses OBSC exposures. The Company recorded no provision and $150 thousand for the three months and nine months period ended September 30, 2022. The increase in the ACL on OBSC exposures for the nine months ended September 30, 2022 was primarily due to an increase in unfunded commitments.
No credit loss estimate is reported for OBSC exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation on the arrangement.

NOTE 98 – FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

FASB’s standards on financial instruments, and on fair value measurements and disclosures, require all entities to disclose in their financial statement footnotes the estimated fair values of financial instruments for which it is practicable to estimate fair values. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities which are classified as available-for-sale and our equity securities that have readily determinable fair values be measured and reported at fair value in our Consolidated Financial Statements. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any of those financial instruments.

Fair value measurement and disclosure standards also establish a framework for measuring fair values.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit(exit price) in the principal or most advantageous market for the assetassets or liability in an orderly transaction between market participants on the measurement date. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describeThere are three levels of inputs that may be used to measure fair values:

·Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

·Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

·Level 3
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
15

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. The estimates do not reflect any premiumfactors that market participants would likely consider in pricing an asset or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to realized gains and losses could have a significant effect on fair value estimates but have not been considered in those estimates. Because no active market exists for a significant portion of our financial instruments, fair value disclosures are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. The estimates are subjective and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly alter the fair values presented. liability.

The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at September 30, 20172022 and December 31, 2016:

13
2021:

·Cash and cash equivalents and fed funds soldInvestment Securities: The carrying amount is estimated to be fair value.

·Securities (available-for-sale and held-to-maturity): Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for specific securities are not readily available.

·Loans and leases: For variable-rate loans and leases that re-price frequently with no significant change in credit risk or interest rate spread, fair values are based on carrying values. Fair values for other loans and leases are estimated by discounting projected cash flows at interest rates being offered at each reporting date for loans and leases with similar terms, to borrowers of comparable creditworthiness. The carrying amount of accrued interest receivable approximates its fair value.

·Loans held for sale: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are held on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.

·Collateral-dependent impaired loans: Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

·Bank-owned life insurance: Fair values are based on net cash surrender policy values at each reporting date.

·Other securities: Certain investments for which no secondary market exists are carried at cost and the carrying amount for those investments typically approximates their estimated fair value, unless an impairment analysis indicates the need for adjustments.

·Deposits (noninterest-bearing and interest-bearing): Fair values for non-maturity deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

·FHLB and other borrowings: Current carrying amounts are used as an approximation of fair values for federal funds purchased, overnight advances from the Federal Home Loan Bank (“FHLB”), borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days of the reporting dates. Fair values of other short-term borrowings are estimated by discounting projected cash flows at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

·Long-term borrowings: Fair values are estimated using projected cash flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

·Subordinated debentures: Fair values are determined based on the current market value for like instruments of a similar maturity and structure.

14

·Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.

Estimated fair valuesvalue for the Company’s financial instruments are as follows, as of the dates noted:

As of September 30, 2017
($ In Thousands)

        Fair Value Measurements 
 

Carrying

Amount

  

Estimated

Fair
Value

  

Quoted Prices

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
                
Financial Instruments:                    
Assets:                    
Cash and cash equivalents $93,317  $93,317  $93,317  $-  $- 
Securities available-for-sale  353,035   353,035   931   349,770   2,334 
Securities held-to-maturity  6,000   7,388   -   7,388   - 
Other securities  9,556   9,556   -   9,556   - 
Loans, net  1,194,606   1,222,370   -   -   1,222,370 
Bank-owned life insurance  26,367   26,367   -   26,367   - 
                     
Liabilities:                    
Noninterest-bearing deposits $308,050  $308,050  $-  $308,050  $- 
Interest-bearing deposits  1,199,941   1,198,411   -   1,198,411   - 
Subordinated debentures  10,310   10,310   -   -   10,310 
FHLB and other borrowings  94,321   94,321   -   94,321   - 

15

As of December 31, 2016
($ In Thousands)

        Fair Value Measurements 
 

Carrying

Amount

  

Estimated

Fair
Value

  Quoted
 Prices
(Level 1)
  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
                
Financial Instruments:                    
Assets:                    
Cash and cash equivalents $62,119  $62,119  $62,119  $-  $- 
Securities available-for-sale  243,206   243,206   940   240,025   2,241 
Securities held-to-maturity  6,000   7,394   -   7,394   - 
Other securities  6,593   6,593   -   6,593   - 
Loans, net  865,424   883,161   -   -   883,161 
Bank-owned life insurance  21,250   21,250   -   21,250   - 
                     
Liabilities:                    
Noninterest- bearing deposits $202,478  $202,478  $-  $202,478  $- 
Interest-bearing deposits  836,713   835,658   -   835,658   - 
Subordinated debentures  10,310   10,310   -   -   10,310 
FHLB and other borrowings  69,000   69,000   -   69,000   - 

Where quoted prices are available in an active market,investment securities are classified within Level 1 of the valuation hierarchy. Level 1determined by quoted market prices, if available (Level 1). For securities include highly liquid government bonds, mortgage products and exchange traded equities. Ifwhere, quoted market prices are not available, securities are classified within Level 2 of the valuation hierarchy, and fair values are estimated bycalculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing models,is a mathematical technique commonly used to price debt securities that are not actively traded, valuing debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where, quoted prices or market prices of similar securities with similar characteristics, orare not available, fair values are calculated using discounted cash flow. Level 2 securities include U. S. agency securities, mortgage-backed securities, obligationsflows or other market indicators (Level 3).

Loans Held for Sale: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are held on our books for an extended period of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs totime, the valuation, securities are classified within Level 3 of the valuation hierarchy.

Assets measured at fair value on a recurring basis are summarized below:

September 30, 2017

($ In Thousands)

     Fair Value Measurements Using 
     

Quoted Prices

in

Active
Markets

For

Identical
Assets

  

Significant

Other

Observable

Inputs

 

Significant

Unobservable

Inputs

 
 Fair Value  (Level 1)  (Level 2)  (Level 3) 
             
Obligations of U. S. Government Agencies $6,505  $-  $6,505  $- 
Municipal securities  135,155   -   135,155   - 
Mortgage-backed securities  193,039   -   193,039   - 
Corporate obligations  17,405   -   15,071   2,334 
Other  931   931   -   - 
Total $353,035  $931  $349,770  $2,334 

16
of those loans is determined using quoted secondary-market prices.

December 31, 2016

($ In Thousands)

     Fair Value Measurements Using 
     

Quoted Prices

in

Active
Markets

For

Identical
Assets

  

Significant

Other

Observable

Inputs

  

Significant

Unobservable

Inputs

 
 Fair Value  (Level 1)  (Level 2)  (Level 3) 
             
Obligations of U. S. Government Agencies $9,045  $-  $9,045  $- 
Municipal securities  98,822   -   98,822   - 
Mortgage-backed securities  114,289   -   114,289   - 
Corporate obligations  20,110   -   17,869   2,241 
Other  940   940   -   - 
Total $243,206  $940  $240,025  $2,241 

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information.

($ In Thousands)

  Bank-Issued
Trust
Preferred
Securities
 
 2017  2016 
Balance, January 1 $2,241  $2,557 
Transfers into Level 3  -   - 
Transfers out of Level 3  -   - 
Other-than-temporary impairment loss included in earnings (loss)  -   - 
Unrealized gain (loss) included in comprehensive income  93   (316)
Balance at September 30, 2017 and December 31, 2016 $2,334  $2,241 

The following table presents quantitative information about recurring Level 3 fair value measurements (in thousands)Collateral Dependent Loans:

Trust Preferred
Securities
 Fair Value  Valuation
Technique
 Significant
Unobservable
Inputs
 Range of
Inputs
September 30, 2017 $2,334  Discounted cash flow Probability of default 1.87% - 3.50%
December 31, 2016 $2,241  Discounted cash flow Probability of default 1.50% - 3.34%

Following is a description of the valuation methodologies used for assets measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

17

Impaired Loans

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral and applyingunderlying such loans. Such adjustments, if any, result in a discount factor to the value. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, or premium or discount existing at origination or acquisitionLevel 3 classification of the loan.inputs for determining fair value. The Company generally adjusts the appraisal down by approximately 10 percent to account for cost associated with litigation and collection. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are classified within Level 2 of the fair value hierarchy.

evaluated on a quarterly basis for additional impairment.

Other Real Estate Owned

:Other real estate owned acquiredconsists of properties obtained through loan foreclosure is initially recorded at fair value less estimated costs to sell, establishing a new cost basis.foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loancredit losses. Fair value of other real estate owned is based on current independent appraisals of the collateral less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. The Company generally adjusts the appraisal down by approximately 10 percent to account for carrying costs. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other non-interest expense.income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted torecorded in other non-interest expense.income. Other real estate owned measured atis classified within Level 3 of the fair value hierarchy.

Interest Rate Swaps: The Company offers interest rate swaps to certain commercial loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a non-recurring basis at September 30, 2017, amountedvariable rate loan and enters into a variable to $7.9 million. Other real estate ownedfixed interest rate swap with the customer. The Company also enters into an
16

offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing the contract or fixed interest payments for the customer. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rates swaps is classified within Level 2 of the fair value hierarchy.

Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:
September 30, 2022Carrying
Amount
Estimated
Fair Value
Fair Value Measurements
($ in thousands)
Quoted Prices
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents$163,841 $163,841 $163,841 $— $— 
Securities available-for-sale:
U.S. Treasury122,918 122,918 122,918 — — 
Obligations of U.S. government agencies and sponsored entities144,926 144,926 — 144,926 — 
Municipal securities550,891 550,891 — 533,933 16,958 
Mortgage-backed securities517,432 517,432 — 517,432 — 
Corporate obligations43,243 43,243 — 43,211 32 
Securities held-to-maturity593,553 593,553 — 593,553 — 
Loans, net3,681,032 3,684,489 — — 3,684,489 
Accrued interest receivable24,570 23,317 — 8,495 14,822 
  Interest rate swaps13,258 13,258 — 13,258 — 
Liabilities:
Noninterest-bearing deposits$1,770,848 $1,770,848 $— $1,770,848 $— 
Interest-bearing deposits3,780,450 3,614,886 — 3,614,886 — 
Subordinated debentures144,952 137,418 — — 137,418 
FHLB advances and other borrowings90,000 90,000 — 90,000 — 
Accrued interest payable1,365 1,365 — 1,365 — 
  Interest rate swaps13,258 13,258 — 13,258 — 
17

December 31, 2021Carrying
Amount
Estimated
Fair Value
Fair Value Measurements
($ in thousands)
Quoted
Prices
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents$919,713 $919,713 $919,713 $— $— 
Securities available-for-sale:
U.S. Treasury135,158 135,158 135,158 — — 
Obligations of U.S. government agencies and sponsored entities183,021 183,021 — 183,021 — 
Municipal securities708,502 708,502 — 688,379 20,123 
Mortgage-backed securities688,298 688,298 — 688,298 — 
Corporate obligations36,853 36,853 — 36,810 43 
Loans, net2,928,811 2,956,297 — — 2,956,297 
Accrued interest receivable23,256 23,256 — 6,838 16,418 
Liabilities:
Non-interest-bearing deposits$1,550,381 $1,550,381 $— $1,550,381 $— 
Interest-bearing deposits3,676,403 3,644,418 — 3,644,418 — 
Subordinated debentures144,726 156,952 — — 156,952 
Accrued interest payable1,711 1,711 — 1,711 — 
Assets measured at fair value on a recurring basis are summarized below:
September 30, 2022
($ in thousands)Fair ValueFair Value Measurements Using
Quoted Prices in
Active Markets
For
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Available-for-sale
U.S. Treasury$122,918 $122,918 $— $— 
Obligations of U.S. Government agencies and sponsored entities144,926 — 144,926 — 
Municipal securities550,891 — 533,933 16,958 
Mortgage-backed securities517,432 — 517,432 — 
Corporate obligations43,243 — 43,211 32 
Total available-for-sale$1,379,410 $122,918 $1,239,502 $16,990 
Interest rate swaps$13,258 $— $13,258 $— 
Liabilities
Interest rate swaps$13,258 $— $13,258 $— 
18

December 31, 2021
($ in thousands)Fair ValueFair Value Measurements Using
Quoted Prices in
Active Markets
For
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale
U.S. Treasury$135,158 $135,158 $— $— 
Obligations of U.S. Government agencies and sponsored entities183,021 — 183,021 — 
Municipal securities708,502 — 688,379 20,123 
Mortgage-backed securities688,298 — 688,298 — 
Corporate obligations36,853 — 36,810 43 
Total available-for-sale$1,751,832 $135,158 $1,596,508 $20,166 
The following is a reconciliation of activity for assets measured at fair value based on significant unobservable inputs (Level 3) information.
Bank-Issued Trust
Preferred Securities
($ in thousands)20222021
Balance, January 1$43 $235 
Paydowns(11)(64)
Unrealized gain included in comprehensive income— 55 
Balance at September 30$32 $226 
Municipal Securities
($ in thousands)2022 2021
Balance, January 1$20,123 $20,126 
Purchases— 4,209 
Maturities, calls and paydowns(524)(4,474)
Unrealized loss included in comprehensive income(2,641)(496)
Balance at September 30$16,958 $19,365 
The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021. The following tables present quantitative information about recurring Level 3 fair value measurements ($ in thousands):
Trust Preferred SecuritiesFair ValueValuation TechniqueSignificant Unobservable
Inputs
Range of Inputs
September 30, 2022$32 Discounted cash flowProbability of default5.78% - 6.11%
December 31, 2021$43 Discounted cash flowProbability of default2.35% - 2.47%
Municipal SecuritiesFair ValueValuation TechniqueSignificant
Unobservable Inputs
Range of Inputs
September 30, 2022$16,958 Discounted cash flowDiscount Rate1.10% - 4.62%
December 31, 2021$20,123 Discounted cash flowDiscount Rate0.50% - 1.90%
19

The following table presents the fair value measurement of assets measured at fair value on a nonrecurringnon-recurring basis and the level within the fair value hierarchy in which the fair value measurements fellwere classified at September 30, 20172022 and December 31, 2016.

($ In Thousands) 

2021.

September 30, 2022
($ in thousands)Fair Value Measurements Using
Fair ValueQuoted Prices in
Active Markets
For
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Collateral dependent loans$6,633 $— $— $6,633 
Other real estate owned10,328 — — 10,328 
December 31, 2021
($ in thousands)Fair Value Measurements Using
Fair ValueQuoted Prices in
Active Markets
For
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Collateral dependent loans$3,564 $— $— $3,564 
Other real estate owned2,565 — — 2,565 
NOTE 9 - SECURITIES
The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities available-for-sale (“AFS”) and securities held-to-maturity at September 30, 2017

     Fair Value Measurements Using 
     

Quoted

Prices in

Active

Markets

For

Identical

Assets

  

Significant

Other

Observable

Inputs

  

Significant

Unobservable

Inputs

 
  Fair Value  (Level 1)  (Level 2)  (Level 3) 
                 
Impaired loans $9,885  $-  $9,885  $- 
Other real estate owned  7,855   -   7,855   - 

18

2022 and December 31, 2016

     Fair Value Measurements Using 
     

Quoted

Prices in

Active

Markets

For

Identical

Assets

  

Significant

Other

Observable

Inputs

  

Significant

Unobservable

Inputs

 
  Fair Value  (Level 1)  (Level 2)  (Level 3) 
             
Impaired loans $6,128  $-  $6,128  $- 
Other real estate owned  6,008   -   6,008   - 

NOTE 10 - SECURITIES

2021.

($ in thousands)September 30, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-sale securities:
U.S. Treasury$135,786 $— $12,868 $122,918 
Obligations of U.S. government agencies and sponsored entities164,486 19,564 144,926 
Tax-exempt and taxable obligations of states and municipal subdivisions661,260 546 110,915 550,891 
Mortgage-backed securities - residential353,965 15 46,071 307,909 
Mortgage-backed securities - commercial234,860 71 25,408 209,523 
Corporate obligations45,933 — 2,690 43,243 
Total available-for-sale$1,596,290 $636 $217,516 $1,379,410 
Held-to-maturity:
U.S. Treasury$109,578 $— $5,670 $103,908 
Obligations of U.S. government agencies and sponsored entities33,074 — 2,164 30,910 
Tax-exempt and taxable obligations of states and municipal subdivisions146,789 — 18,975 127,814 
Mortgage-backed securities - residential159,844 — 19,253 140,591 
Mortgage-backed securities - commercial134,268 — 13,350 120,918 
Corporate obligations10,000 — 1,453 8,547 
Total held-to-maturity$593,553 $— $60,865 $532,688 
20

($ in thousands)December 31, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-sale securities:
U.S. Treasury$135,889 $83 $814 $135,158 
Obligations of U.S. government agencies sponsored entities182,877 1,238 1,094 183,021 
Tax-exempt and taxable obligations of states and municipal subdivisions698,861 12,452 2,811 708,502 
Mortgage-backed securities - residential410,269 4,123 3,425 410,967 
Mortgage-backed securities - commercial277,353 2,917 2,939 277,331 
Corporate obligations35,904 962 13 36,853 
Total available-for-sale$1,741,153 $21,775 $11,096 $1,751,832 
The following disclosure of the estimatedamortized cost and fair value of financial instruments is made in accordancedebt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with authoritative guidance. The estimatedor without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
ACL on Securities
Securities Available for Sale
Quarterly, the Company evaluates if a security has a fair value amounts have been determined using available market information and valuation methodologies that management believesless than its amortized cost. Once these securities are appropriate. However, considerable judgment is necessarily requiredidentified, in order to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realizeddetermine whether a decline in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

A summary ofresulted from a credit loss or other factors, the Company performs further analysis as outlined below:

Review the extent to which the fair value is less than the amortized cost and estimateddetermine if the decline is indicative of credit loss or other factors.
The securities that violate the credit loss trigger above would be subjected to additional analysis.
If the Company determines that a credit loss exists, the credit portion of the allowance will be measured using the discounted cash flow (“DCF”) analysis using the effective interest rate. The amount of credit loss the Company records will be limited to the amount by which the amortized cost exceeds the fair value. The allowance for the calculated credit loss will be monitored going forward for further credit deterioration or improvement.
At both September 30, 2022 and December 31, 2021, the results of the analysis did not identify any securities where the decline was indicative of credit loss factors; therefore, no credit loss was recognized on any of the securities AFS.
Accrued interest receivable is excluded from the estimate of credit losses for securities AFS. Accrued interest receivable totaled $6.2 million and $6.8 million at September 30, 2022 and December 31, 2021, respectively and was reported in interest receivable on the accompanying Consolidated Balance Sheet.
All AFS securities were current with no securities past due or on nonaccrual as of September 30, 2022 and December 31, 2021.
Securities Held to Maturity
At September 30, 2022, the potential credit loss exposure was $402 thousand and consisted of tax-exempt and taxable obligations of states and municipal subdivisions and corporate obligations securities. After applying appropriate probability of default (“PD”) and loss given default (“LGD”) assumptions, the total amount of current expected credit losses was deemed immaterial. Therefore, no reserve was recorded at September 30, 2022.
21

Accrued interest receivable is excluded from the estimate of credit losses for securities held-to-maturity. Accrued interest receivable totaled $2.0 million and $0 at September 30, 2022 and December 31, 2021, respectively and was reported in interest receivable on the accompanying Consolidated Balance Sheet.
At September 30, 2022, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual at September 30, 2022.
The Company monitors the credit quality of the debt securities held-to-maturity through the use of credit ratings. The Company monitors the credit ratings on a quarterly basis. The following table summarizes the amortized cost of debt securities held-to-maturity at September 30, 2022, aggregated by credit quality indicators.
($ in thousands)September 30, 2022
Aaa$452,516 
Aa1/Aa2/Aa366,260 
A1/A221,092 
BBB10,000 
Not rated43,685 
Total$593,553 
The amortized cost and fair value of available-for-saledebt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)September 30, 2022
Amortized
Cost
Fair
Value
Available-for-sale:
Due less than one year$26,758 $26,432 
Due after one year through five years276,821 256,948 
Due after five years through ten years376,584 324,364 
Due greater than ten years327,302 254,234 
Mortgage-backed securities - residential353,965 307,909 
Mortgage-backed securities - commercial234,860 209,523 
Total$1,596,290 $1,379,410 
Held-to-maturity:
Due less than one year$20,850 $20,558 
Due after one year through five years109,905 103,568 
Due after five years through ten years41,211 36,786 
Due greater than ten years127,475 110,267 
Mortgage-backed securities - residential159,844 140,591 
Mortgage-backed securities - commercial134,268 120,918 
Total$593,553 $532,688 
The amortized costs of securities pledged as collateral, to secure public deposits and for other purposes, was $1.053 billion and $889.5 million at September 30, 2022 and December 31, 2021, respectively.
22

The following table summarizes securities in an unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 2022 and December 31, 2021. There were no held-to-maturity securities at December 31, 2021. The securities are aggregated by major security type and length of time in a continuous unrealized loss position:
($ in thousands)September 30, 2022
Losses < 12 MonthsLosses 12 Months or >Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Available-for-sale:
U.S. Treasury$104,630 $10,570 $18,288 $2,298 $122,918 $12,868 
Obligations of U.S. government agencies and sponsored entities78,456 9,317 65,383 10,247 143,839 19,564 
Tax-exempt and taxable obligations of state and municipal subdivisions411,023 80,247 125,582 30,668 536,605 110,915 
Mortgage-backed securities - residential129,058 14,720 177,053 31,351 306,111 46,071 
Mortgage-backed securities - commercial113,360 10,431 91,036 14,977 204,396 25,408 
Corporate obligations43,215 2,686 28 43,243 2,690 
Total$879,742 $127,971 $477,370 $89,545 $1,357,112 $217,516 
Held-to-maturity:
U.S. Treasury$103,908 $5,670 $— $— $103,908 $5,670 
Obligations of U.S. government agencies and sponsored entities30,910 2,164 — — 30,910 2,164 
Tax-exempt and taxable obligations of state and municipal subdivisions120,472 18,975 — — 120,472 18,975 
Mortgage-backed securities - residential140,591 19,253 — — 140,591 19,253 
Mortgage-backed securities - commercial120,918 13,350 — — 120,918 13,350 
Corporate obligations8,547 1,453 — — 8,547 1,453 
Total$525,346 $60,865 $— $— $525,346 $60,865 
23

($ in thousands)December 31, 2021
Losses < 12 MonthsLosses 12 Months or >Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
U.S. Treasury$130,098 $814 $— $— $130,098 $814 
Obligations of U.S. government agencies and sponsored entities121,402 933 5,254 161 126,656 1,094 
Tax-exempt and taxable obligations of state and municipal subdivisions249,430 2,692 3,692 119 253,122 2,811 
Mortgage-backed securities - residential284,183 3,228 8,912 197 293,095 3,425 
Mortgage-backed securities - commercial174,697 2,836 3,038 103 177,735 2,939 
Corporate obligations6,692 42 6,734 13 
Total$966,502 $10,511 $20,938 $585 $987,440 $11,096 
At September 30, 20172022 and December 31, 2016, follows:

($ In Thousands)

  September 30, 2017 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Estimated

Fair

Value

 
Available-for-sale securities:                
Obligations of U.S. Government agencies $6,494  $14  $3  $6,505 
Tax-exempt and taxable obligations of states and municipal subdivisions  132,323   3,069   237   135,155 
Mortgage-backed securities  191,869   1,712   542   193,039 
Corporate obligations  18,368   69   1,032   17,405 
Other  1,255   -   324   931 
  $350,309  $4,864  $2,138  $353,035 
Held-to-maturity securities:                
Taxable obligations of states and municipal subdivisions $6,000  $1,388  $-  $7,388 

2021, the Company’s securities portfolio consisted of 1,392 and 304 securities, respectively, which were in an unrealized loss position. Securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis. No allowance for credit losses was needed at September 30, 2022 and December 31, 2021.
NOTE 10 – LOANS
The Company uses four different categories to classify loans in its portfolio based on the underlying collateral securing each loan. The loans grouped together in each category have been determined to share similar risk characteristics with respect to credit quality. Those four categories are commercial, financial and agriculture, commercial real estate, consumer real estate, consumer installment;
Commercial, financial and agriculture – Commercial, financial and agriculture loans include loans to business entities issued for commercial, industrial, or other business purposes. This type of commercial loan shares a similar risk characteristic in that unlike commercial real estate loans, repayment is largely dependent on cash flow generated from the operation of the business.
Commercial real estate – Commercial real estate loans are grouped as such because repayment is mainly dependent upon either the sale of the real estate, operation of the business occupying the real estate, or refinance of the debt obligation. This includes both owner-occupied and non-owner occupied CRE secured loans, because they share similar risk characteristics related to these variables.
Consumer real estate – Consumer real estate loans consist primarily of loans secured by 1-4 family residential properties and/or residential lots. This includes loans for the purpose of constructing improvements on the residential property, as well as home equity lines of credit.
Consumer installment – Installment and other loans are all loans issued to individuals that are not for any purpose related to operation of a business, and not secured by real estate. Repayment on these loans is mostly dependent on personal income, which may be impacted by general economic conditions.
24

The following table shows the composition of the loan portfolio:
($ in thousands)September 30, 2022December 31, 2021
Loans held for sale
Mortgage loans held for sale$2,225 $7,678 
Total LHFS$2,225 $7,678 
Loans held for investment
Commercial, financial and agriculture (1)$517,197 $397,516 
Commercial real estate2,125,471 1,683,698 
Consumer real estate1,032,343 838,654 
Consumer installment44,377 39,685 
Total loans3,719,388 2,959,553 
Less allowance for credit losses(38,356)(30,742)
Net LHFI$3,681,032 $2,928,811 

19
(1)Loan balance includes $1.5 million and $41.1 million in Paycheck Protection Program (“PPP”) loans as of September 30, 2022 and December 31, 2021, respectively.

  December 31, 2016 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Estimated

Fair

Value

 
Available-for-sale securities:                
Obligations of U.S. Government agencies $9,023  $28  $6  $9,045 
Tax-exempt and taxable obligations of states and municipal subdivisions  98,328   1,678   1,184   98,822 
Mortgage-backed securities  114,991   602   1,304   114,289 
Corporate obligations  21,274   66   1,230   20,110 
Other  1,256   -   316   940 
  $244,872  $2,374  $4,040  $243,206 
Held-to-maturity securities:                
Taxable obligations of states and municipal subdivisions $6,000  $1,394  $-  $7,394 

NOTE 11 – LOANS

Loans typically provide higher yields thanAccrued interest receivable is not included in the other types of earning assets, and, thus, oneamortized cost basis of the Company's goals is for loans to be the largest category of the Company's earning assets. For the quarters endedCompany’s LHFI. At September 30, 20172022 and December 31, 2016, average2021, accrued interest receivable for LHFI totaled $16.1 million and $16.4 million, respectively, with no related ACL and was reported in interest receivable on the accompanying consolidated balance sheet.

Nonaccrual and Past Due LHFI
Past due LHFI are loans accounted for 74.1% and 73.8% of average earning assets, respectively. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

contractually past due 30 days or more as to principal or interest payments. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

The following tables summarize by class our loans classified aspresents the aging of the amortized cost basis in past due in excess of 30 days or moreloans in addition to those loans classified as non-accrual:

nonaccrual including purchase credit deteriorated (“PCD”) loans:
($ in thousands)September 30, 2022
Past Due
30 to 89
Days
Past Due
90 Days
or More and
Still Accruing
NonaccrualPCDTotal
Past Due,
Nonaccrual
and PCD
Total
LHFI
Nonaccrual
and PCD
with No ACL
Commercial, financial and agriculture (1)$293 $— $29 $— $322 $517,197 $— 
Commercial real estate121 — 10,253 1,198 11,572 2,125,471 5,265 
Consumer real estate1,452 571 3,282 1,079 6,384 1,032,343 1,339 
Consumer installment144 — — 147 44,377 — 
Total$2,010 $571 $13,567 $2,277 $18,425 $3,719,388 $6,604 

September 30, 2017

($ In thousands)  

  

Past Due

30 to 89

Days

  

Past Due

90 Days

or More

and Still

Accruing

  Non-
Accrual
  

Total

Past Due

and

Non-

Accrual

  

Total

Loans

 
                
Real Estate-construction $497  $105  $98  $700  $171,609 
Real Estate-mortgage  1,630   180   2,733   4,543   377,307 
Real Estate-non farm non-residential  759   -   1,764   2,523   456,110 
Commercial  115   1,151   211   1,477   164,577 
Lease Financing Rec.  -   -   -   -   2,008 
Obligations of states and subdivisions  -   -   -   -   5,892 
Consumer  140   -   46   186   20,690 
Total $3,141  $1,436  $4,852  $9,429  $1,198,193 

20
(1)Total loan balance includes $1.5 million in PPP loans as of September 30, 2022.

25

December 31, 2021
($ in thousands)Past Due
30 to 89
Days
Past Due 90
Days or
More and
Still Accruing
NonaccrualPCDTotal
Past Due,
Nonaccrual
and PCD
Total
LHFI
Nonaccrual
and PCD
with No ACL
Commercial, financial and agriculture (1)$246 $— $190 $— $436 $397,516 $— 
Commercial real estate453 — 19,445 2,082 21,980 1,683,698 1,661 
Consumer real estate2,140 45 3,776 2,512 8,473 838,654 1,488 
Consumer installment121 — 129 39,685 — 
Total$2,960 $45 $23,418 $4,595 $31,018 $2,959,553 $3,149 

December 31, 2016

($ In Thousands)  

  

Past Due

30 to 89

Days

  

Past Due

90 Days

or More

and

Still

Accruing

  Non-
Accrual
  

Total

Past Due

and

Non-

Accrual

  

Total

Loans

 
                
Real Estate-construction $204  $96  $658  $958  $109,394 
Real Estate-mortgage  2,745   102   1,662   4,509   289,640 
Real Estate-non farm non residential  269   -   909   1,178   314,359 
Commercial  9   -   2   11   129,423 
Lease Financing Rec.  -   -   -   -   2,204 
Obligations of states and subdivisions  -   -   -   -   6,698 
Consumer  22   -   33   55   15,336 
Total $3,249  $198  $3,264  $6,711  $867,054 

(1)Total loan balance includes $41.1 million in PPP loans as of December 31, 2021.
Acquired Loans
In connection with our acquisition of BCB Holdingthe acquisitions, the Company Inc. in 2014, we acquired loans both with deterioratedand without evidence of credit quality. Thesequality deterioration since origination. Acquired loans wereare recorded at estimatedtheir fair value at the time of acquisition date with no carryover offrom the relatedacquired institution's previously recorded allowance for loancredit losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if thereaccounted for under the following accounting pronouncements: ASC 326, Financial Instruments - Credit Losses.
The fair value for acquired loans recorded at the time of acquisition is evidencebased upon several factors including the timing and payment of expected cash flows, as adjusted for estimated credit deteriorationlosses and ifprepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of premium or discount to the unpaid principal balance of each acquired loan. As it relates to acquired PCD loans, the net premium or net discount is probable,adjusted to reflect the Company's allowance for credit losses ("ACL") recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the loan. As it relates to acquired loans not classified as PCD ("non-PCD") loans, the credit loss and yield components of the fair value adjustments are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the average remaining life of those loans. The Company records an ACL for non-PCD loans at the time of acquisition through provision expense, and therefore, no further adjustments are made to the net premium or net discount for non-PCD loans.
The estimated fair value of the non-PCD loans acquired in the BBI acquisition was $460.0 million, which is net of a $8.8 million discount. The gross contractual amounts receivable of the acquired non-PCD loans at acquisition all contractually required payments willwas approximately $468.8 million, of which $6.4 million is the amount of contractual cash flows not expected to be collected.

The following table presents information regardingshows the contractually required payments receivable, cash flows expected to be collected and the estimated fair valuecarrying amount of loans acquired in the BCBBBI acquisition as of July 1, 2014,transaction for which there was, at the closing date of the transaction:

($ In Thousands)

  

Commercial,

financial

and

agricultural

  

Mortgage-

Commercial

  

Mortgage-

Residential

  

Commercial

and other

  Total 
Contractually required payments $1,519  $29,648  $7,933  $976  $40,076 
Cash flows expected to be collected  1,570   37,869   9,697   1,032   50,168 
Fair value of loans acquired  1,513   28,875   7,048   957   38,393 

acquisition, more than insignificant deterioration of credit quality since origination:
21
($ in thousands)Carrying Amount
Purchase price of loans at acquisition$27,669 
Allowance for credit losses at acquisition1,303 
Non-credit discount (premium) at acquisition530 
Par value of acquired loans at acquisition$29,502 

Total outstanding acquired impaired loans were $2.1 million as of September 30, 2017 and $2.2 million as of December 31, 2016. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.

Changes in the carrying amount and accretable yield for acquired impaired loans were as follows at September 30, 2017 and December 31, 2016:

($ In Thousands) 

  September 30, 2017  December 31, 2016 
  

Accretable

Yield

  

Carrying

Amount of

Loans

  

Accretable

Yield

  

Carrying

Amount of

Loans

 
Balance at beginning of period $894  $1,305  $1,219  $1,821 
Accretion  (43)  43   (325)  325 
Payments received, net  -   (139)  -   (841)
Balance at end of period $851  $1,209  $894  $1,305 

The following tables provide additional detail of impaired loans broken out according to class as of September 30, 2017 and December 31, 2016. The recorded investment included in the following tables represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at September 30, 2017 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

September 30, 2017

($ In Thousands) 

           Average  Interest 
           Recorded  Income 
  Recorded  Unpaid  Related  Investment  Recognized 
  Investment  Balance  Allowance  YTD  YTD 
                
Impaired loans with no related allowance:                    
Commercial installment $15  $15  $-  $45  $- 
Commercial real estate  4,383   4,504   -   3,358   89 
Consumer real estate  2,235   2,437   -   1,826   63 
Consumer installment  29   29   -   14   - 
Total $6,662  $6,985  $-  $5,243  $152 
                     
Impaired loans with a related allowance:                    
Commercial installment $195  $195  $101  $115  $- 
Commercial real estate  2,499   2,499   237   2,786   80 
Consumer real estate  506   506   136   490   12 
Consumer installment  23   23   17   24   - 
Total $3,223  $3,223  $491  $3,415  $92 
                     
Total Impaired Loans:                    
Commercial installment $210  $210  $101  $160  $- 
Commercial real estate  6,882   7,003   237   6,144   169 
Consumer real estate  2,741   2,943   136   2,316   75 
Consumer installment  52   52   17   38   - 
Total Impaired Loans $9,885  $10,208  $491  $8,658  $244 

22

As of September 30, 2017, the Company had $1.0 million of foreclosed residential real estate property obtained by physical possession and $0.2 million of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

December 31, 2016

($ In Thousands)

           Average  Interest 
           Recorded  Income 
  Recorded  Unpaid  Related  Investment  Recognized 
  Investment  Balance  Allowance  YTD  YTD 
                
Impaired loans with  no related allowance:                    
Commercial installment $-  $-  $-  $-  $- 
Commercial real estate  2,324   2,570   -   4,368   37 
Consumer real estate  329   329   -   291   1 
Consumer installment  14   14   -   9   - 
Total $2,667  $2,913  $-  $4,668  $38 
                     
Impaired loans with  a related allowance:                    
Commercial installment $153  $153  $10  $244  $9 
Commercial real estate  2,726   2,726   343   2,832   127 
Consumer real estate  556   669   308   733   14 
Consumer installment  26   27   21   32   - 
Total $3,461  $3,575  $682  $3,841  $150 
                     
Total Impaired Loans:                    
Commercial installment $153  $153  $10  $244  $9 
Commercial real estate  5,050   5,296   343   7,200   164 
Consumer real estate  885   998   308   1,024   15 
Consumer installment  40   41   21   41   - 
Total Impaired Loans $6,128  $6,488  $682  $8,509  $188 

The following table represents the Company’s impaired loans at September 30, 2017,2022, and December 31, 2016.

  Sept. 30,  December 31, 
  2017  2016 
  ($ In Thousands) 
Impaired Loans:        
Impaired loans without a valuation allowance $6,662  $2,667 
Impaired loans with a valuation allowance  3,223   3,461 
Total impaired loans $9,885  $6,128 
Allowance for loan losses on impaired loans at period end  491   682 
         
Total nonaccrual loans  4,852   3,264 
         
Past due 90 days or more and still accruing  1,436   198 
Average investment in impaired loans  8,658   8,509 

23

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans:

($ In Thousands) 

Three Months

Ended

Sept. 30, 2017

  

Nine Months

Ended

Sept. 30, 2017

 
       
Interest income recognized during  impairment  -   - 
Cash-basis interest income recognized  60   244 

The gross interest income that would have been recorded in2021 the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for partamortized cost of the three monthsCompany’s PCD loans totaled $27.1 million and nine months ended September 30, 2017 was $90,000$8.6 million, respectively, which had an estimated ACL of $1.7 million and $243,000,$855 thousand, respectively. The Company had no loan commitments to borrowers in non-accrual status at September 30, 2017 and December 31, 2016.

Troubled Debt Restructurings ("TDRs")
If the Company grants a concession to a borrower infor economic or legal reasons related to a borrower’s financial difficulty,difficulties that it would not otherwise consider, the loan is classified as a troubled debt restructuring (“TDR”). The following tables provide detailTDRs.
26

For the Nine Months Ending September 30, 2017

($ In Thousands)

     Outstanding       
  Outstanding  Recorded       
  Recorded  Investment     Interest 
  Investment  Post-  Number of  Income 
  Pre-Modification  Modification  Loans  Recognized 
             
Commercial installment $-  $-   -  $- 
Commercial real estate  -   -   -   - 
Consumer real estate  152   149   2   5 
Consumer installment  -   -   -   - 
Total $152  $149   2  $5 

There were no TDRs modified during the three month period ended September 30, 2017. The balance of TDRs was $7.3 million at September 30, 2017 and $4.1 million at December 31, 2016, respectively, calculated for regulatory reporting purposes. There was $0.2 million allocated in specific reserves established with respect to these loans as of September 30, 2017. As of September 30, 2017,2022, and December 31, 2021, the Company had TDRs totaling $23.4 million and $24.2 million, respectively. The Company acquired three TDRs totaling $1.5 million as part of the BBI acquisition. As of September 30, 2022, the Company had no additional amount committed on any loan classified as TDR.

As of September 30, 2022, and December 31, 2021, TDRs had a related ACL of $704 thousand and $4.3 million, respectively.

The following table presents LHFI by class modified as TDRs that occurred during the three and nine months ended September 30, 2021. There were no TDRs added during the three and nine months ended September 30, 2022.
($ in thousands)Three Months Ended September 30,
2021Number of
Loans
Outstanding
Recorded
Investment
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Commercial, financial and agriculture3$4,914$4,914
Commercial real estate1$38$38
Consumer installment2$113$151
Total6$5,065$5,103
The TDRs presented above increased the ACL $0 and $91 thousand and resulted in no charge-offs for the three months period ended September 30, 2022 and 2021, respectively.
($ in thousands)Nine Months Ended September 30,
2021Number of
Loans
Outstanding
Recorded
Investment
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Commercial, financial and agriculture5$5,151$5,151
Commercial real estate13838
Consumer real estate1132
Consumer installment3168194
Total10$5,370$5,385
The TDRs presented above increased the ACL $0 and $112 thousand and resulted in no charge-offs for the nine months period ended September 30, 2022 and 2021, respectively.
There were no TDRs for which there was a payment default within tweleve months for the nine months ended September 30, 2022. The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification for the nine months ended September 30, 2021 ($ in thousands).
Troubled Debt Restructurings
That Subsequently Defaulted:
Nine Months Ended September 30,
2021
Number of
Loans
Recorded
Investment
Commercial real estate1$165 
Consumer real estate2355 
Total3$520 
The modifications described above included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these loans nor were any of these loans written down. A loan is considered to be in a payment default once it is 30 days contractually past due under the modified terms. The TDRs presented above increased the ACL $0 and $101 thousand and resulted in no charge-offs for the nine months period ended September 30, 2022 and 2021, respectively.
27

The following tables set forthrepresents the amounts and past due status for the BankCompany’s TDRs at September 30, 20172022 and December 31, 2016:

($ In Thousands)

  September 30, 2017 
  

Current

Loans

  

Past Due

30-89

  

Past Due

90 days

and still

accruing

  

Non-

accrual

  

Total

 

 
                
Commercial installment $-  $-  $-  $308  $308 
Commercial real estate  3,461   267   -   1,047   4,775 
Consumer real estate  1,099   88   -   1,011   2,198 
Consumer installment  5   -   -   19   24 
Total $4,565  $355  $-  $2,385  $7,305 
Allowance for loan losses $107  $14  $-  $122  $243 

25
2021:

September 30, 2022Current
Loans
Past Due
30-89
Past Due 90
days and still
accruing
NonaccrualTotal
($ in thousands)
Commercial, financial and agriculture$681 $— $— $— $681 
Commercial real estate13,661 — — 6,847 20,508 
Consumer real estate1,411 51 — 778 2,240 
Consumer installment15 — — — 15 
Total$15,768 $51 $— $7,625 $23,444 
Allowance for credit losses$223 $— $— $481 $704 

($ In Thousands)

  December 31, 2016 
  Current
Loans
  Past Due
30-89
  Past Due
90 days
and still
accruing
  Non-
accrual
  Total 
                
Commercial installment $151  $-  $-  $-  $151 
Commercial real estate  2,463   -   -   1,102   3,565 
Consumer real estate  154   90   -   122   366 
Consumer installment  6   -   -   23   29 
Total $2,774  $90  $-  $1,247  $4,111 
Allowance for loan losses $125  $-  $-  $40  $165 

Internal Risk Ratings

December 31, 2021Current
Loans
Past Due
30-89
Past Due 90
days and still
accruing
NonaccrualTotal
($ in thousands)
Commercial, financial and agriculture$63$$$107$170
Commercial real estate3,36716,85820,225
Consumer real estate1,7721,9733,745
Consumer installment1818
Total$5,220$$$18,938$24,158
Allowance for credit losses$90$$$4,217$4,307
Collateral Dependent Loans
The following table presents the amortized cost basis of collateral dependent individually evaluated loans by class of loans as of September 30, 2022 and December 31, 2021:
September 30, 2022
($ in thousands)Real PropertyTotal
Commercial real estate$5,265 $5,265 
Consumer real estate1,374 1,374 
Total$6,639 $6,639 
December 31, 2021
($ in thousands)Real PropertyTotal
Commercial real estate$1,712$1,712
Consumer real estate1,8581,858
Total$3,570$3,570
A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The following provides a qualitative description by class of loan of the collateral that secures the Company’s collateral-dependent LHFI:
Commercial, financial and agriculture – Loans within these loan classes are secured by equipment, inventory accounts, and other non-real estate collateral.
Commercial real estate – Loans within these loan classes are secured by commercial real property.
Consumer real estate - Loans within these loan classes are secured by consumer real property.
Consumer installment - Loans within these loan classes are secured by consumer goods, equipment, and non-real estate collateral.
There have been no significant changes to the collateral that secures these financial assets during the period.
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Loan Participations
The Company has loan participations, which qualify as participating interest, with other financial institutions. As of September 30, 2022, these loans totaled $202.5 million, of which $93.2 million had been sold to other financial institutions and $109.3 million was purchased by the Company. As of December 31, 2021, these loans totaled $118.4 million, of which $77.8 million had been sold to other financial institutions and $40.6 million was purchased by the Company. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involving no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as:as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. The Company uses the following definitions for risk ratings, whichratings:
Pass: Loan classified as pass are consistent with the definitions used in supervisory guidance:

deemed to possess average to superior credit quality, requiring no more than normal attention.

Special Mention.Mention: Loans classified as special mention have a potential weakness that deserves management'smanagement’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting

These above classifications were the criteria above that are analyzed individuallymost current available as part of the above described process are considered to be pass rated loans.

As of September 30, 20172022, and December 31, 2016,were generally updated within the prior year.

29

The tables below present the amortized cost basis of loans by credit quality indicator and class of loans based on the most recent analysis performed at September 30, 2022 and December 31, 2021. Revolving loans converted to term as of the nine months ended September 30, 2022 and December 31, 2021 were not material to the total loan portfolio.
As of September 30, 2022Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Total
($ in thousands)20222021202020192018Prior
Commercial, financial and
agriculture:
Risk Rating
Pass$139,969 $151,211 $58,425 $58,055 $46,316 $53,783 $115 $507,874 
Special mention389 5,655 1,690 204 — 1,032 — 8,970 
Substandard— 17 — 54 35 247 — 353 
Doubtful— — — — — — — — 
Total commercial, financial and agriculture$140,358 $156,883 $60,115 $58,313 $46,351 $55,062 $115 $517,197 
Commercial real estate:
Risk Rating
Pass$458,767 $458,929 $320,224 $228,481 $147,199 $411,604 $— $2,025,204 
Special mention676 1,389 2,315 11,763 7,184 20,665 — 43,992 
Substandard51 5,159 2,705 3,514 15,394 28,777 — 55,600 
Doubtful— — — — — 675 — 675 
Total commercial real estate$459,494 $465,477 $325,244 $243,758 $169,777 $461,721 $— $2,125,471 
Consumer real estate:
Risk Rating
Pass$264,641 $240,464 $144,526 $62,785 $58,092 $141,643 $103,853 $1,016,004 
Special mention— — — — 837 4,256 — 5,093 
Substandard116 1,003 220 640 1,726 6,515 1,026 11,246 
Doubtful— — — — — — — — 
Total consumer real estate$264,757 $241,467 $144,746 $63,425 $60,655 $152,414 $104,879 $1,032,343 
Consumer installment:
Risk Rating
Pass$15,513 $13,840 $5,858 $2,597 $986 $1,669 $3,867 $44,330 
Special mention— — — — — — — — 
Substandard— 25 — 47 
Doubtful— — — — — — — — 
Total consumer installment$15,513 $13,844 $5,883 $2,606 $987 $1,677 $3,867 $44,377 
Total
Pass$878,890 $864,444 $529,033 $351,918 $252,593 $608,699 $107,835 $3,593,412 
Special mention1,065 7,044 4,005 11,967 8,021 25,953 — 58,055 
Substandard167 6,183 2,950 4,217 17,156 35,547 1,026 67,246 
Doubtful— — — — — 675 — 675 
Total$880,122 $877,671 $535,988 $368,102 $277,770 $670,874 $108,861 $3,719,388 
30

As of December 31, 2021Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Total
($ in thousands)20212020201920182017Prior
Commercial, financial and:
agriculture
Risk Rating
Pass$152,798 $60,106 $52,802 $47,988 $22,083 $43,773 $178 $379,728 
Special mention— 255 749 90 481 29 — 1,604 
Substandard— — 1,398 6,184 360 8,242 — 16,184 
Doubtful— — — — — — — — 
Total commercial, financial and agriculture$152,798 $60,361 $54,949 $54,262 $22,924 $52,044 $178 $397,516 
Commercial real estate:        
Risk Rating
Pass$402,284 $313,288 $207,879 $177,943 $134,234 $332,588 $— $1,568,216 
Special mention1,326 2,259 1,782 15,076 2,779 15,519 — 38,741 
Substandard3,904 3,189 1,931 17,147 18,814 31,756 — 76,741 
Doubtful— — — — — — — — 
Total commercial real estate$407,514 $318,736 $211,592 $210,166 $155,827 $379,863 $— $1,683,698 
Consumer real estate:        
Risk Rating
Pass$243,340 $164,359 $70,465 $66,940 $51,988 $121,238 $98,444 $816,774 
Special mention— — 331 26 1,746 1,949 — 4,052 
Substandard444 532 1,280 3,410 1,288 9,241 1,633 17,828 
Doubtful— — — — — — — — 
Total consumer real estate$243,784 $164,891 $72,076 $70,376 $55,022 $132,428 $100,077 $838,654 
Consumer installment:
Risk Rating
Pass$17,980 $9,245 $4,222 $1,645 $1,088 $1,758 $3,697 $39,635 
Special mention— — — — — — 
Substandard— 26 — 49 
Doubtful— — — — — — — — 
Total consumer installment$17,980 $9,271 $4,225 $1,650 $1,097 $1,765 $3,697 $39,685 
Total
Pass$816,402 $546,998 $335,368 $294,516 $209,393 $499,357 $102,319 $2,804,353 
Special mention1,326 2,514 2,862 15,192 5,007 17,497 — 44,398 
Substandard4,348 3,747 4,612 26,746 20,470 49,246 1,633 110,802 
Doubtful— — — — — — — — 
Total$822,076 $553,259 $342,842 $336,454 $234,870 $566,100 $103,952 $2,959,553 
Allowance for Credit Losses
The ACL is a valuation account that is deducted from loans’ amortized cost basis to present the net amount expected to be collected on the loans. It is comprised of a general allowance for loans that are collectively assessed in pools with similar risk categoriescharacteristics and a specific allowance for individually assessed loans. The allowance is continuously monitored by management to maintain a level adequate to absorb expected losses inherent in the loan portfolio.
The ACL represents the estimated losses for financial assets accounted for on an amortized cost basis. Expected losses are calculated using relevant information, from internal and external sources, about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in
31

underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environment conditions, such as changes in unemployment rates, property values, or other relevant factors. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Expected losses are estimated over the contractual term of the loans, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals, and modifications. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed and recoveries are credited to the allowance when received. Expected recovery amounts may not exceed the aggregate of amounts previously charged-off.
The ACL is measured on a collective basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by call code (segments). Segmenting loans by classcall code will group loans that contain similar types of collateral, purposes, and are usually structured with similar terms making each loan’s risk profile very similar to the rest in that segment. Each of these segments then flows up into one of the four bands (bands), Commercial, Financial, and Agriculture, Commercial Real Estate, Consumer Real Estate, and Consumer Installment. In accordance with the guidance in ASC 326, the Company redefined its LHFI portfolio segments and related loan classes based on the level at which risk is monitored within the ACL methodology. Construction loans (excluding mortgagefor 1-4 family residential properties with a call code 1A1, and other construction, all land development and other land loans heldwith a call code 1A2 were previously separated between the Commercial Real Estate or Consumer Real Estate bands based on loan type code. Under our ASC 326 methodology 1A1 loans are all defined as part of the Consumer Real Estate band and 1A2 loans are all defined as part of the Commercial Real Estate Band.
The PD calculation analyzes the historical loan portfolio over the given lookback period to identify, by segment, loans that have defaulted. A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period. The model observes loans over a 12-month window, detecting any events previously defined. This information is then used by the model to calculate annual iterative count-based PD rates for sale) wereeach segment. This process is then repeated for all dates within the historical data range. These averaged PD’s are used for an immediate reversion back to the historical mean. The historical data used to calculate this input was captured by the Company from 2009 through the most recent quarter end.
The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The model’s calculation also includes a 24-month forecasted PD based on a regression model that calculated a comparison of the Company’s historical loan data to various national economic metrics during the same periods. The results showed the Company’s past losses having a high rate of correlation to unemployment, both regionally and nationally. Using this information, along with the most recently published Wall Street Journal survey of sixty economists’ forecasts predicting unemployment rates out over the next eight quarters, a corresponding future PD can be calculated for the forward-looking 24-month period. This data can also be used to predict loan losses at different levels of stress, including a baseline, adverse and severely adverse economic condition. After the forecast period, PD rates revert to the historical mean of the entire data set.
The LGD calculation is based on actual losses (charge-offs, net recoveries) at a loan level experienced over the entire lookback period aggregated to get a total for each segment of loans. The aggregate loss amount is divided by the exposure at default to determine an LGD rate. Defaults occurring during the lookback period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event. If there is not a minimum of five past defaults in a loan segment, or less than 15.0% calculated LGD rate, or the total balance at default is less than 1% of the balance in the respective call code as follows:

26
of the model run date, a proxy index is used. This index is proprietary to the Company’s ACL modeling vendor derived from loss data of other client institutions similar in organization structure to the Company. The vendor also provides a “crisis” index derived from loss data between the post-recessionary years of 2008-2013 that the Company uses.

The model then uses these inputs in a non-discounted version of DCF methodology to calculate the quantitative portion of estimated losses. The model creates loan level amortization schedules that detail out the expected monthly payments for a loan including estimated prepayments and payoffs. These expected cash flows are discounted back to present value using the loan’s coupon rate instead of the effective interest rate. On a quarterly basis, the Company uses internal credit portfolio data, such as changes in portfolio volume and composition, underwriting practices, and levels of past due loans, nonaccruals and classified assets along with other external information not used in the quantitative calculation to determine if any subjective qualitative adjustments are required so that all significant risks are incorporated to form a sufficient basis to estimate credit losses.

September 30, 2017

($ In Thousands)

  

Real

Estate

Commercial

  

Real

Estate

Mortgage

  

Installment

and

Other

  

Commercial,

Financial and

Agriculture

  Total 
                
Pass $746,097  $223,995  $28,184  $164,373  $1,162,649 
Special Mention  9,619   825   -   3,127   13,571 
Substandard  16,743   4,172   89   1,892   22,896 
Doubtful  95   -   -   26   121 
Subtotal  772,554   228,992   28,273   169,418   1,199,237 
Less:                    
Unearned discount  750   59   -   235   1,044 
Loans, net of unearned discount $771,804  $228,933  $28,273  $169,183  $1,198,193 

December 31, 2016

($ In Thousands)

  

Real

Estate

Commercial

  

Real

Estate

Mortgage

  

Installment

and

Other

  

Commercial,

Financial and

Agriculture

  Total 
                
Pass $522,949  $174,325  $21,278  $134,235  $852,787 
Special Mention  376   237   -   618   1,231 
Substandard  11,873   1,336   79   208   13,496 
Doubtful  -   200   -   40   240 
Subtotal  535,198   176,098   21,357   135,101   867,754 
Less:                    
Unearned discount  378   60   -   262   700 
Loans, net of unearned discount $534,820  $176,038  $21,357  $134,839  $867,054 

Activity

32

The following table presents the activity in the allowance for loancredit losses by portfolio segment for the three and nine months ended September 30, 2022 and 2021:
($ in thousands)Three Months Ended September 30, 2022
Commercial,
Financial and
Agriculture
Commercial
Real Estate
Consumer
Real Estate
Consumer
Installment
Total
Allowance for credit losses:
Beginning balance$4,511 $18,668 $8,752 $469 $32,400 
Initial allowance on PCD loans614 576 113 — 1,303 
Provision for credit losses483 1,663 2,135 19 4,300 
Loans charged-off— — (55)(186)(241)
Recoveries292 18 39 245 594 
Total ending allowance balance$5,900 $20,925 $10,984 $547 $38,356 
($ in thousands)Nine Months Ended September 30, 2022
Commercial,
Financial and
Agriculture
Commercial
Real Estate
Consumer
Real Estate
Consumer
Installment
Total
Allowance for credit losses:
Beginning balance$4,873 $17,552 $7,889 $428 $30,742 
Initial allowance on PCD loans614 576 113 — 1,303 
Provision for credit losses171 2,292 2,197 90 4,750 
Loans charged-off(146)(27)(202)(523)(898)
Recoveries388 532 987 552 2,459 
Total ending allowance balance$5,900 $20,925 $10,984 $547 $38,356 
($ in thousands)Three Months Ended September 30, 2021
Commercial,
Financial and
Agriculture
Commercial
Real Estate
Consumer
Real Estate
Consumer
Installment
Total
Allowance for credit losses:
Beginning balance$3,910 $17,573 $10,339 $635 $32,457 
Provision for credit losses— — — — — 
Loans charged-off(142)(59)(19)(166)(386)
Recoveries57 180 39 71 347 
Total ending allowance balance$3,825 $17,694 $10,359 $540 $32,418 
33

($ in thousands)Nine Months Ended September 30, 2021
Commercial,
Financial and
Agriculture
Commercial
Real Estate
Consumer
Real Estate
Consumer
Installment
Total
Allowance for credit losses:
Beginning balance$6,214$24,319$4,736$551$35,820
Impact of ASC 326 adoption on non-PCD loans(1,319)(4,607)5,257(49)(718)
Impact of ASC 326 adoption on PCD loans16657537221,115
Provision for credit losses
Loans charged-off(1,618)(3,066)(282)(431)(5,397)
Recoveries3824732764671,598
Total ending allowance balance$3,825$17,694$10,359$540$32,418
The initial ACL on PCD loans recorded in September 30, 2022, of $1.3 million were related to the BBI acquisition. The 2022 provision for credit losses includes $3.9 million associated with day one post-merger accounting provision recorded for non-PCD loans and unfunded commitments acquired in the BBI merger. The Company recorded a $4.3 million provision for credit losses for the three months ended September 30, 2022, compared to no provision for the same periods in 2021. The increase in the provision is related to the BBI acquisition. The provision for credit losses was $4.9 million for the nine months ended September 30, 2022, compared with no provision for credit losses for the same period was as follows:

($ In Thousands)      
  Three Months  Nine Months 
  Ended  Ended 
  Sept. 30, 2017  Sept. 30, 2017 
       
Balance at beginning of period $8,070  $7,510 
Loans charged-off:        
Real Estate  (39)  (259)
Installment and Other  (21)  (63)
Commercial, Financial and Agriculture   ( -)  (1)
Total  (60)  (323)
         
Recoveries on loans previously charged-off:        
Real Estate  45   498 
Installment and Other  23   67 
Commercial, Financial and Agriculture  7   39 
Total  75   604 
Net recoveries  15   281 
Provision for Loan Losses  90   384 
Balance at end of period $8,175  $8,175 

27
in 2021.

The following tables represent how the allowance for loan losses is allocated to a particular loan type, as well as the percentage of the category to total loans at September 30, 2017 and December 31, 2016.

Allocation of the Allowance for Loan Losses

  September 30, 2017 
  ($ In Thousands) 
  Amount  

% of loans

in each category

to total loans

 
       
Commercial Non Real Estate $1,557   14.1%
Commercial Real Estate  4,662   64.4 
Consumer Real Estate  1,510   19.1 
Consumer  174   2.4 
Secondary market reserve  180   - 
Unallocated  92   - 
Total $8,175   100%

  December 31, 2016 
  ($ In Thousands) 
  Amount  

% of loans

in each category

to total loans

 
       
Commercial Non Real Estate $1,118   15.6%
Commercial Real Estate  4,071   61.6 
Consumer Real Estate  1,589   20.3 
Consumer  155   2.4 
Unallocated  577   0.1 
 Total $7,510   100%

The following tables providetable provides the ending balancesbalance in the Company's loans (excluding mortgage loans held for sale)Company’s LHFI and allowance for loan losses,the ACL, broken down by portfolio segment as of September 30, 20172022 and December 31, 2016. 2021 ($ in thousands).

September 30, 2022Commercial,
Financial and
Agriculture
Commercial
Real Estate
Consumer
Real Estate
Consumer
Installment
Total
LHFI
Individually evaluated$— $5,265 $1,374 $— $6,639 
Collectively evaluated517,197 2,120,206 1,030,969 44,377 3,712,749 
Total$517,197 $2,125,471 $1,032,343 $44,377 $3,719,388 
Allowance for Credit Losses     
Individually evaluated$— $— $$— $
Collectively evaluated5,900 20,925 10,979 547 38,351 
Total$5,900 $20,925 $10,984 $547 $38,356 
December 31, 2021Commercial,
Financial and
Agriculture
Commercial
Real Estate
Consumer
Real Estate
Consumer
Installment
Total
LHFI
Individually evaluated$— $1,712 $1,858 $— $3,570 
Collectively evaluated397,516 1,681,986 836,796 39,685 2,955,983 
Total$397,516 $1,683,698 $838,654 $39,685 $2,959,553 
Allowance for Credit Losses     
Individually evaluated$— $$$— $
Collectively evaluated4,873 17,548 7,887 428 30,736 
Total$4,873 $17,552 $7,889 $428 $30,742 
34

NOTE 11 - DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps
The tables also provide additional detailCompany enters into interest rate swap agreements primarily to facilitate the risk management strategies of certain commercial customers. The interest rate swap agreements entered into by the Company are all entered into under what is referred to as toa back-to-back interest rate swap, as such, the amountnet positions are offsetting assets and liabilities, as well as income and expenses. All derivative instruments are recorded in the consolidated statement of ourfinancial condition at their respective fair values, as components of other assets and other liabilities. Under a back-to-back interest rate swap program, the Company enters into an interest rate swap with the customer and another offsetting swap with a counterparty. The result is two mirrored interest rate swaps, absent a credit event, that will offset in the financial statements. These swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. The change in fair value is recognized in the income statement as other income and fees. As part of the BBI acquisition, the Bank acquired 33 loans and allowance that correspond to individual versus collective impairment evaluation. with related interest rate swaps.

The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses. See Item No. 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Provision for Loan and Lease Losses” for a description of our methodology.

following table provides outstanding interest rate swaps at September 30, 2022.

28
($ in thousands)
September 30, 2022
Notional amount$326,156 
Weighted average pay rate4.3 %
Weighted average receive rate4.3 %
Weighted average maturity in years6.34


The following table provides the fair value of interest rate swap contracts at September 30, 2017

(In thousands)

     Installment  Financial    
  Real Estate  

and

Other

  

and

Agriculture

  Total 
             
Loans                
Individually evaluated $9,623  $52  $210  $9,885 
Collectively evaluated  991,115   28,222   168,971   1,188,308 
Total $1,000,738  $28,374  $169,181  $1,198,193 
                 
Allowance for Loan Losses                
Individually evaluated $373  $17  $101  $491 
Collectively evaluated  5,978   249   1,457   7,684 
Total $6,351  $266  $1,558  $8,175 

December 31, 2016

(In thousands)

        Commercial,    
     Installment  Financial    
  Real Estate  and
Other
  and
Agriculture
  Total 
             
Loans                
Individually evaluated $5,935  $40  $153  $6,128 
Collectively evaluated  704,923   21,317   134,686   860,926 
Total $710,858  $21,357  $134,839  $867,054 
                 
Allowance for Loan Losses                
Individually evaluated $651  $21  $10  $682 
Collectively evaluated  5,009   711   1,108   6,828 
Total $5,660  $732  $1,118  $7,510 

NOTE 12 – SUBSEQUENT EVENTS/OTHER

Subsequent events have been evaluated by management through2022 included in other assets and other liabilities.


($ in thousands)
September 30, 2022
Derivative AssetsDerivative Liabilities
Interest rate swap contracts$13,258 13,258 

The Company also enters into a collateral agreement with the date the financial statements were issued.

On October 24, 2017,counterparty requiring the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Southwest Banc Shares, Inc., an Alabama corporation (“Southwest”), whereby Southwest will be merged with and intoto post cash or

cash equivalent collateral to mitigate the Company. Pursuant to and simultaneously with entering intocredit risk in the Merger Agreement, The First, and Southwest’s wholly owned subsidiary bank, First Community Bank (“First Community Bank”), entered into a Plan of Bank Merger whereby First Community Bank will be merged with and into The First immediately following the merger of SWBS with and into the Company.transaction. At September 30, 2017, First Community Bank had total assets of approximately $391.6 million.

On October 31, 2017,2022, the Company completed a salehad $1.0 million of an aggregatecollateral posted with its counterparties, which is included in the consolidated statement of 2,012,500 shares of its common stock in a public offering. Net proceeds after underwriting discountsfinancial condition as cash and estimated expenses were approximately $55.2 million.cash equivalents as "restricted cash". The Company intendsalso receives a swap spread to usecompensate it for the net proceeds fromcredit exposure it takes on the offering to fund the cashcustomer-facing portion of the purchase price fortransaction and this upfront cash payment from the Company’s previously announced acquisitioncounterparty is recorded in other income, net of Southwest,any transaction execution expenses, in the consolidated statement of operations. For the three and nine months ended September 30, 2022, net swap spread income included in other income was $20 thousand.


Entering into derivative contracts potentially exposes the Company to fundthe risk of counterparties' failure to fulfill their legal obligations, including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. The Company assesses the credit risk of its dealer counterparties by regularly monitoring publicly available credit rating information, evaluating other potential future acquisitions,market indicators, and for general corporate purposes, includingperiodically reviewing detailed financials.

The Company records the repaymentfair value of debtits interest rate swap contracts separately within other assets and to support organic growth.

other liabilities as current accounting rules do not permit the netting of customer and counterparty fair value amounts in the consolidated statement of financial condition.

NOTE 1312 – RECLASSIFICATION

Certain amounts in the 20162021 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

29

35

PART I - FINANCIAL INFORMATION


NOTE 13 – SUBSEQUENT EVENTS/OTHER
Heritage Southeast Bank
On July 27, 2022, the Company entered into an Agreement and Plan of Merger (the "HSBI Merger Agreement") with Heritage Southeast Bancorporation, Inc., a Georgia corporation ("HSBI"), whereby HSBI will be merged with and into the Company. Pursuant to and simultaneously with entering into the HSBI Merger Agreement, The First Bank and HSBI's wholly owned subsidiary bank, Heritage Southeast Bank, entered into a Plan of Bank Merger whereby Heritage Southeast Bank will be merged with and into The First immediately following the merger of HSBI with and into the Company. Each share of HSBI common stock will, at the effective time of the transaction, be converted into 0.965 of a share of Company common stock, representing a purchase price, as of the announcement date, of approximately $207.0 million. At September 30, 2022, HSBI had approximately $1.7 billion in assets, $1.1 billion in loans, and $1.5 billion in deposits. The closing of the transactions contemplated by the HSBI Merger Agreement is subject to the satisfaction of customary closing conditions, including regulatory approvals and the approval of the shareholders of each of the Company and HSBI.

36

ITEM NO. 2

2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

This

Certain statements made or incorporated by reference in this Quarterly Report on Form 10-Q containsof the Company (the “Report”) which are not statements of historical fact, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Report, constitute forward-looking statements within the meaning of, and subject to the Privateprotections of, Section 27A of the Securities Litigation Reform Act of 1995. Words1933, 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,” “anticipates,“targets,” “estimates,” “projects,” “seek,” “plans,” “believes,“potential,“seeks,“aim,“estimates” and variations of suchother similar words and similar expressions are intended to identify such forward-looking statements. Suchof 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 currently available informationthe current beliefs and expectations of the Company’s management and are subject to varioussignificant risks and uncertaintiesuncertainties. 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. Other factors that could cause actual results to differ materially from the Company’s present expectations. Factors that might cause such differencesthose indicated by forward-looking statements include, but are not limited to: competitive pressures amongto, the following:
the ongoing impact of COVID-19 pandemic on the economy and our operations;
negative impacts on our business, profitability and our stock price that could result from prolonged periods of inflation;
risks and uncertainties relating to recent, pending or potential future mergers or acquisitions, including risks related to the completion of such acquisitions within expected timeframes and the successful integration of the business that we acquire into our operations;
the risk that a future economic downturn and contraction, including a recession, could have a material adverse effect on our capital, financial institutionscondition, credit quality, results of operations and future growth, including the risk that the strength of the current economic environment could be weakened by the continued impact of rising interest rates, supply chain challenges and inflation;
disruptions to the financial markets as a result of the current or anticipated impact of military conflict, including Russia’s military action in Ukraine, terrorism or other geopolitical events;
governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve, as well as legislative, tax and regulatory changes, including those that impact the money supply and inflation;
the costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto, including the costs and effects of litigation related to our participation in government stimulus programs associated with the COVID-19 pandemic;
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 significantly;interest rates, increasing unemployment, or changes in payment behavior or other factors;
37

general economic conditions, either nationally or locally,regionally and especially in areas in which the Company conducts operations beingour primary service area, becoming less favorable than expected; legislationexpected resulting in, among other things, a deterioration in credit quality;
adverse changes in asset quality and resulting credit risk-related losses and expenses;
ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters, public health emergencies and international instability;
developments in our mortgage banking business, including loan modifications, general demand, and the effects of judicial or regulatory requirements or guidance;
current or future legislation, regulatory changes whichor changes in monetary, tax or fiscal policy that adversely affect the abilitybusinesses in which we or our customers or our borrowers are engaged, including the impact of the consolidated CompanyDodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the Federal Reserve’s actions with respect to conductinterest rates, the capital requirements promulgated by the Basel Committee on Banking Supervision (“Basel Committee”), potential impacts from the Tax Cuts and Jobs Act, the CARES Act of 2020, and other COVID-19 relief measures, uncertainty relating to calculation of LIBOR and other regulatory responses to economic conditions;
changes in political conditions or the legislative or regulatory environment;
the adequacy of the level of our allowance for credit losses and the amount of credit loss provisions required to replenish the allowance in future periods;
reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;
changes in the interest rate environment which could reduce anticipated or actual margins;
increased funding costs due to market illiquidity, increased competition for funding, higher interest rates, and increased regulatory requirements with regard to funding;
results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses through additional credit loss provisions or write-down of our assets;
the rate of delinquencies and amount of loans charged-off;
the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;
significant increases in competition in the banking and financial services industries;
changes in the securities markets;
significant turbulence or a disruption in the capital or financial markets and the effect of a fall in stock market prices on our investment securities;
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 combinationsconditions and inflation;
changes in technology or new operations; and risks to cybersecurity;
changes in deposit flows;
38

changes in accounting principles, policies, or guidelines, including the impact of the Current Expected Credit Losses (“CECL”) standard;
our ability to maintain adequate internal control over financial reporting;
risks related to the proposed acquisitioncontinued use, availability and reliability of Southwest Banc Shares, Inc., includingLIBOR and other “benchmark” rates; and
other risks and uncertainties detailed from time to time in our filings with the riskSecurities and Exchange Commission (“SEC”).
We have based our forward-looking statements on our current expectations about future events. Although we believe that the proposed transaction does not close when expected or at all because required regulatory or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all, the terms of the proposed transaction may need to be modified to satisfy such approvals or conditions,expectations reflected in and the riskassumptions underlying our forward-looking statements are reasonable, we cannot guarantee that anticipated benefits fromthese expectations will be achieved or the proposed transaction are not realized in the time frame anticipated or at all as a result of changes in general economic and market conditions.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. FurtherAdditional information concerning these risks and uncertainties is contained in Item 1A. "Risk Factors" in our Annual Report on The First Bancshares, Inc. is availableForm 10-K for the year ended December 31, 2021 the "Company's 2021 Form 10-K" and in itsour other filings with the Securities and Exchange Commission, available at the SEC’s website, http://www.sec.gov.

CRITICAL ACCOUNTING POLICIES

www.sec.gov.

ECONOMIC CONDITIONS
The Company’s financial statements are preparedeconomic conditions and growth prospects for our markets, even against the headwinds of inflation and recessionary concerns, continue to reflect a solid and positive overall outlook with economic activity close to pre-pandemic levels. Increasing interest rates and rising building costs have caused some slowing of the highly robust single family housing market, however, there continues to be a shortage of housing in accordance with accounting principles generally acceptedseveral markets in the United States. The financial informationsoutheast. Worker shortages especially in the restaurant, hospitality and disclosures contained within those statements are significantly impacted by Management’s estimatesretail industries combined with supply chain disruptions impacting numerous industries 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 potentialinflationary conditions has had some impact on the Company’s stated resultslevel of operations. In Management’s opinion,economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers. Overall, the Company’s critical accounting policies dealsoutheast continues to experience economic growth due to company relocations and expansions combined with the following areas: the establishment of the allowance for loan and lease losses, as explained in detail in Note 11 to the Consolidated Financial Statements and in the “Provision for Loan and Lease Losses” and “Allowance for Loan and Lease Losses” sections of this Item No. 2 – overall population growth.

CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations;Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgements that affect the valuationreported amounts of impaired loansassets, liabilities, revenues and foreclosed assets, asexpenses. 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 11B “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements; income taxesStatements” contained in Item 8 “Financial Statements and deferred tax assets and liabilities, especially with regard to the abilitySupplementary Data” 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 and for which we have determined that no impairment exists, as discussed in the “Other Assets” section of this Item No. 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.

30
2021 Form 10-K.

OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

Third quarter 20172022 compared to third quarter 2016

2021

The Company reported net income available to common shareholders of $4.7$14.0 million for the three months ended September 30, 2017,2022, compared with net income available to common shareholders of $2.5$16.1 million for the same period last year.

year, a decrease of $2.1 million or 12.9%. For the third quarter of 2022, fully diluted earnings per share were $0.61, compared to $0.76 for the third quarter of 2021.

Operating net earnings, a non-GAAP financial measure, for the third quarter of 2022 totaled $19.6 million compared to $16.1 million for the third quarter of 2021, an increase of $3.5 million or 21.9%. Operating net earnings,
39

which is a non-GAAP financial measure, for the third quarter of 2022 excludes merger and conversion related costs of $2.7 million, net of tax, initial provision for acquired loans of $2.9 million, net of tax. Operating net earnings, a non-GAAP financial measure, for the third quarter of 2021 excludes merger and conversion related costs of $4 thousand, net of tax, loss on sale of fixed assets, net of tax, $297 thousand, $1.4 million, net of tax, related to the U.S. Treasury Rapid Response Program ("RRP"), and $1.0 million, net of tax, in contributions as a result of the RRP grant. Diluted operating earnings per share, a non-GAAP financial measure, was $0.85 on a fully diluted basis for the third quarter 2022, compared to $0.76 for the same period in 2021, excluding the costs and income described above. See reconciliation of non-GAAP financial measures provided below.
Net interest income increased to $14.9for the third quarter 2022 was $49.1 million, an increase of $9.1 million or 48.4% for the three months ended September 30, 2017,22.8%, compared to $10.1$40.0 million for the same period in 2016. Quarterly average earning assets at September 30, 2017,2021. Fully tax equivalent (“FTE”) net interest income, which is a non-GAAP measure, totaled $50.1 million and $40.7 million for the third quarter of 2022 and 2021, respectively. Purchase accounting adjustments decreased $349 thousand for the third quarter comparisons. Third quarter 2022 FTE net interest margin, which is a non-GAAP measure, increased $486.2 million, or 43.7% and quarterly average interest-bearing liabilities increased $368.7 million or 39.9% when3.50% including 6 basis points related to purchase accounting adjustments compared to September 30, 2016.

Noninterest3.25% for the same quarter in 2021, which included 10 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the net interest margin increased 29 basis points in prior year quarterly comparison. See reconciliation of non-GAAP financial measures provided below.

Non-interest income for the three months ended September 30, 2017,2022 was $3.7$9.0 million compared to $3.1$9.6 million for the same period in 2016,2021, reflecting an increasea decrease of $0.6 million$564 thousand or 18.0%5.9%. This increase was composeddecrease consisted of increases$511 thousand decrease in service chargesmortgage income.
Pre-tax, pre-provision operating earnings, a non-GAAP measure, increased 26.2% to $25.9 million for the quarter-ended September 30, 2022 as compared to $20.5 million for the third quarter of 2021. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the third quarter 2022 excludes merger and interchange fee income.

Theconversion related costs of $3.6 million, $4.3 million provision for loan losseslosses. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the third quarter of 2021 excludes merger and conversion related costs of $5 thousand, $397 thousand bargain purchase gain and loss on sale of fixed assets, $1.8 million in government grants from the U.S. Treasury offset by $1.4 million in charitable contributions related to the U.S. Treasury awards. See reconciliation of non-GAAP financial measures provided below.

Non-interest expense was $90,000$35.9 million for the three months ended September 30, 2017,2022, an increase of $6.9 million or 23.6%, when compared with $143,000the same period in 2021. Charges related to the acquisition of the Cadence Branches and Beach Bank as well as charter conversion accounted for $3.6 million of the increase. Charges related to the ongoing operations of the Cadence Branches totaled $834 thousand and Beach Bank totaled $2.1 million for the third quarter of 2022.
Investment securities totaled $2.004 billion, or 31.0% of total assets at September 30, 2022, compared to $1.485 billion, or 27.0% of total assets at September 30, 2021. The average balance of investment securities increased $727.3 million in prior year quarterly comparison. The average tax equivalent yield on investment securities, which is a non-GAAP measure, increased 18 basis points to 2.40% from 2.22% in prior year quarterly comparison. The investment portfolio had a net unrealized loss of $216.9 million at September 30, 2022 as compared to a net unrealized gain of $18.2 million at September 30, 2021. See reconciliation of non-GAAP financial measures provided below.
The FTE average yield on all earning assets, a non-GAAP measure, increased 23 basis points in prior year quarterly comparison, from 3.60% for the third quarter of 2021 to 3.83% for the third quarter of 2022. Interest expense on average interest-bearing liabilities decreased 4 basis points from 0.52% for the third quarter of 2021 to 0.48% for the third quarter of 2022. Cost of all deposits averaged 19 basis points for the third quarter of 2022 compared to 22 basis points for the third quarter of 2021. See reconciliation of non-GAAP financial measures provided below.

First nine months 2022 compared to first nine months 2021

The Company reported net income available to common shareholders of $46.6 million for the nine months ended September 30, 2022, compared to $48.4 million for the same period last year. Provision for credit losses increased $4.9 million for the year-over-year comparison. Operating net earnings, a non-GAAP financial measure, increased $2.8 million, or 5.7%, from $48.4 million at September 30, 2021 to $51.1 million at September 30, 2022. Operating net earnings, a non-GAAP measure, for the nine months ended September 30, 2022, excludes merger and conversion related costs of $3.9 million, net of tax, government grants from the U.S. Treasury of $652 thousand, net of tax, offset by $123 thousand in contributions related to the government grants from the U.S. Treasury and bargain purchase gain and loss on sale of fixed assets, net of tax, $123 thousand for the year-to-date period ending September 30, 2022. Operating net earnings, a non-
40

GAAP financial measure, for the nine months ended September 30, 2021, excludes merger and conversion related costs of $4 thousand, net of tax, loss on sale of fixed assets, net of tax, $297 thousand, $1.4 million, net of tax, related to the RRP grant, and $1.0 million, net of tax, in contributions as a result of the RRP grant. Operating earnings per share, a non-GAAP measure, were $2.38 on a fully diluted basis for nine-month period ending September 30, 2022, compared to $2.28 for the same period in 2016.2021, excluding the merger-related costs and income described above. See reconciliation of non-GAAP financial measures provided below.

Net interest income increased by $12.6 million, or 10.7%, to $129.9 million for the nine months ended September 30, 2022, compared to $117.3 million for the same period in 2021. This increase was primarily due to interest earned on a high volume of securities. Average earning assets at September 30, 2022, increased $752.1 million, or 15.3%, and average interest-bearing liabilities decreased $597.5 million, or 13.3%, when compared to September 30, 2021.

Non-interest income for the nine months ended September 30, 2022, was $28.8 million compared to $27.9 million for the same period in 2021, reflecting an increase of $1.0 million or 3.5%. The increase can be attributed to $2.0 million in services charges on deposit accounts and interchange fee income coupled with a decrease of $3.6 million in mortgage income.

The provision for credit losses was $4.9 million for the nine months ended September 30, 2022, compared with $0 provision for credit losses for the same period in 2021. The allowance for loancredit losses of $8.2$38.4 million at September 30, 20172022 (approximately 0.68%1.0% of total loans and 1.16% of loans including valuation accounting adjustments on acquired loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. See “Provision“Allowance for Loan and LeaseCredit Losses” in this Item No. 2 – Management’s2. "Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations" for more information on this evaluation.

Noninterest


Non-interest expense increased by $2.5 million or 26.3% for the three months ended September 30, 2017, when compared with the same period in 2016. The largest increase was related to salaries and benefits of $1.7 million of which $1.4 million was attributable to increased employment associated with the acquisitions of Iberville and GCCB.

First nine months of 2017 compared to first nine months of 2016

The Company reported net income available to common shareholders of $8.2$95.4 million for the nine months ended September 30, 2017, compared with net income available to common shareholders of $7.8 million for the same period last year. After tax merger related costs of $3.9 million were expensed during the first nine months of 2017.

Net interest income increased to $43.9 million or 48.5% for the nine months ended September 30, 2017, compared to $29.6 million for the same period in 2016. Average earning assets at September 30, 2017, increased $461.3 million, or 42.1% and average interest-bearing liabilities increased $360.0 million or 39.6% when compared to the first nine months of 2016.

Noninterest income for the nine months ended September 30, 2017, was $10.8 compared to $8.5 million for the same period in 2016, reflecting2022, an increase of $2.3$11.7 million or 26.5%. This increase consists of $0.2 million of increased mortgage income, increased service charges of $0.8 million and increased interchange fee income of $0.8 million.

The provision for loan losses was $0.4 million for the nine months ended September 30, 2017, compared with $0.5 million for the same period in 2016. The allowance for loan losses of $8.2 million at September 30, 2017 (approximately 0.68% of total loans and 1.16% of loans including valuation accounting adjustments on acquired loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. See “Provision for Loan and Lease Losses” in this Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation.

31

Noninterest expense increased by $16.3 million or 61.1% for the nine months ended September 30, 2017,13.9%, when compared with the same period in 2016. $6.9 million of the2021. The increase wasis primarily attributable to salariesan increase of $5.2 million in acquisition and benefits, of which $5.4charter conversion expenses and $2.5 million relatesrelated to the acquisition,ongoing charges associated with the Cadence Branches and also includes $6.3$2.1 million in one-time merger related charges.

to the Beach Bank branch operations.

FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF THE FIRST

The First represents the primary asset of the Company. The First reported total assets of $1.8$6.443 billion at September 30, 20172022 compared to $1.3$6.067 billion at December 31, 2016,2021, an increase of $0.5 billion.$376.5 million. Loans, including loans held for sale, increased $331.1$754.4 million to $1.2$3.722 billion, or 38.2%25.4%, during the first nine months of 2017.2022. Deposits at September 30, 2017,2022 totaled $1.5$5.558 billion compared to $1.0$5.262 billion at December 31, 2016. The First acquired loans of $237.3 million and deposits of $355.6 million as a result of the acquisitions of Iberville and GCCB during the first quarter of 2017. See Note 4 – Business Combinations.

2021.

For the nine monthmonths period ended September 30, 2017,2022, The First reported net income of $9.7$53.6 million compared to $8.7$55.2 million for the nine months ended September 30, 2016.2021. Merger and conversion charges equaled $3.9 million, net of tax, equaled $3.4 million for the first nine months of 2017.

NONPERFORMING ASSETS AND RISK ELEMENTS

Diversification within the loan portfolio is an important means of reducing inherent lending risks. At September 30, 2017, 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 include Mississippi, Louisiana, Alabama and Florida.

At September 30, 2017, The First had loans past due2022 as follows:

  

($ In Thousands)

 
    
Past due 30 through 89 days $3,141 
Past due 90 days or more and still accruing  1,436 

The accrual of interest is discontinued on loans which become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans totaled $4.9 million at September 30, 2017, an increase of $1.6 million from December 31, 2016.

Other real estate owned is carried at fair value, determined by an appraisal, less estimated costscompared to sell. Other real estate owned totaled $7.9 million at September 30, 2017.

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$0 for the borrower’s financial difficulties. At September 30, 2017, the Bank had $7.3 million in loans that were modified as troubled debt restructurings,first nine months of which $4.7 million were performing as agreed with modified terms.

2021.

EARNINGS PERFORMANCE

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is non-interest income, which primarily consists of customer service charges and fees as well as mortgage income but also comes from non-customer sources such as bank-owned life insurance. The majority of the Company’s non-interest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.

32

Net interest incomeNET INTEREST INCOME AND NET INTEREST MARGIN

For the three months ended September 30, 2022, net interest income increased by $9.1 million, or 22.8%, when compared with the same period in 2021. Net interest income increased by $4.9$12.6 million, or 48.4%10.7%, to $129.9 million for the third quarter of 2017 relativenine month period ending September 30, 2022 compared to the third quartersame period in 2021. The increase is primarily related to interest income earned on a higher volume of 2016.loans and securities. PPP loans totaled $1.5 million as of September 30, 2022, a decrease of $156.3 million or 99.0% when compared to the same period last year due to loan forgiveness under the PPP program. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on non-accrualnonaccrual status during the reporting period, and the recovery of interest on loans that had been on non-accrualnonaccrual and were paid off, sold or returned to accrual status.

41

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
September 30, 2022September 30, 2021
Avg.
Balance
Tax
Equivalent
Interest
Yield/
Rate
Avg.
Balance
Tax
Equivalent
Interest
Yield/
Rate
Earning Assets:
Taxable securities$1,612,066 $8,723 2.16 %$986,821 $5,033 2.04 %
Tax exempt securities479,168 3,849 3.21 %377,610 2,550 2.70 %
Total investment securities2,091,234 12,572 2.40 %1,364,431 7,583 2.22 %
Interest bearing deposits in other banks143,867 0.01 %656,891 17 0.01 %
Loans3,492,110 42,274 4.84 %2,983,771 37,480 5.02 %
Total earning assets5,727,211 54,848 3.83 %5,005,093 45,080 3.60 %
Other assets645,661  506,134   
Total assets$6,372,872 $5,511,227   
Interest-bearing liabilities:      
Deposits$3,777,059 $2,748 0.29 %$3,274,257 $2,588 0.32 %
Borrowed funds13,261 92 2.78 %206 — — %
Subordinated debentures144,910 1,886 5.21 %144,630 1,819 5.03 %
Total interest-bearing liabilities3,935,230 4,726 0.48 %3,419,093 4,407 0.52 %
Other liabilities1,806,898   1,427,540  
Shareholders’ equity630,744   664,594  
Total liabilities and shareholders’ equity$6,372,872  $5,511,227  
Net interest income$49,148   $40,028 
Net interest margin 3.43 % 3.20 %
Net interest income (FTE)*$50,122 3.35 % $40,673 3.22 %
Net interest margin (FTE)*  3.50 %  3.25 %
42

($ in thousands)Nine Months Ended
September 30, 2022September 30, 2021
Avg.
Balance
Tax
Equivalent
Interest
Yield/
Rate
Avg.
Balance
Tax
Equivalent
Interest
Yield/
Rate
Earning Assets:
Taxable securities$1,553,820 $23,247 1.99 %$847,745 $12,641 1.99 %
Tax exempt securities485,101 10,812 2.97 %370,706 7,693 2.77 %
Total investment securities2,038,921 34,059 2.23 %1,218,451 20,334 2.23 %
Interest bearing deposits in other banks465,312 47 0.01 %644,074 103 0.02 %
Loans3,151,197 111,091 4.70 %3,040,818 114,368 5.01 %
Total earning assets5,655,430 145,197 3.42 %4,903,343 134,805 3.67 %
Other assets572,623  532,968   
Total assets$6,228,053 $5,436,311   
Interest-bearing liabilities:      
Deposits$3,756,077 $6,936 0.25 %$4,324,047 $9,752 0.30 %
Borrowed funds4,469 92 2.74 %34,202 339 1.32 %
Subordinated debentures144,835 5,546 5.11 %144,604 5,462 5.04 %
Total interest-bearing liabilities3,905,381 12,574 0.43 %4,502,853 15,553 0.46 %
Other liabilities1,692,565   280,930  
Shareholders’ equity630,107   652,528  
Total liabilities and shareholders’ equity$6,228,053  $5,436,311  
Net interest income$129,887   $117,307 
Net interest margin 3.06 % 3.19 %
Net interest income (FTE)*$132,623 2.99 % $119,253 3.21 %
Net interest margin (FTE)*  3.13 %  3.24 %

  Three Months Ended  Three Months Ended 
  September 30, 2017  September 30, 2016 
  Avg.  

Tax

Equivalent

  Yield/  Avg.  

Tax

Equivalent

  Yield/ 
($ In Thousands) Balance  interest  Rate  Balance  interest  Rate 
                   
Earning Assets:                        
Taxable                        
securities $280,441  $1,601   2.28% $177,154  $965   2.18%
Tax exempt securities  93,716   876   3.74%  77,073   704   3.65%
Total investment securities  374,157   2,477   2.65%  254,227   1,669   2.63%
Fed funds sold  36,591   113   1.24%  10,356   25   0.97%
Interest bearing deposits in other banks  3,463   3   0.35%  11,961   16   0.54%
Loans  1,185,493   14,412   4.86%  836,931   9,798   4.68%
Total earning assets  1,599,704   17,005   4.25%  1,113,475   11,508   4.13%
Other assets  172,698           119,559         
Total assets $1,772,402          $1,233,034         
                         
Interest-bearing liabilities:                        
Deposits $1,204,614  $1,375   0.46% $850,442  $962   0.45%
Repo  4,891   38   3.11%  5,000   49   3.92%
Fed funds purchased  3,816   19   1.99%  1,926   5   1.04%
FHLB and FTN  68,041   300   1.76%  55,337   106   0.77%
Subordinated debentures  10,310   41   1.59%  10,310   80   3.10%
Total interest-bearing liabilities  1,291,672   1,773   0.55%  923,015   1,202   0.52%
Other liabilities  316,275           198,889         
Stockholders’ equity  164,455           111,130         
                         
Total liabilities and stockholders’ equity $1,772,402          $1,233,034         
Net interest income (FTE)*     $15,232   3.70%     $10,306   3.61%
Net interest Margin (FTE)*          3.81%          3.70%

*Non-GAAP measure. See reconciliation of Non-GAAP financial measures.

33

43

Average Balances, Tax Equivalent Interest and Yields/Rates

  YTD September 30, 2017  YTD September 30, 2016 
  Avg.  

Tax

Equivalent

  Yield/  Avg.  

Tax

Equivalent

  Yield/ 
($ In Thousands) Balance  interest  Rate  Balance  interest  Rate 
                   
Earning Assets:                        
Taxable securities $265,320  $4,742   2.38% $184,313  $3,055   2.21%
Tax exempt securities  92,040   2,668   3.87%  77,385   2,118   3.65%
Total investment securities  357,360   7,410   2.76%  261,698   5,173   2.64%
Fed funds sold  42,372   330   1.04%  2,377   82   4.60%
Interest bearing deposits in other banks  4,356   7   0.21%  23,626   56   0.32%
Loans  1,153,694   42,083   4.86%  808,821   28,146   4.64%
Total earning assets  1,557,782   49,830   4.26%  1,096,522   33,457   4.07%
Other assets  190,337           116,252         
Total assets $1,748,119          $1,212,774         
                         
Interest-bearing liabilities:                        
Deposits $1,188,919  $3,836   0.43% $824,065  $2,476   0.40%
Repo  4,892   134   3.65%  5,000   145   3.87%
Fed funds purchased  2,211   29   1.75%  1,867   15   1.07%
FHLB and FTN  63,094   817   1.73%  68,170   342   0.67%
Subordinated debentures  10,310   171   2.21%  10,310   162   2.10%
Total interest- bearing liabilities  1,269,426   4,987   0.52%  909,412   3,140   0.46%
Other liabilities  319,451           196,289         
Stockholders’ equity  159,242           107,073         
                         
Total liabilities and stockholders’ equity $1,748,119          $1,212,774         
Net interest income (FTE)*     $44,842   3.74%     $30,317   3.61%
Net interest Margin (FTE)*          3.84%          3.69%

*See reconciliation


LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2017, cash and cash equivalents were $93.3 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately $373.1 million at September 30, 2017. Approximately $265.2 million in loan commitments could fund within the next three months and other commitments, primarily standby letters of credit, totaled $8.2 million at September 30, 2017.

On October 31, 2017, the Company completed a sale of an aggregate of 2,012,500 shares of its common stock in a public offering. Net proceeds after underwriting discounts and estimated expenses were approximately $55.2 million. The Company intends to use the net proceeds from the offering to fund the cash portion of the purchase price for the Company’s previously announced acquisition of Southwest, to fund other potential future acquisitions, and for general corporate purposes, including the repayment of debt and to support organic growth.

Total consolidated equity capital at September 30, 2017, was $167.0 million, or approximately 9.3% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies. The Company’s capital ratios as of September 30, 2017, were as follows:

Tier 1 leverage8.6%
Tier 1 risk-based11.0%
Total risk-based11.6%
Common equity Tier 110.3%

On June 30, 2006, The Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust 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 the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, The Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’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 accordance with the authoritative guidance, the trusts are not included in the consolidated financial statements.

PROVISION 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 is based upon a number of assumptions which it believes to be reasonable, but which may not prove to be accurate, particularly given the Company’s growth and the economy. 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 loan loss allowance will not be required.

35

The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance regarding contingencies. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the prior seven years is utilized in determining the appropriate allowance. Historical loss factors are determined by risk rated 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 upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committee, and data and guidance received or obtained from the Company’s regulatory authorities.

The second part of the allowance is determined in accordance with authoritative guidance regarding loan impairment. Impaired loans are determined based upon a review by internal loan review and senior management.

The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.

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.

36

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 month and nine month periodmonths ended September 30, 20172022 and 2016:

($ In Thousands) Three Months Ended  Nine Months Ended 
EARNINGS STATEMENT 9/30/17  

% of

Total

  9/30/16  

% of

Total

  9/30/17  

% of

Total

  9/30/16  

% of

Total

 
Non-interest income:                                
Service charges on deposit accounts $902   24.7% $606   19.6% $2,692   24.9% $1,847   21.6%
Mortgage income  1,276   34.9%  1,399   45.1%  3,400   31.5%  3,228   37.8%
Interchange fee income  935   25.6%  666   21.5%  2,797   25.9%  1,991   23.3%
Gain (loss) on securities, net  -       -   -   -       129   1.5%
Other charges and fees  545   14.8%  428   13.8%  1,918   17.7%  1,347   15.8%
Total non-interest income $3,658   100% $3,099   100% $10,807   100% $8,542   100%
                                 
Non-interest expense:                                
Salaries and employee benefits $7,327   61.6% $5,645   60.0% $22,577   52.4% $16,194   60.6%
Occupancy expense  1,390   11.7%  1,209   12.8%  4,108   9.5%  3,392   12.7%
FDIC premiums  355   3.0%  254   2.7%  887   2.1%  755   2.8%
Marketing  50   0.4%  76   0.8%  218   0.5%  280   1.0%
Amortization of core deposit intangibles  160   1.3%  100   1.1%  491   1.1%  294   1.1%
Other professional services  320   2.7%  461   4.9%  1,201   2.8%  1,013   3.8%
Other non-interest expense  2,238   18.8%  1,671   17.7%  7,247   16.8%  4,802   18.0%
Acquisition and integration charges  48   0.5%  -   -   6,327   14.8%  -   - 
Total non-interest expense $11,888   100% $9,416   100% $43,056   100% $26,730   100%

Noninterest income increased $0.6 million, or 18.0% as compared to third quarter 2016. The largest increases in noninterest income were increases in service charges and interchange fee income. Third quarter 2017 noninterest expense increased $2.5 million, or 26.3% as compared to third quarter 2016. The largest increase in noninterest expense, other than acquisition charges, was related to salaries and benefits2021:

($ in thousands)Three Months Ended
EARNINGS STATEMENTSeptember 30,
2022
% of
Total
September 30,
2021
% of
Total
Non-interest income:
Service charges on deposit accounts$2,219 24.6 %$1,846 19.3 %
Mortgage fee income1,221 13.5 %1,732 18.1 %
Interchange fee income3,310 36.7 %2,744 28.6 %
(Loss) gain on securities, net— %11 0.1 %
Gain (loss) on sale of premises and equipment— 0.0 %(397)(4.1)%
Government awards/grants— 0.0 %1,826 19.0 %
Other2,271 25.2 %1,824 19.0 %
Total non-interest income$9,022 100 %$9,586 100 %
Non-interest expense:  
Salaries and employee benefits$19,099 53.2 %$16,246 56.0 %
Occupancy expense3,826 10.7 %3,922 13.5 %
FDIC/OCC premiums496 1.4 %532 1.8 %
Marketing50 0.1 %78 0.3 %
Amortization of core deposit intangibles1,227 3.4 %1,052 3.6 %
Other professional services1,256 3.5 %934 3.2 %
Other non-interest expense6,309 17.6 %6,284 21.6 %
Acquisition and charter conversion charges3,640 10.1 %0.0 %
Total non-interest expense$35,903 100 %$29,053 100 %
44

($ in thousands)Nine Months Ended
EARNINGS STATEMENTSeptember 30,
2022
 % of
Total
September 30,
2021
% of
Total
Non-interest income:
Service charges on deposit accounts$6,297 21.8 %$3,516 19.2 %
Mortgage fee income3,678 12.8 %5,534 30.2 %
Interchange fee income9,609 33.3 %5,789 31.7 %
(Loss) gain on securities, net(82)(0.3)%97 0.5 %
Gain (loss) on sale of premises and equipment(114)(0.4)%— 0.0 %
Gain on acquisition281 1.0 %— 0.0 %
Government awards/grants873 3.0 %— 0.0 %
BOLI income from death proceeds1,630 5.7 %— 0.0 %
Other6,671 23.1 %3,359 18.4 %
Total non-interest income$28,843 100 %$18,295 100 %
Non-interest expense:  
Salaries and employee benefits$53,135 55.6 %$32,091 58.7 %
Occupancy expense11,530 12.1 %7,692 14.1 %
FDIC/OCC premiums1,608 1.7 %993 1.8 %
Marketing258 0.3 %199 0.4 %
Amortization of core deposit intangibles3,355 3.5 %2,104 3.8 %
Other professional services2,587 2.7 %1,983 3.6 %
Other non-interest expense17,755 18.6 %9,655 17.6 %
Acquisition and charter conversion charges5,220 5.5 %— 0.0 %
Total non-interest expense$95,448 100 %$54,717 100 %

Noninterest expense increased $16.3 million in year-over-year comparison consisting of increases in salaries and benefits of $6.9 million of which $5.4 million relates to the acquisitions.

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 $3.1$3.9 million or 21.8% of earnings before income taxes for the year throughthird quarter 2022, compared to $4.4 million or 21.5% of earnings before income taxes for the same period in 2021. The provision for the nine months ended September 30, 2017, and remained unchanged when2022 was $11.8 million or 20.1% of earnings before income taxes compared to $13.0 million or 21.2% for the same period of 2016.

in 2021.

BALANCE SHEET ANALYSIS

EARNING ASSETS

The Company’s interest-earning assets are comprised of investments and loans, and the composition, growth characteristics, and credit quality of both are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.

INVESTMENTS

The Company’s investments can at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in
45

our Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. Surplus FRB balances and fedfederal 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 $359.0 million,$1.973 billion, or 20.1%30.6% of total assets at September 30, 2017,2022 compared to $249.2 million,$1.752 billion, or 19.5%28.8% of total assets at December 31,2016.

We had no fed 2021.

There were $10.0 million federal funds sold at September 30, 20172022 and $0.4 million of fed funds sold$0 at December 31, 2016;2021; and interest-bearing balances at other banks decreased to $29.6$92.3 million at September 30, 20172022 from $30.0$804.5 million at December 31, 20162021. The decrease in interest-bearing balances is primarily duerelated to a $721.7 million decrease in ourthe Federal Reserve Bank account.deposits and was partially offset by an increase of $609.8 million in investment securities that were purchased due to deployment of excess liquidity and $273.3 million increase in loans. The Company’s investment portfolio increased $92.4$230.0 million, dueor 13.0%, to acquisitions to a total fair market value of $360.4 million$2.004 billion at September 30, 2017, reflecting an2022 compared to December 31, 2021. The increase of $109.8 million, or 43.8%, forin the portfolio is related to purchases that were made in the first nine months of 2017.2022 offset by a decrease in the fair market value of $227.6 million. The Company carries available-for-sale investments principally at their fair market values.values and held-to-maturity investments at their amortized costs. The Company holds a small amount of “held-to-maturity” investments with a fair market value of $7.4 millionavailable-for-sale securities totaled $1.379 billion at September 30, 2017 as2022 compared to $7.4 million$1.752 billion at December 31, 2016.2021. The fair value of held-to-maturity investments totaled $532.7 million and $0 at September 30, 2022 and December 31, 2021, respectively. All other investment securities are classified as “available-for-sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

38

Refer to tablethe tables shown in NOTE 10 - SECURITIESNote 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

Loans Held for Sale (“LHFS”)
The Company’s grossBank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and leases, excludingconcurrently “locks in” with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the associated allowance for lossesmortgage servicing rights being retained by the Bank. The terms of the loan are dictated by the secondary investors and includingare transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors. Associated servicing rights are not retained. At September 30, 2022, LHFS totaled $1.203$2.2 million, compared to $7.7 million at December 31, 2021.
Loans Held for Investment (“LHFI”)
LHFI, net of deferred fees and costs, were $3.681 billion at September 30, 2017,2022, an increase of $329.8$752.2 million, or 37.8%25.7%, sincefrom $2.929 billion at December 31, 2016.2021. The acquisitionsacquisition of BBI accounted for approximately $237.3$502.3 million of the increase. AtPPP loans were $1.5 million at September 30, 2017, the company had direct energy related loans2022, a decrease of $20.2$39.6 million, representing 1.7%or 96.3%, from $41.1 million at December 31, 2021.
46

The following table showspresents the Company’s composition of the loan portfolio by category:

CompositionLHFI, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans ($ in thousands):

September 30, 2022December 31, 2021
AmountPercent
of Total
AmountPercent
of Total
Commercial, financial and agriculture (1)$517,197 13.9 %$397,516 13.4 %
Commercial real estate2,125,471 57.1 %1,683,698 57.0 %
Consumer real estate1,032,343 27.8 %838,654 28.3 %
Consumer installment44,377 1.2 %39,685 1.3 %
Total loans3,719,388 100 %2,959,553 100 %
Allowance for credit losses(38,356)(30,742) 
Net loans$3,681,032 $2,928,811 

(1)Loan Portfolio

  Sept. 30, 2017  December 31, 2016 
  Amount  

Percent
of

Total

  Amount  

Percent

of
Total

 
  ($ In Thousands) 
Mortgage loans held for sale $4,588   0.4% $5,880   0.6%
Commercial, financial and agricultural  164,577   13.7   129,423   14.8 
Real Estate:                
Mortgage-commercial  456,110   37.9   314,359   36.0 
Mortgage-residential  377,307   31.4   289,640   33.2 
Construction  171,609   14.3   109,394   12.5 
Lease financing receivable  2,008   0.2   2,204   0.3 
Obligations of states and subdivisions  5,892   0.5   6,698   0.8 
Consumer and other  20,690   1.6   15,336   1.8 
Total loans  1,202,781   100%  872,934   100%
Allowance for loan losses  (8,175)      (7,510)    
Net loans $1,194,606      $865,424     

In the context of this discussion, a "real estate mortgage 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 institutionsamount includes $1.5 million and $41.1 million in the Company’s market area of 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 loanPPP loans at September 30, 2022 and tends to increase the magnitude of the real estate loan portfolio component. December 31, 2021, respectively.

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

LOAN CONCENTRATIONS
Diversification within the loan portfolio is an important means of mortgage loans originated byreducing inherent lending risk. As of September 30, 2022, management does not consider there to be any significant credit concentrations within the Bank and sold intoloan portfolio. Although the secondary market. Commitments from investorsBank’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 purchaserepay a loan is dependent upon the loans are obtained upon origination.

39
economic stability of the area.

NON-PERFORMING ASSETS

NONPERFORMING ASSETS

Nonperforming

Non-performing assets (“NPAs”) are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and OREO. Ifother real estate owned. Loans are placed on nonaccrual status when they become ninety days past due (principal and/or interest), unless the Companyloans are adequately secured and in the process of collection. Nonaccrual loans totaled $15.8 million at September 30, 2022, a decrease of $12.2 million from December 31, 2021.
Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $10.3 million at September 30, 2022, an increase of $7.8 million as compared to $2.6 million at December 31, 2021. The acquisition of BBI accounted for approximately $8.1 million of the increase.
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 to a borrowerit would not otherwise consider but for the borrower’s financial difficulty. At September 30, 2022, the Bank had $23.4 million in financial difficulty,loans that were classified as TDRs, of which $15.8 million were performing as agreed with modified terms. At December 31, 2021, the loan falls into the categoryBank had $24.2 million in loans that were classified as TDRs of a troubled debt restructuring (“TDR”).which $5.2 million were performing as agreed with modified terms. TDRs may be classified as either nonperformingnon-performing or performing loans depending on their accrual status. As of September 30, 2022, $7.7 million in loans categorized as TDRs were classified as non-performing as compared to $18.9 million at December 31, 2021.
47

The following table presents comparative data for the Company’s nonperformingnon-performing assets and performing TDRs as of the dates noted:

Nonperforming Assets and Performing Troubled Debt Restructurings

($ In Thousands)

NON-ACCRUAL LOANS         
Real Estate: 9/30/17  12/31/16  9/30/16 
1-4 family residential construction $-  $300  $- 
Other construction/land  98   358   2,788 
1-4 family residential revolving/open-end  61   200   317 
1-4 family residential closed-end  2,672   1,463   1,652 
Nonfarm, nonresidential, owner-occupied  625   587   598 
Nonfarm, nonresidential, other nonfarm nonresidential  1,139   322   336 
TOTAL REAL ESTATE  4,595   3,230   5,691 
Commercial and industrial  211   2   72 
Loans to individuals - other  46   33   36 
TOTAL NON-ACCRUAL LOANS  4,852   3,265   5,799 
Other real estate owned  7,855   6,008   4,670 
TOTAL NON-PERFORMING ASSETS $12,707  $9,273  $10,469 
Performing TDRs $4,676  $2,774  $2,903 
Total non-performing assets as a % of total loans & leases net of unearned income  1.06%  1.06%  1.21%
Total non-accrual loans as a % of total loans & leases net of unearned income  0.40%  0.37%  0.67%

Nonperforming assetsnoted.

($ in thousands)September 30, 2022December 31, 2021
Nonaccrual Loans
Commercial, financial and agriculture$29 $190 
Commercial real estate11,452 21,527 
Consumer real estate4,361 6,288 
Consumer installment
Total Nonaccrual Loans15,844 28,013 
  
Other real-estate owned10,328 2,565 
  
Total NPAs$26,172 $30,578 
Performing TDRs$15,767 $5,220 
Past due 90 days or more and still accruing$571 $45 
Total NPAs as a % of total loans & leases net of unearned income0.7 %1.0 %
Total nonaccrual loans as a % of total loans & leases net of unearned income0.4 %0.9 %
NPAs totaled $12.7$26.2 million at September 30, 2017,2022, compared to $9.3$30.6 million at December 31, 2016.2021, a decrease of $4.4 million. The increase of $3.4 million is attributable to the acquisitions with associated fair value marks. The ALLL/ACL/total loans ratio was 0.68%1.03% at September 30, 20172022, and .87%1.04% at December 31, 2016. Including2021. Total valuation accounting adjustments were $11.5 million on acquired loans, the total valuation plus ALLL was 1.16% of loans at September 30, 2017.2022. The Company recorded a $9.5 million credit mark related to the BBI acquisition. The ratio of annualized net charge-offs (recoveries) to total loans was (0.005)% for the quarter ended September 30, 2017 compared to (0.04)% for the quarter ended September 30, 2016. As noted in our first quarter 2015 10-Q,2022 compared to 0.03% for the year ended December 31, 2021.
ALLOWANCE FOR CREDIT LOSSES
On January 1, 2021, the Company had been notified thatadopted 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 recoverywider range of $941,000 was more likely than not expected during 2015. We receivedreasonable and supportable information to determine credit losses. In accordance with ASC 326, the first installment during the second quarter of 2015Company has developed an ACL methodology effective January 1, 2021, which totaled $481,000 and the second installment during the third quarter of 2015 which totaled $241,000. The remaining balance of $219,000 was received in 2016.

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ALLOWANCE FOR LOAN AND LEASE LOSSES

Thereplaces 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 leaseexpected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environment conditions, such as changes in unemployment rates, property values, or other relevant factors. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Management evaluates the adequacy of the ACL quarterly and makes provisions for credit losses is established throughbased on this evaluation. See Note 10 “Loans” for a description of the Company’s methodology and the quantitative and qualitative factors included in the calculation.
At September 30, 2022, the ACL was $38.4 million, or 1.0% of LHFI, an increase of $7.6 million, or 24.8% when compared to December 31, 2021. The 2022 provision for credit losses includes $3.9 million associated with a day one post-merger accounting provision recorded for non-PCD loans, unfunded commitments, and a $1.3 million initial allowance on PCD loans acquired in the BBI merger. At December 31, 2021, the allowance for loan and lease losses. It is maintained at a level thatlosses was approximately $30.7 million, which was 1.0% of LHFI.
At September 30, 2022, management believes the allowance is adequate to absorb probable incurredappropriate and should any of the factors considered by management in evaluating the appropriateness of the allowance for credit losses change, management’s
48

estimate of inherent losses in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off againstportfolio could also change, which would affect the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off.

level of future provisions for credit losses.

The table that follows summarizes the activity in the allowance for loan and leasecredit losses for the noted periods:

Allowance for Loanthree and Lease Losses

($ In Thousands)

  3 months
ended
  3 months
ended
  9 months
ended
  9 months
ended
  For the
Year
Ended
 
  9/30/17  9/30/16  9/30/17  9/30/16  12/31/16 
Balances:                    
Average gross loans & leases outstanding during period: $1,185,493  $836,931  $1,153,694  $808,821  $820,881 
Gross Loans & leases outstanding at end of period  1,202,781   863,803   1,202,781   863,803   872,934 
                     
Allowance for Loan and Lease Losses:                    
Balance at beginning of period $8,070  $7,259  $7,510  $6,747  $6,747 
Provision charged to expense  90   143   384   538   625 
Charge-offs:                    
Real Estate-                    
1-4 family residential construction  -   -   32   -   - 
Other construction/land  39   -   111   67   274 
1-4 family revolving, open-ended  -   -   67   -   134 
1-4 family closed-end  -   130   49   219   219 
Nonfarm, nonresidential, owner-occupied  -   -   -   -   - 
Total Real Estate  39   130   259   286   627 
Commercial and industrial  -   -   1   6   71 
Credit cards  -   -   -   1   6 
Automobile loans  12   20   30   29   37 
Loans to individuals - other  -   -   -   -   - 
All other loans  9   6   33   25   30 
Total  60   156   323   347   771 
Recoveries:                    
Real Estate-                    
1-4 family residential construction  -   -   -   -   - 
Other construction/land  24   108   274   191   229 
1-4 family revolving, open-ended  -   3   51   17   17 
1-4 family closed-end  16   105   160   194   502 
Nonfarm, nonresidential, owner-occupied  5   1   13   6   7 
Total Real Estate  45   217   498   408   755 
Commercial and industrial  7   3   39   83   84 
Credit cards  -   1   -   1   2 
Automobile loans  4   -   11   1   1 
Loans to individuals - other  7   5   21   10   12 
All other loans  12   9   35   40   55 
Total  75   235   604   543   909 
Net loan charge offs (recoveries)  (15)  (79)  (281)  (196)  (138)
Balance at end of period $8,175  $7,481  $8,175  $7,481  $7,510 
                     
RATIOS                    
Net Charge-offs (recoveries) to average Loans & Leases(annualized)  (0.005)%  (0.04)%  (0.03)%  (0.03)%  (0.02)%
Allowance for Loan Losses to gross Loans & Leases at end of period  0.68%  0.87%  0.68%  0.87%  0.86%
Net Loan Charge-offs (recoveries) to   provision for loan losses  (16.67)%  (55.24)%  (73.18)%  (36.43)%  (22.08)%

41
nine months ended September 30, 2022 and 2021 ($ in thousands):

Allowance for Credit Losses
Balances:Three Months Ended
September 30, 2022
Three Months Ended
September 30, 2021
Nine Months Ended
September 30, 2022
Nine Months Ended
September 30, 2021
Average LHFI outstanding during period:$3,162,310 $2,983,771 $3,041,337 $3,040,818 
LHFI outstanding at end of period:3,719,388 2,960,919 3,719,388 2,960,919 
Allowance for Credit Losses:
Balance at beginning of period$32,400 $32,457 $30,742 $35,820 
ASC 326 adoption adjustment— — — 397 
Initial allowance on PCD loans1,303 — 1,303 — 
Provision:
Initial provision for acquired non-PCD loans3,855 — 3,855 — 
Provision for credit losses charged to expense445 — 895 — 
Charge-offs:
Commercial, financial and agriculture— 142 146 1,618 
Commercial real estate— 59 27 3,066 
Consumer real estate55 19 202 282 
Consumer installment186 166 523 431 
Total Charge-offs241 386 898 5,397 
Recoveries:
Commercial, financial and agriculture292 57 388 382 
Commercial real estate18 180 532 473 
Consumer real estate39 39 987 276 
Consumer installment245 71 552 467 
Total Recoveries594 347 2,459 1,598 
Net loan charge offs (recoveries)(353)39 (1,561)3,799 
Balance at end of period$38,356 $32,418 $38,356 $32,418 
RATIOS
Net Charge-offs (recoveries) to average LHFI (annualized)0.0 %0.0 %(0.1)%0.2 %
ACL to LHFI at end of period1.0 %1.1 %1.0 %1.1 %
Net Loan Charge-offs (recoveries) to PCL(79.3)%0.0 %(174.4)%0.0 %

OFF-BALANCE SHEET ARRANGEMENTS

The Company maintains commitments to extendrecorded a $4.3 million and $4.8 million provision for credit inlosses for 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 $265.2 million atthree and nine months ended September 30, 20172022 and $220.3 million at December 31, 2016, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 22.1% of gross loans outstanding at$0 for the three and nine months ended September 30, 20172021, respectively. An initial provision for acquired non-PCD loans of $3.9 million and 25.2% at December 31, 2016, with the increase due in part to higher commitments in commercial and industrial loans. The Company also had undrawn lettersan initial allowance on PCD loans of credit issued to customers totaling $8.2$1.3 million at September 30, 2017 and $1.7 million at December 31, 2016. 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 8 to the consolidated financial statements.

In addition to unused commitments to provide credit, the Company is utilizing a $82.0 million letter of credit issued by the Federal Home Loan Bank (“FHLB”) on the Company’s behalf as securitywas recorded as of September 30, 2017. That letter of credit is backed by loans which are pledged2022 due to the FHLBacquisition of BBI.

49

The following tables summarizes the ACL at September 30, 2022 and at December 31, 2021.
($ in thousands)September 30, 2022December 31, 2021
Commercial, financial and agriculture$5,900 $4,873 
Commercial real estate20,925 17,552 
Consumer real estate10,984 7,889 
Consumer installment547 428 
Total$38,356 $30,742 
ALLOWANCE FOR CREDIT LOSSES ON OBSC EXPOSURES
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The ACL on OBSC exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The Company recorded $150 thousand provision for credit losses on OBSC exposures for the nine month period ended September 30, 2022 and $0 for the same period in 2021. The increase in the ACL on OBSC exposures for the nine months ended September 30, 2022 was primarily due to an increase in unfunded commitments.

OTHER ASSETS

The Company’s balance of non-interest earning cash and due from banks was $63.7$71.6 million at September 30, 20172022 and $31.7$115.2 million at December 31, 2016.2021. The balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the level of cash maintained on hand at our branches, and our reserve requirement among other things, and is subject to significant fluctuation in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to and borrowings from correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank.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.

42

Total equityother securities increased $3.0$8.8 million dueto $31.1 million at September 30, 2022 compared to $22.2 million at December 31, 2021. A majority of the increase in other securities is related to an increase in FHLB stock and federal reserve stock.held at the FHLB. The Company’s net premises and equipment at September 30, 20172022 was $46.2$140.5 million and $34.6$126.0 million at December 31, 2016; the result being2021; anincreaseof $11.6$14.6 million, or 33.4%12% for the first nine months of 2017. Included2022. The increase is attributed to the BBI acquisition. Operating right-of-use assets at September 30, 2022 totaled $7.9 million compared to $4.1 million at December 31, 2021, an increase of $3.8 million. The increase in operating right-of-use assets is attributed to the acquisition of BBI. Financing right-of-use assets at September 30, 2022 totaled $2.0 million compared to $2.4 million at December 31, 2021, a decrease of $348 thousand. Bank-owned life insurance at September 30, 2022 totaled $95.4 million compared to $87.4 million at December 31, 2021, an increase of $7.9 million. The increase in bank-owned life insurance is attributed to $10.1 million of insurance included in the acquisition of Iberville was $4.0 millionBBI offset by a decrease in bank-owned life insurance, creating a balancedeath benefits received in the first quarter of $26.4 million2022. Goodwill at September 30, 2017. Bank-owned life insurance is also discussed above in the “Non-Interest Income and Non-Interest Expense” section. Goodwill2022 increased by $6.7$22.1 million during the period,to $178.8 million compared to $156.7 million at December 31, 2021 as a result of the acquisitions, ending the first nine months of 2017 with a balance of $20.4 million.BBI acquisition. Other intangible assets, consisting primarily of the Company’s core deposit intangible (“CDI”), increased by $3.1$6.4 million to $35.9 million as of September 30, 2022, compared to $29.5 million at December 31, 2021, due to the acquisitions. The Company’s goodwillBBI acquisition.

Goodwill and otherindefinite-lived intangible assets are evaluatedtested for impairment at least annually, for potential impairment, and pursuant tomore frequently if events or changes in circumstances indicate that analysisit is more likely than not that the asset is impaired. At September 30, 2022, management has determined that no impairment exists as of September 30, 2017.

exists.

Other real estate owned increased $1.8by $7.8 million, or 30.7% during303%, to $10.3 million at September 30, 2022 as compared to December 31, 2021. The acquisition of BBI accounted for approximately $8.1 million of the first nine monthsincrease.
50

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 $630.2 million at September 30, 2022 and $627.8 million at December 31, 2021, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 16.9% of gross loans at September 30, 2022 and 21.2% at December 31, 2021. The Company also had undrawn similar standby letters of credit to customers totaling $14.5 million at September 30, 2022 and $12.3 million at December 31, 2021. The effect on the Company’s revenues, expenses, cash flows and liquidity from the acquisitionunused portion of GCCB. Seethe 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 4 –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 of September 30, 2022. 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 $1.494 billion at September 30, 2022. Furthermore, funds can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cash for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As of September 30, 2022, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $1.097 billion of the Company’s investment balances, compared to $985.4 million at December 31, 2021. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding federal funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since it utilizes a letter of credit from the FHLB rather than investment securities for certain pledging requirements.
The Company’s liquidity ratio as of September 30, 2022 was 25.8%, as compared to internal liquidity policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines:
September 30, 2022Policy MaximumPolicy Compliance
Loans to Deposits (including FHLB advances)66.4 %90.0 %In Policy
Net Non-core Funding Dependency Ratio1.3 %20.0 %In Policy
Fed Funds Purchased / Total Assets0.2 %10.0 %In Policy
FHLB Advances / Total Assets1.2 %20.0 %In Policy
FRB Advances / Total Assets0.0 %10.0 %In Policy
Pledged Securities to Total Securities45.6 %90.0 %In Policy
51

Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.
As of September 30, 2022, cash and cash equivalents were $163.8 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately $915.0 million at September 30, 2022. Approximately $630.2 million in loan commitments could fund within the next three months and includes other commitments, primarily commercial and $14.5 million similar letters of credit, at September 30, 2022.
Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs.
The Company’s primary uses of funds are ordinary operating expenses and shareholder dividends, and its primary source of funds is dividends from the Bank since the Company does not conduct regular banking operations. Both the Company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 1. Business Combinations.

"Supervision and Regulation" in the Company’s 2021 Form 10-K.

DEPOSITS AND INTEREST BEARING LIABILITIES

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 paid by deposit type for the three-monthnine month periods ended September 30, 20172022 and 20162021 is included in the Average Balances, Tax Equivalent Interest and Yield/Rates tables appearing above, inunder the section titledheading “Net Interest Income and Net Interest Margin.”
In the third quarter of 2022, the Company ceased the Deposit Reclassification program it implemented at the beginning of 2020. The program reclassified non-interest bearing and NOW deposit balances to money market accounts. A distribution of the Company’s deposits showing the year-to-date average balance and percentage of total deposits by type is presented for the noted periods in the following table.

Deposit Distribution      
($ In Thousands) Sept. 30, 2017  December 31, 2016 
Non-interest bearing demand deposits $308,050  $202,478 
NOW accounts and Other  639,802   430,903 
Money Market accounts  157,219   113,253 
Savings accounts  135,373   69,540 
Time Deposits of less than $250,000  209,714   162,797 
Time Deposits of $250,000 or more  57,833   60,220 
Total deposits $1,507,991  $1,039,191 
         
Percentage of Total Deposits        
         
Non-interest bearing demand deposits  20.4%  19.5%
NOW accounts and other  42.4%  41.5%
Money Market accounts  10.5%  10.9%
Savings accounts  9.0%  6.7%
Time Deposits of less than $250,000  13.9%  15.6%
Time Deposits of $250,000 or more  3.8%  5.8%
Total  100%  100%

43
Deposits at December 31, 2021 are shown without reclassification for consistency with the current period presentation.

Deposit DistributionSeptember 30, 2022December 31, 2021
($ in thousands)Average
Balance
Average
Rate
Paid
Average
Balance
Average
Rate
Paid
Non-interest-bearing demand deposits$1,647,205 — $1,366,529 — 
Interest bearing deposits:
NOW accounts and other1,836,462 0.34 %1,529,293 0.48 %
Money market accounts825,400 0.11 %756,951 0.20 %
Savings accounts531,304 0.02 %440,977 0.03 %
Time deposits562,912 0.35 %537,538 0.59 %
Total interest-bearing deposits3,756,078 0.25 %3,264,759 0.37 %
Total deposits$5,403,283 0.17 %$4,631,288 0.26 %

As of September 30, 2022, average deposits increased by $772.0 million, or 16.7% to $5.403 billion from $4.631 billion at December 31, 2021. The most significant growth during 2022 compared to 2021 was in NOW accounts. The average cost of interest-bearing deposits and total deposits was 0.25% and 0.17% during at September 30, 2022 compared to 0.37% and 0.26% at December 31, 2021. The decrease in the average cost of interest-bearing deposit during the first nine months of 2022 compared to December 31, 2021 was related to the Bank gradually reducing interest rates during 2021. In addition to reducing rates, several larger public fund relationships renewed into lower rates during the first quarter of 2022.
52

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include fedfederal funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank,FHLB, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and fedfederal 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-bearingnoninterest-bearing deposit liabilities increased by $25.3$220.5 million, or 31.9%14.2%, in the first nine months of 2017, due2022. In the third quarter of 2022, the Company ceased the Deposit Reclassification program it implemented at the beginning of 2020. The program reclassified non-interest bearing and NOW deposit balances to anmoney market accounts. The increase in notes payablenoninterest-bearing deposits is related to the FHLB. Repurchase agreements decreased $5.0 million. The Company hadending of the Deposit Reclassification program coupled with the BBI acquisition. As of September 30, 2022, junior subordinated debentures totaling $10.3increased $226 thousand, net of issuance costs, to $145.0 million. Subordinated debt is discussed more fully in the below Capital section of this report.
LEASE LIABILITIES
As of September 30, 2022, operating lease liabilities increased $3.9 million, or 93.0% to $8.1 million from $4.2 million at September 30, 2017 and December 31, 2016,2021. The increase in operating lease liabilities is attributed to the formacquisition of long-term borrowingsBBI. Finance lease liabilities decreased $132 thousand, or 6.3% to $2.0 million from trust subsidiaries formed specifically to issue trust preferred securities.

$2.1 million at December 31, 2021.

OTHER NON-INTEREST BEARING LIABILITIES

Other liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities increased by $4.0$13.6 million, or 100.8%58.1%, during the first nine months of 2017, due2022. The increase is primarily related to the increase in otheracquisition of BBI. As of September 30, 2022, accrued but unpaid expenses.

liquidity and market RisK MANAGEMENT

LIQUIDITY

Liquidity management refersinterest payable decreased $346 thousand, or 20.2% to the Company’s ability$1.4 million from $1.7 million at December 31, 2021. The ACL on OBSC exposures increased $150 thousand 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 our ability to meet liquidity needs under adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored and we are focused on maintaining adequate liquidity resources to draw upon should unexpected needs arise.

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances via FHLB lines of credit, or solicit brokered deposits if deposits are not immediately obtainable from local sources. The net availability on lines of credit from the FHLB totaled $414.1$1.2 million at September 30, 2017. Furthermore, funds can be obtained2022 when compared to December 31, 2021.

CAPITAL
At September 30, 2022, the Company had total shareholders’ equity of $621.5 million, comprised of $25.3 million in common stock, $41.1 million in treasury stock, $558.2 million in surplus, $241.1 million in undivided profits and $162.0 million in accumulated comprehensive loss on available-for-sale securities. Total shareholders’ equity at the end of 2021 was $676.2 million. The decrease of $54.7 million, or 8.1%, in shareholders’ equity during the first nine months of 2022 is primarily attributable to $170.0 million decrease in accumulated comprehensive loss related to the effect of rising interest rates on the market value of our available-for-sale securities, treasury stock acquired of $22.2 million, and $11.7 million in cash dividends paid, these decreases in total shareholders’ equity were offset by drawing downcapital added through net earnings of $46.6 million.
On December 16, 2020, the Company announced that its Board of Directors has authorized a share repurchase program (the “2021 Repurchase Program”), pursuant to which the Company may purchase up to an aggregate of $30 million in shares of the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition,issued and outstanding common stock. Under the program, the Company can raise immediate cashcould, but is not required to, from time to time repurchase up $30 million of its own common stock in any manner determined appropriate by the Company’s management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, was be determined by management at is discretion and depended on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The 2021 Repurchase Program expired on December 31, 2021. The Company repurchased 165,623 shares in 2021 pursuant to the 2021 Repurchase Program.
On February 8, 2022, the Company announced the renewal of the 2021 Repurchase Program that previously expired on December 31, 2021. Under the renewed 2021 Repurchase Program, the Company could from time to time repurchase up to an aggregate of $30 million of the Company’s issued and outstanding common stock in any manner determined appropriate by the Company’s management, less the amount of prior purchases under the program during the 2021 calendar year. The renewed 2021 Repurchase Program was completed in February 2022 when the Company’s repurchases under the program approached the maximum authorized amount. The Company repurchased 600,000 shares for temporary needs$22.2 million under the 2021 Repurchase Program in the first quarter of 2022.
53

On March 9, 2022, the Company announced that its Board of Directors has authorized a new share repurchase program (the “2022 Repurchase Program”), pursuant to which the Company may purchase up to an aggregate of $30 million in shares of the Company’s issued and outstanding common stock during the 2022 calendar year. Under the program, the Company may, but is not required to, from time to time repurchase up to $30 million of shares of its own common stock in any manner determined appropriate by sellingthe 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 agreementthe program, will be determined by management at is discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The 2022 Repurchase Program will have an expiration date of December 31, 2022.
The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to repurchase those investments1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in fiscal year 2023. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our statement of condition or result of operations.
The Company uses a variety of measures to evaluate its portfolio whichcapital 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 pledgeddeemed to be “advanced approaches” institutions, the Company has elected to opt out of the requirement of the standards initially adopted by the Basal Committee on Banking Supervision in December 2010 (which standards are commonly referred to as collateral. “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.
Regulatory Capital Ratios The First BankSeptember 30,
2022
December 31,
2021
Minimum Required to
be Well Capitalized
Minimum Capital
Required Basel III Fully
Phased In
Common Equity Tier 1 Capital Ratio15.5 %16.6 %6.5 %7.0 %
Tier 1 Capital Ratio15.5 %16.6 %8.0 %8.5 %
Total Capital Ratio16.4 %17.4 %10.0 %10.5 %
Tier 1 Leverage Ratio10.6 %10.8 %5.0 %7.0 %
Regulatory Capital Ratios The First Bancshares, Inc.September 30,
2022
December 31,
2021
Minimum Required to
be Well Capitalized
Minimum Capital
Required Basel III Fully
Phased In
Common Equity Tier 1 Capital Ratio*12.6 %13.7 %N/AN/A
Tier 1 Capital Ratio**12.9 %14.1 %N/AN/A
Total Capital Ratio16.7 %18.6 %N/AN/A
Tier 1 Leverage Ratio9.3 %9.2 %N/AN/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 at September 30, 2022 were well above the threshold for the Company and the Bank to be classified as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. Basel III rules require a “capital conservation buffer” for both the Company and the Bank. The capital conservation buffer is subject to a three-year phase-in period that began January 1, 2016 and was fully phased-in on January 1, 2019 at 2.5%. Under this guidance banking institutions with a CETI, Tier 1 Capital Ratio and Total Risk Based Capital above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.
54

As of September 30, 2017,2022, management believes that each of the market valueBank and the Company met all capital adequacy requirements to which they are subject. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.
Total consolidated equity capital at September 30, 2022 was $621.5 million, or approximately 9.6% of unpledged debt securities plus pledged securities in excess of current pledgingtotal assets. The Company currently has adequate capital to meet the minimum capital requirements comprised $95.6for all regulatory agencies.
On June 30, 2006, The Company issued $4.1 million of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 (“Trust 2”) in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. Trust 2 issued $4.0 million of Trust Preferred Securities (“TPSs”) to investors. The Company’s investment balances, compared to $101.2 million at December 31, 2016. The increase in unpledged securities from September, 2017 compared to December 2016 is primarily due to an increase in portfolio assets. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding fed funds soldobligations under the debentures and vault cash. The Company hasrelated documents, taken together, constitute a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize 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 FHLBfull and unconditional guarantee by the Company totaled $82.0 millionof Trust 2’s obligations under the preferred securities. The preferred securities are redeemable by the Company at September 30, 2017. Management isits option. The preferred securities must be redeemed upon maturity of the opinion that available investmentsdebentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (“LIBOR”) plus 1.65% and other potentially liquid assets, alongis payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.
On July 27, 2007, The Company issued $6.2 million of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 (“Trust 3”) in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6.0 million of TPSs to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 3’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.
In 2018, the Company acquired FMB’s Capital Trust 1 (“Trust 1”), which consisted of $6.1 million of floating rate junior subordinated deferrable interest debentures in which the Company owns all of the common equity. The debentures are the sole asset of Trust 1. Trust 1 issued $6.0 million of TPSs to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 1’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2033. Interest on the preferred securities is the three-month LIBOR plus 2.85% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.
In accordance with the standby funding sources it has arranged,provisions of ASC 810, Consolidation, the trusts are more than sufficientnot included in the consolidated financial statements.
Subordinated Notes
On April 30, 2018, the Company entered into two Subordinated Note Purchase Agreements pursuant to meetwhich the Company sold and issued $24 million in aggregate principal amount of 5.875% fixed-to-floating rate subordinated notes due 2028 and $42 million in aggregate principal amount of 6.40% fixed-to-floating rate subordinated notes due 2033 (collectively, the “Notes”).
The Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are not subject to redemption at the option of the holder. Principal and interest on the Notes are subject to acceleration only in limited circumstances. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and anticipated short-term liquidity needs.

44
future senior indebtedness, and each Note is pari passu in right to payment with respect to the other Notes.

On September 25, 2020, The Company’s liquidity ratio asCompany entered into a Subordinated Note Purchase Agreement with certain qualified institutional buyers pursuant to which the Company sold and issued $65.0 million in aggregate principal amount of its 4.25% Fixed to Floating Rate Subordinated Notes due 2030. The Notes are unsecured and have a ten-year term, maturing October 1, 2030, and will bear interest at a fixed annual rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate (which is expected to be the Three-Month Term Secured Overnight Financing Rate (“SOFR”) plus 412.6 basis points), payable quarterly in arrears. As provided in the Notes, under specified conditions the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than Three-Month Term SOFR.

55

The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after October 1, 2025, and to redeem the Notes at any time in whole upon certain other specified events.
The Company had $145.0 million of subordinated debt, net of deferred issuance costs $1.9 million and unamortized fair value mark $606 thousand, at September 30, 2017 was 14.1%, as2022, compared to internal policy guidelines$144.7 million, net of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines:

  Sept. 30, 2017  

Policy

Maximum

  

Policy

Compliance

Loans to Deposits (including FHLB advances)  75.0%  90.0% In Policy
Net Non-core Funding Dependency Ratio  6.0%  20.0% In Policy
Fed Funds Purchased / Total Assets  0.0%  10.0% In Policy
FHLB Advances / Total Assets  4.4%  20.0% In Policy
FRB Advances / Total Assets  0.0%  10.0% In Policy
Pledged Securities to Total Securities  72.0%  90.0% In Policy

Continued growth in core depositsdeferred issuance costs $2.1 million and relatively high levelsunamortized fair value mark $646 thousand, at December 31, 2021.

Reconciliation 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.

The holding company’s primary uses of funds are ordinary operating expensesNon-GAAP Financial Measures

Our accounting and stockholder dividends, and its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations. Management anticipates that the Bank will have sufficient earningsreporting policies conform to provide dividends to the holding company to meet its funding requirements for the foreseeable future. Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) DividendsGAAP in the Company’s AnnualUnited 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-K10-Q includes operating net earnings; diluted operating earnings per share; net interest income, FTE; pre-tax, pre-provision operating earnings; total interest income, FTE; interest income investment securities, FTE and certain ratios derived from these non-GAAP financial measures. The Company believes that the non-GAAP financial measures included in this Quarterly Report on Form 10-Q allow management and investors to understand and compare results in a more consistent manner for the year ended December 31, 2016.

INTEREST RATEperiods presented herein. The tax equivalent adjustment to net interest income, total interest income, and interest income investment securities recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 25.3% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and believes it enhances the comparability of income and expenses arising from taxable and nontaxable sources. Operating net earnings and diluted operating earnings per share exclude acquisition and charter conversion charges, bargain purchase gain and loss on sale of fixed assets, Treasury awards, BOLI income from death proceeds, and contributions related to the Treasury awards. Pre-tax, pre-provision operating earnings excludes acquisition and charter conversion charges, provision for credit losses, bargain purchase gain and loss on sale of fixed assets, Treasury awards, BOLI income from death proceeds, and charitable contributions related to Treasury awards. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented, and other bank holding companies may define or calculate these measures differently. The most comparable GAAP measures to these measures are earnings per share, net interest income, earnings, total interest income, and average yield on investment securities, respectively. These non-GAAP financial measures should not be considered in isolation and do not purport to be an alternative to the efficiency ratio, net income, earnings per share, net interest income, net interest margin, average yield on investment securities, average yield on all earning assets, common equity, book value per common share or other GAAP financial measures as a measure of operating performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided below.

Operating Net Earnings
($ in thousands)Three Months Ended September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Net income available to common shareholders$14,043 $16,132 $46,624 $48,376 
Acquisition and charter conversion charges3,640 5,220 
Tax on acquisition and charter conversion charges(919)(1)(1,318)(1)
Initial provision for acquired loans3,855 — 3,855 — 
Tax on initial provision for acquired loans(976)— (976)— 
Bargain purchase gain and loss on sale of fixed assets— 397 (165)397 
Tax on bargain purchase gain and loss on sale of fixed assets— (100)42 (100)
Treasury awards— (1,826)(872)(1,826)
Tax on Treasury awards— 462 220 462 
BOLI income from death proceeds— — (1,630)— 
Contributions related to Treasury awards— 1,400 165 1,400 
Tax on contributions related to Treasury awards— (354)(42)(354)
Net earnings available to common shareholders, operating$19,643 $16,115 $51,123 $48,359 
56

Diluted Operating Earnings per Share
($ in thousands)Three Months Ended September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Diluted earnings per share$0.61 $0.76 $2.17 $2.28 
Acquisition and charter conversion charges0.16 — 0.24 — 
Tax on acquisition and charter conversion charges(0.05)— (0.06)— 
Initial provision for acquired loans0.17 — 0.18 — 
Tax on initial provision for acquired loans(0.04)— (0.04)— 
Bargain purchase gain and loss on sale of fixed assets— 0.02 (0.01)0.02 
Effect of Treasury awards— (0.09)(0.04)(0.09)
Tax on Treasury awards— 0.02 0.01 0.02 
BOLI income from death proceeds— — (0.08)— 
Contributions related to Treasury awards— 0.07 0.01 0.07 
Tax on contributions related to Treasury awards— (0.02)— (0.02)
Diluted earnings per share, operating$0.85 $0.76 $2.38 $2.28 
Net Interest Income, Fully Tax Equivalent
($ in thousands)Three Months Ended September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Net interest income$49,148$40,028$129,887$117,307
Tax exempt investment income(2,875)(1,905)(8,077)(5,748)
Taxable investment income3,8492,55010,8127,694
Net interest income, FTE$50,122$40,673$132,622$119,253
Average earning assets$5,727,211$5,005,093$5,655,430$4,903,343
Net interest margin, FTE3.50 %3.25 %3.13 %3.24 %
Pre-Tax Pre-Provision Operating Earnings
($ in thousands)Three Months Ended September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Earnings before income taxes$17,967 $20,561$58,382$61,418
Acquisition and charter conversion charges3,640 55,2205
Provision for credit loss4,300 — 4,900 — 
Bargain purchase gain and loss on sale of fixed assets— 397 (165)397 
Treasury awards— (1,826)(872)(1,826)
BOLI income from death proceeds— (1,630)
Contributions related to Treasury awards— 1,400 165 1,400 
Pre-Tax, Pre-Provision Operating Earnings$25,907 $20,537$66,000$61,394
57

Total Interest Income, Fully Tax Equivalent
($ in thousands)Three Months Ended September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Total interest income$53,874$44,435$142,462$132,860
Tax-exempt investment income(2,875)(1,905)(8,077)(5,748)
Taxable investment income3,8492,55010,8127,694
Total interest income, FTE$54,848$45,080$145,197$134,806
Yield on average earning assets, FTE3.83 %3.60 %3.42 %3.67 %
Interest Income Investment Securities, Fully Tax Equivalent
($ in thousands)Three Months Ended September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
Interest income investment securities$11,598$6,938$31,324$18,389
Tax-exempt investment income(2,875)(1,905)(8,077)(5,748)
Taxable investment income3,8492,55010,8127,694
Interest income investment securities, FTE$12,572$7,583$34,059$20,335
Average investment securities$2,091,234$1,364,431$2,038,921$1,218,451
Yield on investment securities, FTE2.40 %2.15 %2.23 %2.23 %
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK MANAGEMENT

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.

To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios every month. The model imports relevant information for the Company’s financial instruments and incorporates Management’smanagement’s assumptions on pricing, duration, and optionality for anticipated new volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).

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The following table shows the estimated changes in net interest income at risk and market value of equity along with policy limits:
September 30, 2022Net Interest Income at RiskMarket Value of Equity
Change in Interest
Rates
% Change
from Base
Policy Limit% Change
from Base
Policy Limit
Up 400 bps(1.8)%(20.0)%(11.6)%(40.0)%
Up 300 bps0.9 %(15.0)%(6.3)%(30.0)%
Up 200 bps2.2 %(10.0)%(2.5)%(20.0)%
Up 100 bps1.9 %(5.0)%(0.4)%(10.0)%
Down 100 bps(4.3)%(5.0)%(2.4)%(10.0)%
Down 200 bps(10.3)%(10.0)%(7.3)%(20.0)%
We use seven standard interest rate scenarios in conducting our 12-month net interest income simulations: “static,” upward shocks of 100, 200, 300 and 400 basis points, and downward shocks of 100, and 200 basis points. Pursuant to policy guidelines, we typically attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock. As of September 30, 2017,2022, the Company had the following estimated net interest income sensitivity profile, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

September 30, 2017 Net Interest Income at Risk – Sensitivity Year 1 
($ In Thousands) -200 bp  -100 bp  STATIC  +100 bp  +200 bp  +300 bp  +400 bp 
Net Interest Income $53,060  $54,580  $58,067  $59,791  $61,432  $63,091  $64,615 
Dollar Change  -5,007   -3,487       1,724   3,365   5,024   6,548 
NII @ Risk - Sensitivity Y1  -8.6%  -6.0%      3.0%  5.8%  8.7%  11.3%

September 30, 2022Net Interest Income at Risk – Sensitivity Year 1
($ in thousands) -200 bp-100 bpSTATIC +100 bp+200 bp+300 bp+400 bp
Net Interest Income193,088 205,914 215,168 219,276 219,795 217,136 211,335 
Dollar Change(22,080)(9,254)4,108 4,6271,968(3,833)
NII @ Risk - Sensitivity Y1(10.3)%(4.3)%1.9 %2.2 %0.9 %(1.8)%
Policy Limits(10.0)%(5.0)%(5.0)%(10.0)%(15.0)%(20.0)%
If there were an immediate and sustained downward adjustment of 200 basis points in interest rates, all else being equal, net interest income over the next twelve months would likely be approximately $5.0$22.1 million lower than in a stable interest rate scenario, for a negative variance of 8.6%10.3%. The unfavorable variance increases if rates were to drop below 200 basis points, due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts, for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This effect would be exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While management believes that further interest rate reductions are highly unlikely, the potential percentage drop in net interest income exceeds our internal policy guidelines in declining interest rate scenarios and we will continue to monitor our interest rate risk profile and take corrective action as deemed appropriate.

Net interest income would likely improve by $3.4$4.6 million, or 5.8%2.2%, if interest rates were to increase by 200 basis points relative to a stable interest rate scenario, with the favorable variance expanding the higher interest rates rise. The initial increase in rising rate scenarios will be limited to some extent by the fact that some of our variable-rate loans are currently at rate floors, resulting in a re-pricing lag while base rates are increasing to floored levels, but the Company still appears well-positionedwould expect to benefit from a material upward shift in the yield curve.

The Company’s one yearone-year cumulative GAP ratio is approximately 220.3%206.0%, which means that there are more assets repricing than liabilities within the first year. The Company is “asset-sensitive.” These results are based on cash flows from assumptions of assets and liabilities that reprice (maturities, likely calls, prepayments, etc.). Typically, the net interest income of asset-sensitive companiesfinancial institutions should improve with rising rates and decrease with declining rates.

If interest rates change in the modeled amounts, our assets and liabilities may not perform as anticipated. Measuring interest rate risk has inherent limitations including model assumptions. For example, changes in market indices as modeled in conjunction with changes in the shapes of the yield curves could result in different net interest income. We consider many factors in monitoring our interest rate risk, and management adjusts strategies for the balance sheet and earnings as needed.
In addition to the net interest income simulations shown above, we run stress scenarios modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits, which flowed into the Company in the most recent
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economic cycle, and potential unfavorable movement in deposit rates relative to yields on earning assets. Even though net interest income will naturally be lower with no balance sheet growth, the rate-driven variances projected for net interest income in a static growth environment are similar to the changes noted above for our standard projections. When a greater level of non-maturity deposit runoff is assumed or unfavorable deposit rate changes are factored into the model, projected net interest income in declining rate and flat rate scenarios does not change materially relative to standard growth projections. However, the benefit we would otherwise experience in rising rate scenarios is minimized and net interest income remains relatively flat.

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The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate risk. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at projected replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time as the characteristics of the Company’s balance sheet evolve and interest rate and yield curve assumptions are updated.

The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’smanagement’s best estimates. The table below shows estimated changes in the Company’s EVE as of September 30, 2017,2022, under different interest rate scenarios relative to a base case of current interest rates:

  Balance Sheet Shock 
($ In Thousands) -200 bp  -100 bp  STATIC
(Base)
  +100 bp  +200 bp  +300 bp  +400 bp 
Market Value of Equity $389,176  $387,021  $447,973  $495,850  $533,964  $565,223  $590,236 
Change in EVE from base  -58,797   -60,952       47,877   85,991   117,250   142,263 
% Change  -13.1%  -13.6%      10.7%  19.2%  26.2%  31.8%
Policy Limits  -20.0%  -10.0%      -10.0%  -20.0%  -30.0%  -40.0%

September 30, 2022Balance Sheet Shock
($ in thousands)-200 bp-100 bpSTATIC
(Base)
+100 bp+200 bp+300 bp+400 bp
Market Value of Equity1,269,9411,336,5041,369,4281,363,4411,335,2251,282,9321,210,445
Change in EVE from base(99,487)(32,924)(5,987)(34,203)(86,496)(158,983)
% Change(7.3)%(2.4)%(0.4)%(2.5)%(6.3)%(11.6)%
Policy Limits(20.0)%(10.0)%(10.0)%(20.0)%(30.0)%(40.0)%
The table shows that our EVE will generally deteriorate in declining rate scenarios, but should benefit from a parallel shift upward in the yield curve. As noted previously, however, Management believes that the potential for a significant rate decline is low. We also run stress scenarios for EVE to simulate the possibility of higher loan prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular.

CAPITAL RESOURCES

At September 30, 2017 the Company had total stockholders’ equity of $167.0 million, comprised of $9.2 million in common stock, less than $0.1 million in treasury stock, $105.0 million in surplus, $51.6 million in undivided profits, $1.7 million in accumulated comprehensive income for available-for-sale securities. Total stockholders’ equity at the end of 2016 was $154.5 million. The increase of $12.5 million, or 8.1%, in stockholders’ equity during the first nine months of 2017 is comprised of capital added via net earnings of $8.2 million, $2.7 million increase in accumulated comprehensive income for available-for-sale securities, and 2.2 million of common stock issued for the purchase of GCCB, offset by $1.0 million in cash dividends paid.

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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 help ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of the dates indicated.

Regulatory Capital Ratios

The First, ANBA

  

Sept. 30,

2017

  December 31,
2016
  

Minimum

Required to be

Well

Capitalized

 
Common Equity Tier 1 Capital Ratio  12.1%  16.2%  6.5%
Tier 1 Capital Ratio  12.1%  16.2%  8.0%
Total Capital Ratio  12.7%  17.0%  10.0%
Tier 1 Leverage Ratio  9.5%  13.1%  5.0%

Regulatory Capital Ratios

The First Bancshares, Inc.

  

Sept. 30,

2017

  December 31,
2016
  

Minimum

Required to be

Well

Capitalized

 
Common Equity Tier 1 Capital Ratio*  10.3%  13.8%  6.5%
Tier 1 Capital Ratio**  11.0%  14.7%  8.0%
Total Capital Ratio  11.6%  15.5%  10.0%
Tier 1 Leverage Ratio  8.6%  11.9%  5.0%

* The numerator does not include Preferred Stock and Trust Preferred.

** The numerator includes Trust Preferred.

Regulatory capital ratios slightly decreased from December 31, 2016 to September 30, 2017 as asset growth outpaced capital formation. Our capital ratios remain very strong relative to the median for peer financial institutions, and at September 30, 2017 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. 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.

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Reconciliation of Non-GAAP Financial Measures

We report net interest income and net interest margin on a fully tax equivalent, or FTE, basis, which calculations are not in accordance with generally accepted accounting principles, or GAAP. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 34% 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. Net interest income and net interest margin on a fully tax equivalent basis should not be viewed as a substitute for net interest income or net interest margin provided in accordance with GAAP. See reconciliation of net interest income (FTE) to net interest income calculated in accordance with GAAP and net interest margin (FTE) to net interest margin calculated in accordance with GAAP below:

Net Interest Income Fully Tax Equivalent

($ In Thousands) Three Months  Three Months 
  Ended  Ended 
  Sept. 30, 2017  Sept. 30, 2016 
       
Net interest income $14,935  $10,067 
Tax exempt investment income  (579)  (465)
Taxable investment income  876   704 
Net interest income fully tax equivalent $15,232  $10,306 
Net interest income fully tax equivalent $15,232  $10,306 
Average earning assets $1,599,704  $1,113,475 
Net interest margin fully tax equivalent  3.81%  3.70%

($ In Thousands)      
  YTD  YTD 
  Sept. 30, 2017  Sept. 30, 2016 
       
Net interest income $43,939  $29,597 
Tax exempt investment income  (1,765)  (1,398)
Taxable investment income  2,668   2,118 
Net interest income fully tax equivalent $44,842  $30,317 
Net interest income fully tax equivalent $44,842  $30,317 
Average earning assets $1,557,782  $1,096,522 
Net interest margin fully tax equivalent  3.84%  3.69%

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PART I - FINANCIAL INFORMATION

ITEM NO. 3

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”

PART I - FINANCIAL INFORMATION

ITEM NO. 4

4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2017,2022, (the “Evaluation Date”), we carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e)and 15d-15(e) promulgated under the SecuritiesExchange Act. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act of 1934, as amended. Based on this evaluation, asis recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Evaluation Date,SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under
60

the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

Changes in Internal Controls

Control over Financial Reporting

There have been no changes significant or otherwise, in our internal controlscontrol over financial reporting, that occurredas such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended September 30, 2017,2022 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1:1. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings in the normal course of business. Management does not believe, based on currently available information, that the outcome of any such proceedings will have a material adverse effect on our financial condition or results of operations.

ITEM 1A:1A. RISK FACTORS

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in "Part I - Item 1A - Risk Factors" of the Company's 2021 Form 10-K, which could materially affect its business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.
There werehave been no material changes infrom the Company’s risk factors since December 31, 2016, other than as set forth below:

Shareholder approval for the proposed merger of Southwest with and into the Company may not be received and regulatory consents or approvals may not be received, may take longer than expected or impose conditions that are not presently anticipated.

Before the merger may be completed, Southwest’s shareholders must approve the transaction and such shareholder approval may not be received. In addition, various approvals or consents must be obtained from the Federal Reserve, the OCC, and other bank, securities, antitrust and other regulatory authorities. These regulators may impose conditions on consummation of the merger or require changes to the terms of the merger. Although we do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying the effective time of the merger or imposing additional costs on or limitingpreviously disclosed in our revenues following the merger. Furthermore, such conditions or changes may constitute a burdensome condition that may allow us to terminate the merger agreement and we may exercise our right to terminate the merger agreement. There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed.

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We may fail to realize the anticipated cost savings and other financial benefits of the proposed acquisition of Southwest on the anticipated schedule, if at all.

The Company and Southwest have historically operated independently. The success of the merger of Southwest with and into The Company will depend, in part, on our ability to successfully combine our businesses. To realize the anticipated benefits of the merger, after the effective time of the merger, we expect to integrate Southwest’s business into our own. We may face significant challenges in integrating Southwest’s operations in a timely and efficient manner and in retaining personnel from these two banks that we consider to be key personnel. We anticipate that we will achieve cost savings from the merger when the two companies have been fully integrated, however achieving the anticipated cost savings and financial benefits of the mergers will depend, in part, on whether we can successfully integrate these businesses. Actual growth and cost savings, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. In addition, integration efforts following the mergers will require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day business of the combined company. Any inability to realize the full extent of, or any of, the anticipated cost savings and financial benefits of the mergers, as well as any delays encountered in the integration process, could have an adverse effect on the business and results of operations of the combined company, which may affect the market price of our common stock.

We will incur significant transaction and merger-related costs in connection with the proposed acquisition of Southwest.

We have incurred and expect to incur a number of non-recurring costs associated with the proposed acquisition of Southwest. These costs and expenses include fees paid to financial, legal and accounting advisors, severance, retention bonus and other potential employment-related costs, filing fees, printing expenses and other related charges. Some of these costs are payable by us regardless of whether the acquisition is completed. There are also a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the merger and the integration of the two companies’ businesses. While we have assumed that a certain level of expenses would be incurred in connection with the acquisition, there are many factors beyond our control that could affect the total amount or the timing of the integration and implementation expenses.

There may also be additional unanticipated significant costs in connection with the acquisition that we may not recoup. These costs and expenses could reduce the realization of efficiencies, strategic benefits and additional income we expect to achieve from the acquisition. Although we expect that these benefits will offset the transaction expenses and implementation costs over time, the net benefit may not be achieved in the near term or at all.

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For additional information on risk factors, refer to Part I, Item 1A. “Risk Factors” of the Annual Report on Form 10-K of The First Bancshares, Inc., filed withfor the Securities and Exchange Commission on March 16, 2017.

year ended December 31, 2021.

ITEM 2:2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3:3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4: (REMOVED AND RESERVED)

Item 5: Other Information

4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 6:5. OTHER INFORMATION
Not applicable
62

ITEM 6. EXHIBITS -

(a)Exhibits

Exhibit No.Description
Exhibit No.Description
3.12.1
2.2
3.1
3.2
3.23.3
3.4
4.1
4.2
10.14.3
4.4
4.5
31.1
31.2
31.2
32.1
32.1
32.2
32.2

101.INS101.INS XBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase

52

* Filed herewith.

** Furnished herewith.
63

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE FIRST BANCSHARES, INC.
(Registrant)
November 9, 2022/s/ M. RAY (HOPPY) COLE, JR.
November 9, 2017
M. Ray (Hoppy) Cole, Jr.
(Date)
Chief Executive Officer
(Date)

November 9, 2022/s/ DONNA T. (DEE DEE) LOWERY

November 9, 2017
Donna T. (Dee Dee) Lowery, Executive
(Date)
Vice President and Chief Financial Officer

(Date)53

64