U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2021~~

2022


☐o			TRANSITION 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, INC.

(Exact name of registrant as specified in its charter)


Mississippi			64-0862173
(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)

(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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00	FBMS	The Nasdaq Stock Market

Indicate by check mark whether the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑þ No ☐o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☑þ No ☐o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filer

☐

~~Accelerated filer~~

☑

Non-accelerated filer

☐

Smaller Reporting 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, ~~21,669,316~~25,277,502 shares issued and ~~21,019,709~~24,027,895 outstanding as of November 2, ~~2021.~~

2022.

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

Table of Contents

The First Bancshares, Inc.

Form 10-Q

Quarter Ended September 30, ~~2021~~

2022

Index


Part I. Financial Information

Item 1.	Financial Statements	3
	Consolidated Balance Sheets—Unaudited at September 30, ~~2021~~2022	3
	Consolidated Statements of Income—Unaudited	4
	Consolidated Statements of Comprehensive ~~Income—~~Income (Loss)—Unaudited	5
	Consolidated Statements of Changes in Shareholders’ Equity - —Unaudited	6
	Consolidated Statements of Cash Flows—Unaudited	7 8
	Notes to Consolidated Financial Statements—Unaudited	8 10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32 37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53 58
Item 4.	Controls and Procedures	55 60

Part II. Other Information

Item 1.	Legal Proceedings	56 62
Item 1A.	Risk Factors	56 62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56 62
Item 3.	Defaults Upon Senior Securities	56 62
Item 4.	Mine Safety Disclosures	56 62
Item 5.	Other Information	56 62
Item 6.	Exhibits	57 63
Signatures		58 64

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands)

(Unaudited)

September 30,

December 31,


2021

2020
ASSETS

Cash and due from banks

$
113,170

$
137,684
Interest-bearing deposits with banks

544,126

424,870
Total cash and cash equivalents

657,296

562,554
Debt securities available-for-sale, at fair value

1,463,255

1,022,182
Other securities

22,225

27,475
Total securities

1,485,480

1,049,657
Loans held for sale

8,540

21,432
Loans held for investment

2,960,919

3,123,678
Allowance for credit losses (1)

(32,418)

(35,820)
Net loans held for investment

2,928,501

3,087,858
Interest receivable

23,144

26,344
Premises and equipment

116,875

114,823
Operating lease right-of-use assets

4,245

5,969
Finance lease right-of-use assets

2,474

2,658
Cash surrender value of bank-owned life insurance

87,469

73,732
Goodwill

156,944

156,944
Other real estate owned

2,580

5,802
Other assets

38,336

44,987
Total assets

$
5,511,884

$
5,152,760
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Deposits:

Noninterest-bearing

$
596,126

$
571,079
Interest-bearing

4,076,415

3,644,201
Total deposits

4,672,541

4,215,280
Interest payable

1,376

2,134
Borrowed funds

0

114,647
Subordinated debentures

144,650

144,592
Operating lease liabilities

4,335

6,031
Finance lease liabilities

2,140

2,281
Allowance for credit losses on off-balance sheet credit exposures (1)

718

0
Other liabilities

17,441

22,980
Total liabilities

4,843,201

4,507,945
Shareholders' equity:




Common stock, par value $1 per share, 40,000,000 shares authorized;21,669,504 shares issued at September 30, 2021, and 21,598,993 shares issued at December 31, 2020, respectively

21,670

21,599
Additional paid-in capital

458,512

456,919
Retained earnings

193,800

154,241
Accumulated other comprehensive income

13,632

25,816
Treasury stock, at cost, 649,607 shares at September 30, 2021 and 483,984 shares at December 31, 2020

(18,931)

(13,760)
Total shareholders' equity

668,683

644,815
Total liabilities and shareholders' equity

$
5,511,884

$
5,152,760

~~(1)~~– Beginning January 1, 2021, allowance for credit losses is based on current expected credit loss methodology. Prior to January 1, 2021, allowance for loan loss was based on incurred loss methodology.


	(Unaudited)
	September 30, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	71,555	$	115,232
Interest-bearing deposits with banks	92,286		804,481
Total cash and cash equivalents	163,841		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 securities	31,060		22,226
Total securities	2,004,023		1,774,058
Loans held for sale	2,225		7,678
Loans held for investment	3,719,388		2,959,553
Allowance for credit losses	(38,356)		(30,742)
Net loans held for investment	3,681,032		2,928,811
Interest receivable	24,570		23,256
Premises and equipment	140,533		125,959
Operating lease right-of-use assets	7,901		4,095
Finance lease right-of-use assets	2,046		2,394
Cash surrender value of bank-owned life insurance	95,351		87,420
Goodwill	178,764		156,663
Other real estate owned	10,328		2,565
Other assets	144,234		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-bearing	3,780,450		3,676,403
Total deposits	5,551,298		5,226,784
Interest payable	1,365		1,711
Borrowed funds	90,000		—
Subordinated debentures	144,952		144,726
Operating lease liabilities	8,092		4,192
Finance lease liabilities	1,962		2,094
Allowance for credit losses on off-balance sheet credit exposures	1,220		1,070
Other liabilities	34,488		20,665
Total liabilities	5,833,377		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, respectively	25,278		21,669
Additional paid-in capital	558,181		459,228
Retained earnings	241,132		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’ equity	621,471		676,172
Total liabilities and shareholders’ equity	$	6,454,848	$	6,077,414

See Notes to Consolidated Financial Statements

Table of Contents

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

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

(Unaudited)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020
Interest and dividend income:

Interest and fees on loans

$
37,480

$
40,999

$
114,368

$
117,597
Interest and dividends on securities:

Taxable interest and dividends

5,033

3,433

12,641

10,815
Tax exempt interest

1,905

1,877

5,748

4,985
Interest on federal funds sold and interest bearing deposits in other banks

17

29

103

337
Total interest income

44,435

46,338

132,860

133,734
Interest expense:





Interest on deposits

2,588

4,912

9,752

15,544
Interest on borrowed funds

1,819

1,453

5,801

4,973
Total interest expense

4,407

6,365

15,553

20,517
Net interest income

40,028

39,973

117,307

113,217
Provision for credit losses

0

6,921

0

21,628
Net interest income after provision for credit losses

40,028

33,052

117,307

91,589
Non-interest income:



Service charges on deposit accounts

1,846

1,779

5,363

5,289
Gain on securities

11

32

107

278
Gain on acquisition

0

0

0

7,023
(Loss) gain on sale of premises and equipment

(397)

0

(383)

461
Other

8,126

6,983

22,794

17,897
Total non-interest income

9,586

8,794

27,881

30,948
Non-interest expense:





Salaries and employee benefits

16,246

15,494

48,337

44,589
Occupancy and equipment

3,922

3,826

11,614

9,943
Acquisition and integration charges

5

238

5

3,273
Other

8,880

7,378

23,814

20,640
Total non-interest expense

29,053

26,936

83,770

78,445
Income before income taxes

20,561

14,910

61,418

44,092
Income tax expense

4,429

2,993

13,042

6,921
Net income

$
16,132

$
11,917

$
48,376

$
37,171

Basic earnings per share

$
0.77

$
0.56

$
2.30

$
1.81
Diluted earnings per share

0.76

0.55

2.28

1.80


	(Unaudited)				(Unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
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 dividends	8,723		5,033		23,247		12,641
Tax exempt interest	2,875		1,905		8,077		5,748
Interest on federal funds sold and interest-bearing deposits in other banks	2		17		47		103
Total interest income	53,874		44,435		142,462		132,860
Interest expense:
Interest on deposits	2,748		2,588		6,937		9,752
Interest on borrowed funds	1,978		1,819		5,638		5,801
Total interest expense	4,726		4,407		12,575		15,553
Net interest income	49,148		40,028		129,887		117,307
Provision for credit losses, LHFI	4,300		—		4,750		—
Provision for credit losses, OBSC exposures	—		—		150		—
Net interest income after provision for credit losses	44,848		40,028		124,987		117,307
Non-interest income:
Service charges on deposit accounts	2,219		1,846		6,297		5,363
(Loss) gain on securities	1		11		(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)
Other	6,802		6,300		19,958		20,968
Total non-interest income	9,022		9,586		28,843		27,881
Non-interest expense:
Salaries and employee benefits	19,099		16,246		53,135		48,337
Occupancy and equipment	3,826		3,922		11,530		11,614
Acquisition expense/charter conversion	3,640		5		5,220		5
Other	9,338		8,880		25,563		23,814
Total non-interest expense	35,903		29,053		95,448		83,770
Income before income taxes	17,967		20,561		58,382		61,418
Income tax expense	3,924		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 share	0.61		0.76		2.17		2.28

See Notes to Consolidated Financial Statements

Table of Contents

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(LOSS)

($ in thousands)

(Unaudited)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020
Net income

$
16,132

$
11,917

$
48,376

$
37,171
Other comprehensive income:

Unrealized holding gains (losses) arising during the period on available-for-sale securities

(7,306)

368

(16,204)

19,983
Reclassification adjustment for gains included in net income

(11)

(32)

(107)

(278)
Unrealized holding gains (losses) arising during the period on available-for-sale securities

(7,317)

336

(16,311)

19,705
Income tax benefit (expense)

1,852

(85)

4,127

(4,993)
Other comprehensive income (loss)

(5,465)

251

(12,184)

14,712
Comprehensive income

$
10,667

$
12,168

$
36,192

$
51,883


	(Unaudited)				(Unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
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) benefit	17,150		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

Table of Contents

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

($ in thousands except per share data, unaudited)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock			Total
	Shares	Amount								Shares	Amount
Balance, January 1, 2021	21,598,993	$	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 grants	84,578	85		(85)		—		—		—	—		—
Restricted stock grants forfeited	(500)	(1)		1		—		—		—	—		—
Repurchase of restricted stock for payment of taxes	(14,720)	(15)		(426)		—		—		—	—		(441)
Compensation expense	—	—		440		—		—		—	—		440
Balance, March 31, 2021	21,668,351	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 grants	3,000	3		(3)		—		—		—	—		—
Restricted stock grants forfeited	(1,021)	(1)		1		—		—		—	—		—
Compensation expense	—	—		549		—		—		—	—		549
Balance, June 30, 2021	21,670,330	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, 2021	21,669,504	$	21,670	$	458,512	$	193,800	$	13,632	(649,607)	$	(18,931)	$	668,683

Table of Contents

Accumulated

Additional

Other

Common Stock

Paid-in

Retained

Comprehensive

Treasury Stock


Shares

Amount

Capital

Earnings

Income

Shares

Amount

Total
Balance, January 1, 2020

18,996,948

$
18,997

$
409,805

$
110,460

$
10,089

(194,682)

$
(5,693)

$
543,658
Net income

—

—

—

8,311

—

—

—

8,311
Other comprehensive income

—

—

—

—

5,742

—

—

5,742
Dividends on common stock, $0.10 per share

—

—

—

(1,885)

—

—

—

(1,885)
Issuance of restricted stock grants

60,680

61

(61)

—

—

—

—

—
Repurchase of restricted stock for payment of taxes

(10,991)

(11)

(367)

—

—

—

—

(378)
Compensation expense

—

—

478

—

—

—

—

478
Balance, March 31, 2020

19,046,637

$
19,047

$
409,855

$
116,886

$
15,831

(194,682)

$
(5,693)

$
555,926
Net income

—

—

—

16,943

—

—

—

16,943
Other comprehensive income

—

—

—

—

8,719

—

—

8,719
Dividends on common stock, $0.10 per share

—

—

—

(2,131)

—

—

—

(2,131)
Issuance of common shares for SWG acquisition

2,546,967

2,547

45,311

—

—

—

—

47,858
Repurchase of restricted stock for payment of taxes

(2,652)

(3)

(56)

—

—

—

—

(59)
Issuance of restricted stock grants

3,750

4

(4)

—

—

—

—

—
Restricted stock grants forfeited

(4,762)

(5)

5

—

—

—

—

—
Compensation expense

—

—

539

—

—

—

—

539
Balance, June 30, 2020

21,589,940

$
21,590

$
455,650

$
131,698

$
24,550

(194,682)

$
(5,693)

$
627,795

Net income

—

—

—

11,917

—

—

—

11,917
Other comprehensive income

—

—

—

—

251

—

—

251
Dividends on common stock, $0.10 per share

—

—

—

(2,141)

—

—

—

(2,141)
Issuance of restricted stock grants

13,259

13

(13)

—

—

—

—

—
Restricted stock grants forfeited

(500)

—

—

—

—

—

—

—
Compensation expense

—

—

547

—

—

—

—

547
Balance, September 30, 2020

21,602,699

$
21,603

$
456,184

$
141,474

$
24,801

(194,682)

$
(5,693)

$
638,369

Balance, January 1, 2021

21,598,993

$
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 grants

84,578

85

(85)

—

—

—

—

—
Restricted stock grants forfeited

(500)

(1)

1

—

—

—

—

—
Repurchase of restricted stock for payment of taxes

(14,720)

(15)

(426)

—

—

—

—

(441)
Compensation expense

—

—

440

—

—

—

—

440
Balance, March 31, 2021

21,668,351

$
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 grants

3,000

3

(3)

—

—

—

—

—
Restricted stock grants forfeited

(1,021)

(1)

1

—

—

—

—

—
Compensation expense

—

—

549

—

—

—

—

549
Balance, June 30, 2021

21,670,330

$
21,670

$
457,396

$
180,820

$
19,097

(649,607)

$
(18,931)

$
660,052
Net income

—

—

—

16,132

—

—

—

16,132
Other comprehensive loss

—

—

—

—

(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, 2021

21,669,504

$
21,670

$
458,512

$
193,800

$
13,632

(649,607)

$
(18,931)

$
668,683

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY CONTINUED

($ in thousands except per share data, unaudited)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock			Total
	Shares	Amount								Shares	Amount
Balance, January 1, 2022	21,668,644	$	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 grants	82,123	82		(82)		—		—		—	—		—
Restricted stock grants forfeited	(1,000)	(1)		1		—		—		—	—		—
Repurchase of restricted stock for payment of taxes	(15,330)	(16)		(538)		—		—		—	—		(554)
Compensation expense	—	—		466		—		—		—	—		466
Balance, March 31, 2022	21,734,437	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 grants	47,827	48		(48)		—		—		—	—		—
Restricted stock grants forfeited	(1,000)	(1)		1		—		—		—	—		—
Repurchase of restricted stock for payment of taxes	(2,533)	(2)		(71)		—		—		—	—		(73)
Compensation expense	—	—		546		—		—		—	—		546
Balance, June 30, 2022	21,778,731	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 acquisition	3,498,936	3,499		97,970		—		—		—	—		101,469
Issuance of restricted stock grants	60	—		—		—		—		—	—		—
Compensation expense	—	—		708		—		—		—	—		708
Balance, September 30, 2022	25,277,727	$	25,278	$	558,181	$	241,132	$	(162,009)	(1,249,607)	$	(41,111)	$	621,471

See Notes to Consolidated Financial Statements

Table of Contents

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)


	(Unaudited)
	Nine Months Ended September 30,
	2022		2021
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 accretion	5,549		10,453
Provision for credit loss	4,900		—
Loss on sale or writedown of ORE	252		778
Securities loss (gain)	82		(107)
Acquisition gain	(281)		—
Loss (gain) on disposal of premises and equipment	114		383
Restricted stock expense	1,720		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 sale	118,511		195,263
Changes in:
Interest receivable	166		3,200
Interest payable	(346)		(758)
Operating lease liability	3,900		(1,696)
Other, net	1,844		2,667
Net cash provided by operating activities	68,393		76,872
Cash flows from investing activities:
Maturities, calls and paydowns of available-for-sale and held-to-maturity securities	157,181		174,987
Proceeds from sales of securities available-for-sale	21,069		—
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 securities	1,237		—
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 owned	2,260		4,221
Proceeds from the sale of land	712		—
Bank-owned life insurance – death proceeds	1,630		—
Purchase of bank-owned life insurance	—		(12,330)
Cash received in excess of cash paid for acquisitions	23,939		—
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 funds	270,001		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 equivalents	919,713		562,554
Ending cash and cash equivalents	$	163,841	$	657,296

Table of Contents

(Unaudited)

Nine Months Ended

September 30,

2021

2020

Cash flows from operating activities:




Net income

$
48,376

$
37,171
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization and accretion

10,453

6,393
Provision for credit losses

0

21,628
Loss on sale or writedown of ORE

778

1,150
Securities gain

(107)

(278)
Acquisition gain

0

(7,023)
(Gain) loss on disposal of premises and equipment

383

(461)
Restricted stock expense

2,117

1,564
Increase in cash value of life insurance

(1,407)

(1,139)
Federal Home Loan Bank stock dividends

(26)

(118)
Residential loans originated and held for sale

(182,371)

(232,191)
Proceeds from sale of residential loans held for sale

195,263

220,665
Changes in:


Interest receivable

3,200

(8,663)
Interest payable

(758)

(188)
Operating lease liability

(1,696)

(95)
Other, net

2,667

(2,231)
Net cash provided by operating activities

76,872

36,184

Cash flows from investing activities:




Maturities, calls and paydowns of available-for-sale securities

174,987

152,873
Proceeds from sales of securities available-for-sale securities

0

579
Purchases of available-for-sale securities

(636,825)

(241,057)
Redemptions of other securities, net

5,276

351
Net decrease (increase) in loans

160,700

(161,535)
Net changes in premises and equipment

(6,448)

(6,034)
Proceeds from sale of other real estate owned

4,221

3,024
Proceeds from the sale of land

0

1,416
Purchase of bank-owned life insurance

(12,330)

(5,682)
Cash received in excess of cash paid for acquisition

0

29,245
Net cash used in investing activities

(310,419)

(226,820)

Cash flows from financing activities:




Increase in deposits

457,443

676,223
Net decrease in borrowed funds

(114,647)

(107,992)
Principal payments on finance lease liabilities

(141)

(137)
Dividends paid on common stock

(8,682)

(6,063)
Cash paid to repurchase common stock

(5,171)

0
Issuance of subordinated debt, net

0

63,914
Payment of subordinated debt issuance costs

(60)

0
Repurchase of restricted stock for payment of taxes

(453)

(437)
Net cash provided by financing activities

328,289

625,508
Net change in cash and cash equivalents

94,742

434,872
Beginning cash and cash equivalents

562,554

168,864
Ending cash and cash equivalents

$
657,296

$
603,736




Supplemental disclosures:




Loans transferred to other real estate

1,780

1,752
Issuance of restricted stock grants

86

78
Dividends on restricted stock grants

135

94
Stock issued in connection with SWG acquisition

0

47,858
Lease liabilities arising from obtaining right-of-use assets

14

3,162

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED

($ in thousands)


	(Unaudited)
	Nine Months Ended September 30,
	2022	2021
Supplemental disclosures:
Loans transferred to other real estate	1,490	1,780
Issuance of restricted stock grants	130	86
Dividends on restricted stock grants	176	135
Stock issued in connection with BBI acquisition	101,469	—
Lease liabilities arising from obtaining right-of-use assets	600	14
Lease liabilities arising from BBI acquisition	5,437	—

See Notes to Consolidated Financial Statements

Table of Contents

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, ~~2021~~

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, ~~2021,~~2022, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, ~~2020.~~

2021.

NOTE 2 – SUMMARY OF ORGANIZATION

The First Bancshares, Inc., Hattiesburg, Mississippi (the “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 ~~A National Banking Association~~Bank (the “Bank” or “The First”).

On January 15, 2022, the Bank, then named The First, A National Banking Association, 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, ~~2021,~~2022, the Company had approximately ~~$5.512~~$6.455 billion in assets, ~~$2.929~~$3.681 billion in net loans held for investment (“LHFI”), ~~$4.673~~$5.551 billion in deposits, and ~~$668.7~~$621.5 million in ~~shareholders’~~shareholders' equity. For the nine months ended September 30, ~~2021,~~2022, the Company reported net income of ~~$48.4~~$46.6 million.

On February 25, ~~2021,~~2022, the Company paid a cash dividend in the amount of ~~$0.13~~$0.17 per share to shareholders of record as of the close of business on February 10, ~~2021.~~2022. On May ~~21, 2021,~~25, 2022, the Company paid a cash dividend in the amount of ~~$0.14~~$0.18 per share to shareholders of record as of the close of business on May 10, ~~2021.~~2022. On July 15, 2021, the Company paid a cash dividend of $0.15 per share to be paid on its common stock on August 25, 2021 to shareholders of record as of the close of business on August 10, 2021. On October 21, 2021,27, 2022, the Company announced that its Board of Directors declared a cash dividend of ~~$0.16~~$0.19 per share to be paid on its common 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 ~~26, 2021~~25, 2022 to shareholders of record as of the close of business on November ~~10, 2021.~~

In August 2021 the Bank, applied to the Mississippi Department of Banking and Consumer Finance to convert from a national association to a Mississippi state-chartered bank. If approved and the conversion is completed, the Mississippi Department of Banking will be the Bank's primary regulator, and the Federal Reserve Bank of Atlanta will be the Bank's primary federal regulator. The application is currently being reviewed.

8, 2022.

NOTE 3 – ACCOUNTING STANDARDS

Effect of Recently Adopted Accounting Standards

In November 2021, FASB issued Accounting ~~Standards~~Standard Update (“ASU”) ~~2016-13,~~ ~~Financial Instruments - Credit Losses (“~~~~ASC 326”~~) introduces guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities (“AFS”). For assets held at amortized cost basis, Accounting Standards Codification (“ASC”) 326 eliminates the current incurred loss approach and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amountNo. 2021-10, Government Assistance (Topic 832): “Disclosures by Business Entities about Government Assistance.” These amendments are expected to ~~be collected. This guidance also changes the accounting for purchased loans and debt securities with credit deterioration.~~

~~ASC 326 also applies~~increase transparency in financial reporting by requiring business entities to ~~off-balance sheet credit (“OBSC”) exposures such as unfunded loan commitments, letters~~disclose information about certain types of ~~credit and other financial guarantees that are not unconditionally cancellable by the Company.~~government assistance they receive. The Company ~~estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via~~adopted ASU 2021-10 effective January 1, 2022. Adoption of ASU 2021-10 did not have a ~~contractual obligation to extend credit, unless that~~

~~Table of Contents~~

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. Expected credit losses related to OBSC exposures are presented as a liability.

The allowance for loan credit losses (“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 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 recoveries 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 call 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 for 1-4 family residential properties with a call code 1A1, and other construction, all land development and other land loans with 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 probability of default (“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 each 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 loss given default (“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 LDG rate, a proxy index is used. This index is proprietarymaterial impact 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.

consolidated financial statements.

~~Table of Contents~~

The model then uses these inputs in a non-discounted version of discounted cash flow (“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.

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. These purchased credit deteriorated (“PCD”) loans are recorded at the amount paid. It is the Company’s policy that a loan meets this definition if it is adversely risk rated as Non-Pass (Special Mention, Substandard, Doubtful or Loss) including non-accrual loans, as well as loans identified as TDR’s. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.

~~Upon adoption of ASC 326, the Company elected to maintain segments of loans that were previously accounted for under ASC 310-30~~ ~~Accounting for Purchased Loans with Deteriorated Credit Quality~~ and will continue to account for these segments as a unit of account unless the loan is collateral dependent. PCD loans that are collateral dependent will be assessed individually. Loans are only removed from the existing segments if they are written off, paid off, or sold. Upon adoption of ASC 326, the allowance for credit losses was determined for each segment and added to the band’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the segment and the new amortized cost basis is the noncredit premium or discount, which will be amortized into interest income over the remaining life of the segment. Changes to the allowance for credit losses after adoption are recorded through provision expense.

The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. Upon adoption of ASC 326, the Company increased the ACL by $1.1 million and adjusted the amortized cost basis of the PCD assets. The remaining noncredit discount of approximately $685 thousand (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021.Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. Loans classified as nonaccrual, troubled debt restructuring (“TDRs”), greater than 90 days past due and still accruing interest, and PCD loans that are collateral dependent will be reviewed quarterly for potential individual assessment. Any loan classified as nonaccrual, TDR, or PCD that is not determined to need individual assessment will be evaluated collectively within its respective segment.

ASC 326 requires that a loan be evaluated for losses individually and reserved for separately, if the loan does not share similar risk characteristics to any other loan segments. The Company’s process for determining which loans require specific evaluation follows the standard and is two-fold. All non-performing loans, including nonaccrual loans, loans considered to be TDRs or PCDs, are evaluated to determine if they meet the definition of collateral dependent under the new standard. These are loans where no more payments are expected from the borrower, and foreclosure or some other collection action is probable. Secondly, all non-performing loans that are not considered to be collateral dependent, but are 90 days or greater past due and/or have a balance of $500 thousand or greater, will be individually reviewed to determine if the loan displays similar risk characteristic to substandard loans in the related segment.

TDRs are loans for which the contractual terms on the loan have been modified and both of the following conditions exist: (1) the borrower is experiencing financial difficulty and (2) the restructuring constitutes a concession. Concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company assesses all loan modifications to determine whether they constitute a TDR.

~~The allowance for OBSC exposures was determined using the same methodology that is applied to LHFI. Utilization rates are determined based on historical usage.~~

~~Table of Contents~~

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2021. As of December 31, 2020, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material.

Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, ~~Measurement of Credit Losses on Financial Instruments~~. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

~~Accrued interest receivable on available-for-sale debt securities totaled $5.7 million at December 31, 2020 and is excluded from the estimate of credit losses.~~

~~The Company made the following policy elections related to the adoption of the guidance in ASC 326:~~

●

Accrued interest will be written off against interest income when the related financial asset is charged off. Therefore, accrued interest will be excluded from the amortized cost basis for purposes of calculating the allowance for credit losses. Accrued interest receivable is presented with other assets in a separate line item in the consolidated balance sheet.

●

The fair value of collateral practical expedient has been elected on certain loans, in determining the allowance for credit losses, for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty.

~~Table of Contents~~

The adoption of ASC 326 increased the allowance for credit losses on loans by approximately $397 thousand and OBSC exposures by approximately $718 thousand at January 1, 2021, as shown below. The increase in the allowance for credit losses on loans includes the $1.1 million increase for PCD loans as discussed above, less a decrease in ACL for certain pooled loans:

($ in thousands)






January 1,

December 31,

2021

2020

As Reported

Pre-ASC 326

Transition

Under
Assets:

Adoption

Adjustment

ASC 326
Loans






Commercial, financial, and agriculture

$
6,214

$
(1,153)

$
5,061
Commercial real estate

24,319

(4,032)

20,287
Consumer real estate

4,736

5,629

10,365
Consumer installment

551

(47)

504
Allowance for credit losses on loans

$
35,820

$
397

$
36,217
Liabilities:






Allowance for credit losses on OBSC exposures

0

718

718
Total allowance for credit losses

$
35,820

$
1,115

$
36,935

~~The transition had no net impact to retained earnings because the allowance for OBSC exposures was offset by decrease in the allowance for certain pooled loans.~~

New Accounting Standards That Have Not Yet Been Adopted

In March 2020, the Financial Accounting Standards Board (“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

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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. 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): Troubled 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 loan 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 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 requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. This ASU is effective for the Company after December 15, 2022. The Company is assessing ASU 2022-02 and its impact on the Company’s consolidated financial statements.

NOTE 4 – BUSINESS COMBINATIONS

Acquisitions

~~Cadence~~

Beach Bancorp, Inc.

On August 1, 2022, the Company completed its acquisition of 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 merger of BBI with and into the Company, Beach Bank, ~~Branches~~

~~On September 2, 2021,~~BBI's wholly-owned subsidiary, was merged with and into The First ~~entered into a definitive agreement to acquire 7 Cadence Bank, N.A. (“Cadence”) branches in Northeast Mississippi. The divesture of these branches is a result~~Bank. Under the terms of the ~~joint Letter~~BBI Merger Agreement, each share of ~~Agreement (“LOA”) entered~~BBI common stock and each share of BBI preferred stock was converted into ~~between BancorpSouth Bank (“BancorpSouth”~~the right to receive 0.1711 of a share of Company common stock (the "BBI Exchange Ratio"), and ~~Cadence~~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 ~~United States Department~~number of ~~Justice’s Antitrust Division (“DOJ”)~~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 consideration of approximately $101.5 million to 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 an additional 310,427 shares of the Company's common stock.

In connection with the ~~proposed merger~~acquisition of ~~BancorpSouth~~BBI, the Company recorded approximately $21.8 million of goodwill and ~~Cadence.~~

It$9.8 million core deposit intangible. Goodwill is ~~expected that the First will assume approximately $450 million in deposits~~not deductible for a premium of $1 million, acquire approximately $42 million in loans at par value, acquire the real estate associated with the seven Cadence branches at their appraised value, and acquire other assets associated with the branches at book value.income taxes. The definitive purchase agreement provides that the consummation of the transaction must occur within 180 days following the BancorpSouth and Cadence merger. However, this transaction is expected to close in the fourth quarter of 2021, subject to the satisfaction of customary closing conditions, including the consummation of the BancorpSouth and Cadence merger and receipt of all necessary regulatory approvals. The First intends to make offers of employment to current branch employees upon the close of the transaction andcore deposit intangible will be ~~providing additional information~~amortized to ~~customers~~expense over 10 years. The Company also incurred $1.3 million of provision for credit losses on credit marks from the ~~branches slated for divestiture.~~

loans acquired from Beach Bank.

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Expenses associated with the ~~branch~~BBI acquisition were ~~$5 thousand~~$2.3 million and $2.9 million for the ~~three-month~~three months and nine months period ended September 30, ~~2021.~~2022, respectively. These costs included charges associated with ~~due diligence as well as~~ legal and consulting expenses, which have been expensed as incurred.

The ~~Company~~assets acquired and liabilities assumed 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 of 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

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provisional amounts that are identified during the measurement period, which will ~~incur additional expenses~~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 a 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 on loans, core deposit intangible and 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 generated from the transaction ($ in thousands):


Purchase price:
Cash and stock	$	101,470
Total purchase price	101,470
Identifiable assets:
Cash	$	23,939
Investments	22,907
Loans	482,903
Other real estate	8,797
Bank owned life insurance	10,092
Core deposit intangible	9,791
Personal and real property	13,825
Deferred tax asset	28,105
Other assets	9,649
Total assets	610,008
Liabilities and equity:
Deposits	490,588
Borrowings	25,000
Other liabilities	14,772
Total liabilities	530,360
Net assets acquired	79,648
Goodwill	$	21,822

Cadence Bank Branches

On December 3, 2021, The First completed its acquisition of seven Cadence Bank, N.A. (“Cadence”) branches in Northeast Mississippi (the “Cadence Branches”). In connection with the ~~closing, including additional~~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 a $1.6 million bargain purchase gain and $2.9 million 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 will be amortized to expense over 10 years. The Company also incurred $370 thousand of provision for credit losses on credit marks from the loans acquired.

Expenses associated with the branch acquisition of the Cadence Branches were $142 thousand and $604 thousand for the three months and nine months period ended September 30, 2022, respectively. These costs included charges associated with legal and consulting ~~expenses.~~

expenses, which have been expensed as incurred.

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The assets acquired and liabilities assumed and consideration paid in the acquisition of the Cadence 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 of 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 a 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 on loans, core deposit intangible and 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 price	1,000
Identifiable assets:
Cash	$	359,916
Loans	40,262
Core deposit intangible	2,890
Personal and real property	9,675
Other assets	135
Total assets	412,878
Liabilities and equity:
Deposits	410,171
Other liabilities	126
Total liabilities	410,297
Net assets acquired	2,581
Bargain purchase gain	$	(1,581)

Supplemental Pro Forma Information

The following table presents certain supplemental 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 effective 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 income	33,710		45,114
Total revenue	174,261		174,553
Income before income taxes	69,123		63,787

Supplemental pro-forma earnings were adjusted to exclude 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 acquisition date.

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NOTE 5 – EARNINGS APPLICABLE TO COMMON 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. 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 Three Months Ended

For the Three Months Ended

September 30, 2021

September 30, 2020

Net Income

Shares

Per

Net Income

Shares

Per


(Numerator)

(Denominator)

Share Data

(Numerator)

(Denominator)

Share Data
Basic earnings per share

$
16,132

21,020,128

$
0.77

$
11,917

21,405,309

$
0.56
Effect of dilutive shares:

Restricted stock grants

190,763

108,400

Diluted earnings per share

$
16,132

21,210,891

$
0.76

$
11,917

21,513,709

$
0.55

For the Nine Months Ended

For the Nine Months Ended

September 30, 2021

September 30, 2020

Net Income

Shares

Per

Net Income

Shares

Per


(Numerator)

(Denominator)

Share Data

(Numerator)

(Denominator)

Share Data
Basic earnings per share

$
48,376

21,015,996

$
2.30

$
37,171

20,521,779

$
1.81
Effect of dilutive shares:

Restricted stock grants

186,661

125,466

Diluted earnings per share

$
48,376

21,202,657

$
2.28

$
37,171

20,647,245

$
1.80


	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 grants			111,397					186,661
Diluted earnings per share	$	46,624	21,467,128	$	2.17	$	48,376	21,202,657	$	2.28

The Company granted ~~84,578~~82,123 shares and ~~60,680~~84,578 shares of restricted stock in the first quarter of ~~2021~~2022 and ~~2020,~~2021, respectively. The Company granted ~~3,000~~47,827 shares and ~~3,750~~3,000 shares of restricted stock in the second quarter of ~~2021~~2022 and ~~2020,~~2021, respectively. The Company ~~did 0t grant any~~granted 60 shares and 0 shares of restricted stock in the third quarter of 2022 and 2021, ~~and granted 13,259 shares in the third quarter of 2020.~~

respectively.

NOTE 6 – 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 securities, which are also recognized as separate components of equity.

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NOTE 7 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. At September 30, ~~2021,~~2022, and December 31, ~~2020~~2021 these financial instruments consisted of the following:

($ in thousands)

September 30, 2021

December 31, 2020


Fixed Rate

Variable Rate

Fixed Rate

Variable Rate
Commitments to make loans

$
75,040

$
14,318

$
97,738

$
16,203
Unused lines of credit

188,156

271,516

157,006

195,221
Standby letters of credit

2,194

9,586

4,182

11,486


($ in thousands)	September 30, 2022				December 31, 2021
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	85,066	$	11,113	$	80,760	$	23,946
Unused lines of credit	219,118		314,864		213,332		309,791
Standby letters of credit	4,470		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 ~~0.5%~~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

~~Table of Contents~~

~~The Company adopted ASC 326, effective January 1, 2021, which requires the Company to estimate expected credit losses for OBSC exposures which are not unconditionally cancellable.~~ 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. ~~Upon adoption of ASC 326,~~

Changes in the ~~Company recorded an~~ ACL on ~~unfunded commitments of $718 thousand. The Company~~OBSC exposures were as follows for the presented periods:


($ in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Balance at beginning of period	$	1,220	$	718	$	1,070	$	—
Adoption of ASU 326	—		—		—		718
Credit loss expense related to OBSC exposures	—		—		150		—
Balance at end of period	$	1,220	$	718	$	1,220	$	718

Adjustments to the ACL on OBSC exposures are recorded 0to provision for credit losses on OBSC ~~exposures~~exposures. The Company recorded no provision and $150 thousand for the three months and nine months period ended September 30, ~~2021.~~

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 8 – FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the assets or liability in an orderly transaction between market participants on the measurement date. There 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.

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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.

The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at September 30, ~~2021~~2022 and December 31, ~~2020:~~

●

~~Investment Securities~~: The fair value for investment securities are determined by quoted market prices, if available (Level 1). For securities where, quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing 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 are not available, fair values are calculated using discounted cash flows 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 time, the fair value of those loans is determined using quoted secondary-market prices.

2021:

•

Investment Securities: The fair value for investment securities are determined by quoted market prices, if available (Level 1). For securities where, quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing 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 are not available, fair values are calculated using discounted cash flows 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 time, the fair value of those loans is determined using quoted secondary-market prices.

•Collateral Dependent 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. 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 underlying such loans. Such adjustments, if any, result in a Level 3 classification of the 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 evaluated on a quarterly basis for additional impairment.

•Other Real Estate Owned: Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for credit 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 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 recorded in other non-interest income. Other real estate owned is 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 variable rate loan and enters into a variable to fixed interest rate swap with the customer. The Company also enters into an

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●

~~Collateral Dependent 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. 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 underlying such loans. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs. 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 evaluated on a quarterly basis for additional impairment.

●

~~Other Real Estate Owned~~: Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for credit 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 selling 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 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 recorded in other non-interest income. Other real estate owned is classified within Level 3 of the fair value hierarchy.

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.

~~Table of Contents~~

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

September 30, 2021

Fair Value Measurements
($ in thousands)








Significant


Other

Significant

Observable

Unobservable

Carrying

Estimated

Quoted Prices

Inputs

Inputs


Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

Financial Instruments:

Assets:










Cash and cash equivalents

$
657,296

$
657,296

$
657,296

$
0

$
0
Securities available-for-sale:

U.S. Treasury

36,831

36,831

36,831

0

0
Obligations of U.S. government agencies and sponsored entities

190,134

190,134

0

190,134

0
Municipal securities

560,654

560,654

0

541,289

19,365
Mortgage-backed securities

644,459

644,459

0

644,459

0
Corporate obligations

31,177

31,177

0

30,951

226
Loans, net

2,928,501

2,927,915

0

0

2,927,915
Accrued interest receivable

23,144

23,144

0

5,848

17,296
Liabilities:

Noninterest-bearing deposits

$
596,126

$
596,126

$
0

$
596,126

$
0
Interest-bearing deposits

4,076,415

4,051,141

0

4,051,141

0
Subordinated debentures

144,650

155,655

0

0

155,655
Accrued interest payable

1,376

1,376

0

1,376

0

December 31, 2020

Fair Value Measurements
($ in thousands)








Significant


Other

Significant

Quoted

Observable

Unobservable

Carrying

Estimated

Prices

Inputs

Inputs


Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

Financial Instruments:










Assets:










Cash and cash equivalents

$
562,554

$
562,554

$
562,554

$
0

$
0
Securities available-for-sale:

U.S. Treasury

9,383

9,383

9,383

0

0
Obligations of U.S. government agencies and sponsored entities

100,170

100,170

0

100,170

0
Municipal securities

480,374

480,374

0

460,248

20,126
Mortgage-backed securities

401,232

401,232

0

401,232

0
Corporate obligations

31,023

31,023

0

30,788

235
Loans, net

3,087,858

3,089,318

0

0

3,089,318
Accrued interest receivable

26,344

26,344

0

5,690

20,654
Liabilities:










Non-interest-bearing deposits

$
571,079

$
571,079

$
0

$
571,079

$
0
Interest-bearing deposits

3,644,201

3,647,845

0

3,647,845

0
Subordinated debentures

144,592

145,289

0

0

145,289
FHLB and other borrowings

114,647

114,647

0

114,647

0
Accrued interest payable

2,134

2,134

0

2,134

0


September 30, 2022	Carrying 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. Treasury	122,918		122,918		122,918		—		—
Obligations of U.S. government agencies and sponsored entities	144,926		144,926		—		144,926		—
Municipal securities	550,891		550,891		—		533,933		16,958
Mortgage-backed securities	517,432		517,432		—		517,432		—
Corporate obligations	43,243		43,243		—		43,211		32
Securities held-to-maturity	593,553		593,553		—		593,553		—
Loans, net	3,681,032		3,684,489		—		—		3,684,489
Accrued interest receivable	24,570		23,317		—		8,495		14,822
Interest rate swaps	13,258		13,258		—		13,258		—
Liabilities:
Noninterest-bearing deposits	$	1,770,848	$	1,770,848	$	—	$	1,770,848	$	—
Interest-bearing deposits	3,780,450		3,614,886		—		3,614,886		—
Subordinated debentures	144,952		137,418		—		—		137,418
FHLB advances and other borrowings	90,000		90,000		—		90,000		—
Accrued interest payable	1,365		1,365		—		1,365		—
Interest rate swaps	13,258		13,258		—		13,258		—

Table of Contents

December 31, 2021 Carrying
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. Treasury 135,158 135,158 135,158 — —
Obligations of U.S. government agencies and sponsored entities 183,021 183,021 — 183,021 —
Municipal securities 708,502 708,502 — 688,379 20,123
Mortgage-backed securities 688,298 688,298 — 688,298 —
Corporate obligations 36,853 36,853 — 36,810 43
Loans, net 2,928,811 2,956,297 — — 2,956,297
Accrued interest receivable 23,256 23,256 — 6,838 16,418
Liabilities:
Non-interest-bearing deposits $ 1,550,381 $ 1,550,381 $ — $ 1,550,381 $ —
Interest-bearing deposits 3,676,403 3,644,418 — 3,644,418 —
Subordinated debentures 144,726 156,952 — — 156,952
Accrued interest payable 1,711 1,711 — 1,711 —

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


September 30, 2022
($ in thousands)	Fair Value		Fair 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 entities	144,926		—		144,926		—
Municipal securities	550,891		—		533,933		16,958
Mortgage-backed securities	517,432		—		517,432		—
Corporate obligations	43,243		—		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	$	—

~~September 30, 2021~~Table of Contents

($ in thousands)

Fair Value Measurements Using

Quoted Prices in

Active Markets

Significant Other

Significant

For

Observable

Unobservable

Identical Assets

Inputs

Inputs


Fair Value

(Level 1)

(Level 2)

(Level 3)
Available-for-sale

U.S. Treasury

$
36,831

$
36,831

$
0

$
0
Obligations of U.S. Government agencies and sponsored entities

190,134

0

190,134

0
Municipal securities

560,654

0

541,289

19,365
Mortgage-backed securities

644,459

0

644,459

0
Corporate obligations

31,177

0

30,951

226
Total available-for-sale

$
1,463,255

$
36,831

$
1,406,833

$
19,591

~~December 31, 2020~~

($ in thousands)

Fair Value Measurements Using

Quoted Prices in

Active Markets

Significant Other

Significant

For

Observable

Unobservable

Identical Assets

Inputs

Inputs


Fair Value

(Level 1)

(Level 2)

(Level 3)
Available-for-sale

U.S. Treasury

$
9,383

$
9,383

$
0

$
0
Obligations of U.S. Government agencies and sponsored entities

100,170

0

100,170

0
Municipal securities

480,374

0

460,248

20,126
Mortgage-backed securities

401,232

0

401,232

0
Corporate obligations

31,023

0

30,788

235
Total available-for-sale

$
1,022,182

$
9,383

$
992,438

$
20,361


December 31, 2021
($ in thousands)	Fair Value		Fair 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 entities	183,021		—		183,021		—
Municipal securities	708,502		—		688,379		20,123
Mortgage-backed securities	688,298		—		688,298		—
Corporate obligations	36,853		—		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)

2021

2020
Balance, January 1

$
235

$
408
Paydowns

(64)

(273)
Unrealized gain included in comprehensive income

55

106
Balance at September 30

$
226

$
241

Municipal Securities
($ in thousands)

2021

2020
Balance, January 1

$
20,126

$
10,345
Purchases

4,209

14,540
Maturities, calls and paydowns

(4,474)

(3,223)
Transfer to level 2

—

(6,405)
Unrealized (loss) included in comprehensive income

(496)

—
Balance at September 30

$
19,365

$
15,257


	Bank-Issued Trust Preferred Securities
($ in thousands)	2022		2021
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

~~Table of Contents~~

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, ~~2021~~2022 and December 31, ~~2020.~~2021. The following tables present quantitative information about recurring Level 3 fair value measurements ($ in thousands):

Trust Preferred Securities

Fair Value

Valuation Technique

Significant Unobservable
Inputs

Range of Inputs

September 30, 2022

Discounted cash flow

Probability of default

5.78% - 6.11%

December 31, 2021

Discounted cash flow

Probability of default

2.35% - 2.47%

Municipal Securities

Fair Value

Valuation Technique

Significant
Unobservable Inputs

Range of Inputs

September 30, 2022

16,958

Discounted cash flow

Discount Rate

1.10% - 4.62%

December 31, 2021

20,123

Discounted cash flow

Discount Rate

0.50% - 1.90%

Table of Contents

Significant Unobservable

Trust Preferred Securities

Fair Value

Valuation Technique

Inputs

Range of Inputs
September 30, 2021

$
226

Discounted cash flow

Probability of default

0.99% - 2.39%
December 31, 2020

$
235

Discounted cash flow

Probability of default

1.08% - 2.48%

Significant Unobservable

Municipal Securities

Fair Value

Valuation Technique

Inputs

Range of Inputs
September 30, 2021

$
19,365

Discounted cash flow

Discount Rate

0.50% - 2.50%
December 31, 2020

$
20,126

Discounted cash flow

Discount Rate

0.50% - 2.45%

The following table presents the fair value measurement of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements were classified at September 30, ~~2021~~2022 and December 31, ~~2020.~~

~~September 30, 2021~~

($ in thousands)

Fair Value Measurements Using

Quoted Prices in

Significant

Active Markets

Other

Significant

For

Observable

Unobservable

Identical Assests

Inputs

Inputs


Fair Value

(Level 1)

(Level 2)

(Level 3)
Collateral dependent loans

$
4,511

$
0

$
0

$
4,511
Other real estate owned

2,580

0

0

2,580

~~December 31, 2020~~

($ in thousands)

Fair Value Measurements Using

Quoted Prices in

Significant

Active Markets

Other

Significant

For

Observable

Unobservable

Identical Assests

Inputs

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)
Impaired loans

$
15,107

$
0

$
0

$
15,107
Other real estate owned

5,802

0

0

5,802

2021.


September 30, 2022
($ in thousands)			Fair Value Measurements Using
	Fair Value		Quoted 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 owned	10,328		—		—		10,328


December 31, 2021
($ in thousands)			Fair Value Measurements Using
	Fair Value		Quoted 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 owned	2,565		—		—		2,565

NOTE 9 - SECURITIES

~~On January 1, 2021,~~

The following table summarizes the ~~Company adopted ASC 326, which made changes to the accounting for AFS~~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, 2022 and December 31, 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 entities	164,486		4		19,564		144,926
Tax-exempt and taxable obligations of states and municipal subdivisions	661,260		546		110,915		550,891
Mortgage-backed securities - residential	353,965		15		46,071		307,909
Mortgage-backed securities - commercial	234,860		71		25,408		209,523
Corporate obligations	45,933		—		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 entities	33,074		—		2,164		30,910
Tax-exempt and taxable obligations of states and municipal subdivisions	146,789		—		18,975		127,814
Mortgage-backed securities - residential	159,844		—		19,253		140,591
Mortgage-backed securities - commercial	134,268		—		13,350		120,918
Corporate obligations	10,000		—		1,453		8,547
Total held-to-maturity	$	593,553	$	—	$	60,865	$	532,688

Table of Contents


($ 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 entities	182,877		1,238		1,094		183,021
Tax-exempt and taxable obligations of states and municipal subdivisions	698,861		12,452		2,811		708,502
Mortgage-backed securities - residential	410,269		4,123		3,425		410,967
Mortgage-backed securities - commercial	277,353		2,917		2,939		277,331
Corporate obligations	35,904		962		13		36,853
Total available-for-sale	$	1,741,153	$	21,775	$	11,096	$	1,751,832

The amortized cost and fair value of debt securities ~~whereby credit losses should be presented as an allowance, rather than as~~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. Securities not due at a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires financial assets measured at amortized cost, including held-to-maturity debt securities, to measure an expected credit loss under CECL methodology that requires consideration of a broader range of reasonable and supportable information to inform credit losses estimates. For further discussionsingle maturity date are shown separately.

ACL on ~~the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 3 “Accounting Standards” to the Consolidated Financial Statements~~Securities

Securities Available for ~~additional information.~~

All securities information presented as of September 30, 2021 is in accordance with ASC 326. All securities information presented prior to January 1, 2021 is in accordance with previous applicable GAAP. See the Company’s prior accounting policies in Note 1 “Summary of Significant Accounting Policies” of the 2020 Form 10-K.

Sale

~~Table of Contents~~

~~Available-for-sale~~

ASC 326 makes targeted improvements to the accounting for credit losses on securities AFS. The concept of other-than-temporarily impaired has been replaced with the allowance for credit losses. Unlike securities held-to-maturity, securities available-for-sale are evaluated on an individual level and pooling of securities is not allowed.

Quarterly, the Company evaluates if a security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted 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 determine 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 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.

•Review the extent to which the fair value is less than the amortized cost and determine 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 ~~DCF analysis was performed and 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. ~~At September 30, 2021, accrued~~Accrued interest receivable totaled ~~$5.8~~$6.2 million ~~for securities AFS~~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 0no 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.

Table of Contents

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 ~~gross unrealized gains and losses, and estimated fair values~~ of ~~AFS~~debt securities held-to-maturity at September 30, ~~2021 and December 31, 2020:~~

($ in thousands)

September 30, 2021

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair


Cost

Gains

Losses

Value
Available-for-sale securities:








U.S. Treasury

$
36,769

$
155

$
93

$
36,831
Obligations of U.S. government agencies and sponsored entities

188,372

2,140

378

190,134
Tax-exempt and taxable obligations of states and municipal subdivisions

552,023

11,873

3,242

560,654
Mortgage-backed securities - residential

409,548

5,611

1,755

413,404
Mortgage-backed securities - commercial

228,392

4,087

1,424

231,055
Corporate obligations

29,902

1,280

5

31,177
Total

$
1,445,006

$
25,146

$
6,897

$
1,463,255

2022, aggregated by credit quality indicators.


($ in thousands)	September 30, 2022
Aaa	$	452,516
Aa1/Aa2/Aa3	66,260
A1/A2	21,092
BBB	10,000
Not rated	43,685
Total	$	593,553

~~Table of Contents~~

($ in thousands)

December 31, 2020




Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value
Available-for-sale securities:








U.S. Treasury

$
9,063

$
320

$
0

$
9,383
Obligations of U.S. government agencies sponsored entities

97,107

3,130

67

100,170
Tax-exempt and taxable obligations of states and municipal subdivisions

464,348

16,326

300

480,374
Mortgage-backed securities - residential

228,257

8,206

42

236,421
Mortgage-backed securities - commercial

158,784

6,087

60

164,811
Corporate obligations

30,063

976

16

31,023
Total

$
987,622

$
35,045

$
485

$
1,022,182

The amortized cost and fair value of debt securities ~~at September 30, 2021~~ 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. ~~Securities not due at a single maturity date are shown separately.~~

($ in thousands)

September 30, 2021

Available-for-Sale

Amortized

Fair

Cost

Value
Due less than one year

$
39,457

$
39,747
Due after one year through five years

150,510

155,127
Due after five years through ten years

363,236

366,264
Due greater than ten years

253,863

257,658
Mortgage-backed securities - residential

409,548

413,404
Mortgage-backed securities - commercial

228,392

231,055
Total

$
1,445,006

$
1,463,255


($ 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 years	276,821		256,948
Due after five years through ten years	376,584		324,364
Due greater than ten years	327,302		254,234
Mortgage-backed securities - residential	353,965		307,909
Mortgage-backed securities - commercial	234,860		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 years	109,905		103,568
Due after five years through ten years	41,211		36,786
Due greater than ten years	127,475		110,267
Mortgage-backed securities - residential	159,844		140,591
Mortgage-backed securities - commercial	134,268		120,918
Total	$	593,553	$	532,688

The amortized costs of securities pledged as collateral, to secure public deposits and for other purposes, was ~~$763.4 million~~$1.053 billion and ~~$576.0~~$889.5 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Table of Contents

The following table summarizes ~~available-for-sale~~ securities ~~with~~in an unrealized ~~losses~~loss position for which an allowance for credit losses has not been recorded at September 30, ~~2021~~2022 and ~~that are not deemed to be other than temporarily impaired as of~~ December 31, ~~2020.~~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, 2021

Losses < 12 Months

Losses 12 Months or >

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


Value

Losses

Value

Losses

Value

Losses
U.S. Treasury

$
20,481

$
93

$
0

$
0

$
20,481

$
93
Obligations of U.S government agencies and sponsored entities

70,889

277

5,411

101

76,300

378
Tax-exempt and taxable obligations of state and municipal subdivisions

204,957

2,917

4,987

325

209,944

3,242
Mortgage-backed securities - residential

238,477

1,748

486

7

238,963

1,755
Mortgage-backed securities - commercial

119,357

1,408

1,555

16

120,912

1,424
Corporate obligations

0

0

42

5

42

5
Total

$
654,161

$
6,443

$
12,481

$
454

$
666,642

$
6,897


($ in thousands)	September 30, 2022
	Losses < 12 Months				Losses 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 entities	78,456		9,317		65,383		10,247		143,839		19,564
Tax-exempt and taxable obligations of state and municipal subdivisions	411,023		80,247		125,582		30,668		536,605		110,915
Mortgage-backed securities - residential	129,058		14,720		177,053		31,351		306,111		46,071
Mortgage-backed securities - commercial	113,360		10,431		91,036		14,977		204,396		25,408
Corporate obligations	43,215		2,686		28		4		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 entities	30,910		2,164		—		—		30,910		2,164
Tax-exempt and taxable obligations of state and municipal subdivisions	120,472		18,975		—		—		120,472		18,975
Mortgage-backed securities - residential	140,591		19,253		—		—		140,591		19,253
Mortgage-backed securities - commercial	120,918		13,350		—		—		120,918		13,350
Corporate obligations	8,547		1,453		—		—		8,547		1,453
Total	$	525,346	$	60,865	$	—	$	—	$	525,346	$	60,865

Table of Contents

($ in thousands)

December 31, 2020

Losses < 12 Months

Losses 12 Months or >

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


Value

Losses

Value

Losses

Value

Losses
U.S. Treasury

$
0

$
0

$
0

$
0

$
0

$
0
Obligations of U.S government agencies and sponsored entities

6,593

65

326

2

6,919

67
Tax-exempt and taxable obligations of state and municipal subdivisions

10,193

300

0

0

10,193

300
Mortgage-backed securities - residential

30,202

42

11

0

30,213

42
Mortgage-backed securities - commercial

10,134

29

3,596

31

13,730

60
Corporate obligations

5,217

8

40

8

5,257

16
Total

$
62,339

$
444

$
3,973

$
41

$
66,312

$
485

($ in thousands) December 31, 2021
Losses < 12 Months Losses 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 entities 121,402 933 5,254 161 126,656 1,094
Tax-exempt and taxable obligations of state and municipal subdivisions 249,430 2,692 3,692 119 253,122 2,811
Mortgage-backed securities - residential 284,183 3,228 8,912 197 293,095 3,425
Mortgage-backed securities - commercial 174,697 2,836 3,038 103 177,735 2,939
Corporate obligations 6,692 8 42 5 6,734 13
Total $ 966,502 $ 10,511 $ 20,938 $ 585 $ 987,440 $ 11,096

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company’s securities portfolio consisted of ~~254~~1,392 and 71304 securities, respectively, which were in an unrealized loss position. ~~AFS securities~~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. ~~NaN~~No allowance for credit losses was needed at September 30, ~~2021. The Company did not consider these investments to be other-than-temporarily impaired at~~2022 and December 31, ~~2020.~~

2021.

NOTE 10 – LOANS

On January 1, 2021, the Company adopted ASU 326. The FASB issued ASU 326 to replace the incurred loss model for loans and other financial assets with an expected loss model and requires consideration of a wider range of reasonable and supportable information to determine credit losses. In accordance with ASC 326, the Company has developed an ACL methodology, which replaces its previous allowance for loan losses methodology. All loan information presented as of September 30, 2021 is in accordance with ASC 326. All loan information presented prior to January 1, 2021 is in accordance with previous applicable GAAP. See the Company’s prior accounting policies in Note 1 “Summary of Significant Accounting Policies” of the 2020 Form 10-K.

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.

Table of Contents

The following table shows the composition of the loan ~~portfolio as of September 30, 2021 and December 31, 2020, is summarized below:~~portfolio:


($ in thousands)	September 30, 2022		December 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 estate	2,125,471		1,683,698
Consumer real estate	1,032,343		838,654
Consumer installment	44,377		39,685
Total loans	3,719,388		2,959,553
Less allowance for credit losses	(38,356)		(30,742)
Net LHFI	$	3,681,032	$	2,928,811

($ in thousands)

September 30, 2021

December 31, 2020
Loans held for sale




Mortgage loans held for sale

$
8,540

$
21,432
Total LHFS

$
8,540

$
21,432

Loans held for investment

Commercial, financial and agriculture (1)

$
449,098

$
579,443
Commercial real estate

1,650,461

1,652,993
Consumer real estate

824,513

850,206
Consumer installment

36,847

41,036
Total loans

2,960,919

3,123,678
Less allowance for credit losses

(32,418)

(35,820)
Net LHFI

$
2,928,501

$
3,087,858

~~(1)~~
(1)			Loan balance includes ~~$87.1~~$1.5 million and ~~$239.7~~$41.1 million in ~~PPP~~Paycheck Protection Program (“PPP”) loans as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Accrued interest receivable is not included in the amortized cost basis of the Company’s LHFI. At September 30, 2022 and December 31, 2021, accrued interest receivable for LHFI totaled ~~$17.3~~$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 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 presents the aging of the amortized cost basis in past due loans in addition to those loans classified as nonaccrual including ~~PCD~~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		Nonaccrual		PCD		Total 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 estate	121		—		10,253		1,198		11,572		2,125,471		5,265
Consumer real estate	1,452		571		3,282		1,079		6,384		1,032,343		1,339
Consumer installment	144		—		3		—		147		44,377		—
Total	$	2,010	$	571	$	13,567	$	2,277	$	18,425	$	3,719,388	$	6,604

($ in thousands)

September 30, 2021

Total


Past Due

Past Due





Past Due,




30 to 89

90 Days or More and

Nonaccrual

Total

Nonaccrual and

Days

Still Accruing

Nonaccrual

PCD

and PCD

LHFI

PCD with No ACL
Commercial, financial and agriculture (1)

$
151

$
—

$
228

$
—

$
379

$
449,098

$
—
Commercial real estate

670

—

15,333

2,382

18,385

1,650,461

1,100
Consumer real estate

1,154

456

3,318

3,728

8,656

824,513

2,008
Consumer installment

89

—

21

2

112

36,847

—
Total

$
2,064

$
456

$
18,900

$
6,112
��
$
27,532

$
2,960,919

$
3,108


(1)			Total loan balance includes ~~$87.1~~$1.5 million in PPP loans as of September 30, ~~2021.~~ 2022.

Table of Contents



														December 31, 2021
($ in thousands)	December 31,2020												($ in thousands)	Past Due 30 to 89 Days		Past Due 90 Days or More and Still Accruing		Nonaccrual		PCD		Total Past Due, Nonaccrual and PCD		Total LHFI		Nonaccrual and PCD with No ACL
			Past Due 90						Total
	Past Due		Days or						Past Due,
	30 to 89		More and Still						Nonaccrual		Total
	Days		Accruing		Nonaccrual		PCI		and PCI		LHFI
Commercial, financial and agriculture (1)	$	1,007	$	244	$	2,197	$	221	$	3,669	$	579,443	Commercial, financial and agriculture (1)	$	246	$	—	$	190	$	—	$	436	$	397,516	$	—
Commercial real estate		2,116		1,553		19,499		3,388		26,556		1,652,993	Commercial real estate	453		—		19,445		2,082		21,980		1,683,698		1,661
Consumer real estate		5,389		895		2,480		5,954		14,718		850,206	Consumer real estate	2,140		45		3,776		2,512		8,473		838,654		1,488
Consumer installment		419		—		32		3		454		41,036	Consumer installment	121		—		7		1		129		39,685		—
Total	$	8,931	$	2,692	$	24,208	$	9,566	$	45,397	$	3,123,678	Total	$	2,960	$	45	$	23,418	$	4,595	$	31,018	$	2,959,553	$	3,149

~~(1)~~
(1)			Total loan balance includes $41.1 million in PPP loans as of December 31, ~~2020 includes $239.7 million in PPP loans.~~2021.

Acquired Loans

~~On January 1, 2021,~~

In connection with the acquisitions, the Company ~~adopted ASC 326~~acquired loans both with and ~~elected to account~~without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution's previously recorded allowance for ~~its existing acquired PCI~~credit losses. Acquired loans ~~as PCD loans included within the LHFI portfolio. The Company elected to maintain segments of loans that were previously~~are accounted for under ~~ASC 310-30 and will continue to account for these segments as a unit of account unless~~ the loan is collateral dependent. PCD loans that are collateral dependent will be assessed individually. Loans are only removed from the existing segments if they are written off, paid off, or sold. Upon adoption offollowing accounting pronouncements: ASC 326, Financial Instruments - Credit Losses.

The fair value for acquired loans recorded at the ~~ACL was determined~~time of acquisition is based upon several factors including the timing and payment of expected cash flows, as adjusted for ~~each segment~~estimated credit losses and ~~added~~prepayments, 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 band’s carrying amount to establish a new amortized cost basis. The difference between~~ the unpaid principal balance of each acquired loan. As it relates to acquired PCD loans, the ~~segment~~net premium or net discount is adjusted to reflect the Company's allowance for credit losses ("ACL") recorded for PCD loans at the time of acquisition, and the ~~new~~remaining fair value adjustment is accreted or amortized ~~cost basis was the noncredit discount of approximately $685 thousand, which will be accreted~~ into interest income over the remaining life of the ~~segment. Changes~~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 ~~ACL after adoption are recorded through provision expense.~~ 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 was approximately $468.8 million, of which $6.4 million is the amount of contractual cash flows not expected to be collected.

The following table shows the carrying amount of loans acquired in the BBI acquisition transaction for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination:


($ in thousands)	Carrying Amount
Purchase price of loans at acquisition	$	27,669
Allowance for credit losses at acquisition	1,303
Non-credit discount (premium) at acquisition	530
Par value of acquired loans at acquisition	$	29,502

As of September 30, 2022, and December 31, 2021 the amortized cost of the Company’s PCD loans totaled ~~$10.6~~$27.1 million and $8.6 million, respectively, which had an estimated ACL of ~~$1.0 million.~~

~~Prior to the adoption of FASB ASC 326, the Company acquired loans with deteriorated credit quality in 2014, 2017, 2018, 2019~~$1.7 million and 2020. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan 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 (PCI loans). Acquired loans are considered to be impaired if it is probable, based on current available information, that the Company will be unable to collect all cash flows as expected. If expected cash flows cannot reasonably be estimated as to what will be collected, there will not be any interest income recognized on these loans.

$855 thousand, respectively.

~~Table of Contents~~

~~Impaired LHFI~~

Prior to the adoption of FASB ASC 326, the Company individually evaluated impaired LHFI. The following table provides a detail of impaired loans broken out according to class as of December 31, 2020. The following table does not include PCI loans. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. 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.

December 31, 2020

Average

Interest
($ in thousands)

Recorded

Income

Recorded

Unpaid

Related

Investment

Recognized


Investment

Balance

Allowance

YTD

YTD
Impaired loans with no related allowance:










Commercial, financial and agriculture

$
—

$
—

$
—

$
198

$
—
Commercial real estate

5,884

6,087

—

11,433

47
Consumer real estate

712

758

—

790

5
Consumer installment

23

24

—

17

—
Total

$
6,619

$
6,869

$
—

$
12,438

$
52

Impaired loans with a related allowance:

Commercial, financial and agriculture

$
2,241

$
2,254

$
1,235

$
2,186

$
58
Commercial real estate

17,973

18,248

4,244

13,687

36
Consumer real estate

536

544

176

734

4
Consumer installment

26

26

14

86

—
Total

$
20,776

$
21,072

$
5,669

$
16,693

$
98

Total impaired loans:

Commercial, financial and agriculture

$
2,241

$
2,254

$
1,235

$
2,384

$
58
Commercial real estate

23,857

24,335

4,244

25,120

83
Consumer real estate

1,248

1,302

176

1,524

9
Consumer installment

49

50

14

103

—
Total Impaired Loans

$
27,395

$
27,941

$
5,669

$
29,131

$
150

~~The cash basis interest earned in the chart above is materially the same as the interest recognized during impairment for the year ended December 31, 2020.~~

The gross interest income that would have been recorded in 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 part of the nine months ended September 30, 2020, was $1.1 million. The Company had 0 loan commitments to borrowers in nonaccrual status at September 30, 2021 or December 31, 2020.

Troubled Debt Restructurings

("TDRs")

If the Company grants a concession to a borrower for economic or legal reasons related to a borrower’s financial difficulties that it would not otherwise consider, the loan is classified as TDRs.

Table of Contents

In response to the Coronavirus Disease 2019 (“COVID-19”) pandemic and its economic impact to its customers, the Company implemented a short-term modification program in accordance with interagency regulatory guidance to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due at the time of the modification. This program allowed for a deferral of payments for up two successive 90-day periods for a cumulative maximum of 180 days. Pursuant to interagency guidance, such short-term deferrals are not deemed to meet the criteria for reporting as TDRs. For borrowers requiring a longer-term modification following the short-term loan modification program the Company worked with these borrowers whose loans were not more 30 days past due at December 31, 2019 and who required modification as a result of COVID-19 to modify such loans under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

As of September 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Company had TDRs totaling ~~$25.9~~$23.4 million and ~~$27.5~~$24.2 million, respectively. The Company acquired three TDRs totaling $1.5 million as part of the BBI acquisition. As of September 30, ~~2021,~~2022, the Company had 0no additional amount committed on any loan classified as TDR. As of September 30, 2022, and December 31, 2021, TDRs had a related ACL of ~~$3.0~~$704 thousand and $4.3 million, ~~compared to a related allowance for loan loss of $4.1 million at December 31, 2020.~~

respectively.

The following table presents LHFI by class modified as TDRs that occurred during the three ~~months~~ and nine months ended September 30, ~~2021~~2021. There were no TDRs added during the three and ~~2020($ in thousands, except for number of loans).~~

Three Months Ended September 30,

Outstanding

Outstanding

Recorded

Recorded

Number of

Investment

Investment
2021

Loans

Pre-Modification

Post-Modification
Commercial, financial and agriculture

3

$
4,914

$
4,914
Commercial real estate

1

38

38
Consumer installment

2

113

151
Total

6

$
5,065

$
5,103

2020


Commercial real estate

2

$
573

$
602
Total

2

$
573

$
602

nine months ended September 30, 2022.


($ in thousands)	Three Months Ended September 30,
2021	Number of Loans	Outstanding Recorded Investment Pre-Modification		Outstanding Recorded Investment Post-Modification
Commercial, financial and agriculture	3	$	4,914	$	4,914
Commercial real estate	1	$	38	$	38
Consumer installment	2	$	113	$	151
Total	6	$	5,065	$	5,103

The TDRs presented above increased the ACL ~~$91 thousand~~$0 and ~~increased the allowance for loan losses $29~~$91 thousand and resulted in no charge-offs for the three months period ended September 30, 2022 and 2021, ~~and 2020,~~ respectively.

Nine Months Ended September 30,

Outstanding

Outstanding

Recorded

Recorded

Number of

Investment

Investment
2021

Loans

Pre-Modification

Post-Modification
Commercial, financial and agriculture

5

$
5,151

$
5,151
Commercial real estate

1

38

38
Consumer real estate

1

13

2
Consumer installment

3

168

194
Total

10

$
5,370

$
5,385

2020


Commercial, financial and agriculture

2

$
47

$
46
Commercial real estate

5

1,506

1,530
Total

7

$
1,553

$
1,576


($ in thousands)	Nine Months Ended September 30,
2021	Number of Loans	Outstanding Recorded Investment Pre-Modification		Outstanding Recorded Investment Post-Modification
Commercial, financial and agriculture	5	$	5,151	$	5,151
Commercial real estate	1	38		38
Consumer real estate	1	13		2
Consumer installment	3	168		194
Total	10	$	5,370	$	5,385

~~Table of Contents~~

The TDRs presented above increased the ACL ~~$112 thousand~~$0 and ~~increased the allowance for loan loss $76~~$112 thousand and resulted in 0no charge-offs ~~for the~~ for the nine months period ended September 30, 2022 and 2021, ~~and 2020,~~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, except for number of loans)~~thousands).

Nine Months Ended September 30,

2021

2020
Troubled Debt Restructurings

Number of

Recorded

Number of

Recorded
That Subsequently Defaulted:

Loans

Investment

Loans

Investment

Commercial real estate

1

$
165

4

$
2,291
Consumer real estate

2

355

1

3
Total

3

$
520

5

$
2,294


Troubled Debt Restructurings That Subsequently Defaulted:	Nine Months Ended September 30,
	2021
	Number of Loans	Recorded Investment
Commercial real estate	1	$	165
Consumer real estate	2	355
Total	3	$	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 ~~$101 thousand~~$0 and ~~the allowance for loan losses $54~~$101 thousand and resulted in no charge-offs for the nine months period ended September 30, 2022 and 2021, ~~and 2020,~~ respectively.

Table of Contents

The following tables represents the Company’s TDRs at September 30, ~~2021~~2022 and December 31, ~~2020:~~

September 30, 2021





Past Due 90




Current

Past Due

days and still

($ in thousands)

Loans

30‑89

accruing

Nonaccrual

Total
Commercial, financial and agriculture

$
74

$
—

$
—

$
127

$
201
Commercial real estate

8,324

—

—

13,092

21,416
Consumer real estate

2,203

54

—

2,026

4,283
Consumer installment

21

—

—

—

21
Total

$
10,622

$
54

$
—

$
15,245

$
25,921
Allowance for credit losses

$
135

$
—

$
—

$
2,872

$
3,007

December 31, 2020

Past Due 90

Current

Past Due

days and still

($ in thousands)

Loans

30‑89

accruing

Nonaccrual

Total
Commercial, financial and agriculture

$
59

$
—

$
—

$
765

$
824
Commercial real estate

4,560

49

—

18,076

22,685
Consumer real estate

1,559

269

—

2,161

3,989
Consumer installment

23

3

—

—

26
Total

$
6,201

$
321

$
—

$
21,002

$
27,524
Allowance for loan losses

$
163

$
29

$
—

$
3,936

$
4,128

2021:

September 30, 2022 Current
Loans Past Due
30-89 Past Due 90
days and still
accruing Nonaccrual Total
($ in thousands)
Commercial, financial and agriculture $ 681 $ — $ — $ — $ 681
Commercial real estate 13,661 — — 6,847 20,508
Consumer real estate 1,411 51 — 778 2,240
Consumer installment 15 — — — 15
Total $ 15,768 $ 51 $ — $ 7,625 $ 23,444
Allowance for credit losses $ 223 $ — $ — $ 481 $ 704

December 31, 2021 Current
Loans Past Due
30-89 Past Due 90
days and still
accruing Nonaccrual Total
($ in thousands)
Commercial, financial and agriculture $ 63 $ — $ — $ 107 $ 170
Commercial real estate 3,367 — — 16,858 20,225
Consumer real estate 1,772 — — 1,973 3,745
Consumer installment 18 — — — 18
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:

($ in thousands)

Real Property

Total
Commercial real estate

$
2,177

$
2,177
Consumer real estate

2,415

2,415
Total

$
4,592

$
4,592


September 30, 2022
($ in thousands)	Real Property		Total
Commercial real estate	$	5,265	$	5,265
Consumer real estate	1,374		1,374
Total	$	6,639	$	6,639


December 31, 2021
($ in thousands)	Real Property		Total
Commercial real estate	$	1,712	$	1,712
Consumer real estate	1,858		1,858
Total	$	3,570	$	3,570

~~Table of Contents~~

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.~~

•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, ~~2021,~~2022, these loans totaled ~~$120.8~~$202.5 million, of which ~~$72.5~~$93.2 million had been sold to other financial institutions and ~~$48.3~~$109.3 million was ~~retained~~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 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:

Pass: Loan classified as pass are 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’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.

These above classifications were the most current available as of September 30, ~~2021,~~2022, and were generally updated within the prior year.

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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.~~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.

($ in thousands)

Term Loans Amortized Cost Basis by Origination Year

Revolving

As of September 30, 2021

2021

2020

2019

2018

2017

Prior

Loans

Total
Commercial, financial and:
















agriculture
















Risk Rating
















Pass

$
180,872

$
64,986

$
57,228

$
52,121

$
27,160

$
48,124

$
108

$
430,599
Special mention

—

266

1,301

102

100

182

—

1,951
Substandard

—

15

1,432

6,296

377

8,428

—

16,548
Doubtful

—

—

—

—

—

—

—

—
Total commercial, financial

and agriculture

$
180,872

$
65,267

$
59,961

$
58,519

$
27,637

$
56,734

$
108

$
449,098

Commercial real estate:

Risk Rating

Pass

$
275,202

$
334,184

$
234,725

$
201,575

$
142,712

$
346,672

$
—

$
1,535,070
Special mention

—

2,254

2,585

13,236

5,303

21,163

—

44,541
Substandard

183

3,261

1,985

17,357

18,684

29,380

—

70,850
Doubtful

—

—

—

—

—

—

—

—
Total commercial real estate

$
275,385

$
339,699

$
239,295

$
232,168

$
166,699

$
397,215

$
—

$
1,650,461

Consumer real estate:

Risk Rating

Pass

$
173,505

$
185,892

$
79,379

$
74,386

$
59,082

$
133,634

$
95,284

$
801,162
Special mention

—

—

336

27

1,781

1,985

—

4,129
Substandard

454

536

815

3,461

1,435

11,276

1,245

19,222
Doubtful

—

—

—

—

—

—

—

—
Total consumer real estate

$
173,959

$
186,428

$
80,530

$
77,874

$
62,298

$
146,895

$
96,529

$
824,513

Consumer installment:

Risk Rating

Pass

$
12,401

$
10,470

$
5,436

$
2,084

$
1,239

$
1,755

$
3,424

$
36,809
Special mention

—

—

—

—

2

1

—

3
Substandard

—

—

16

—

11

8

—

35
Doubtful

—

—

—

—

—

—

—

—
Total consumer installment

$
12,401

$
10,470

$
5,452

$
2,084

$
1,252

$
1,764

$
3,424

$
36,847

Total

Pass

$
641,980

$
595,532

$
376,768

$
330,166

$
230,193

$
530,185

$
98,816

$
2,803,640
Special mention

—

2,520

4,222

13,365

7,186

23,331

—

50,624
Substandard

637

3,812

4,248

27,114

20,507

49,092

1,245

106,655
Doubtful

—

—

—

—

—

—

—

—
Total

$
642,617

$
601,864

$
385,238

$
370,645

$
257,886

$
602,608

$
100,061

$
2,960,919


As of September 30, 2022	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Total
($ in thousands)	2022		2021		2020		2019		2018		Prior
Commercial, financial and
agriculture:
Risk Rating
Pass	$	139,969	$	151,211	$	58,425	$	58,055	$	46,316	$	53,783	$	115	$	507,874
Special mention	389		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 mention	676		1,389		2,315		11,763		7,184		20,665		—		43,992
Substandard	51		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
Substandard	116		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	—		4		25		9		1		8		—		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 mention	1,065		7,044		4,005		11,967		8,021		25,953		—		58,055
Substandard	167		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

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~~At December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:~~

Commercial,

December 31, 2020

Financial and

Commercial

Consumer

Consumer

($ in thousands)

Agriculture

Real Estate

Real Estate

Installment

Total
Pass

$
563,772

$
1,530,366

$
834,920

$
40,884

$
2,969,942
Special Mention

2,143

64,012

1,889

20

68,064
Substandard

11,875

66,535

13,397

132

91,939
Doubtful

1,653

23

—

—

1,676
Subtotal

$
579,443

$
1,660,936

$
850,206

$
41,036

$
3,131,621
Less: Unearned discount

—

7,943

—

—

7,943

LHFI, net of unearned discount

$
579,443

$
1,652,993

$
850,206

$
41,036

$
3,123,678

As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year Revolving
Loans Total
($ in thousands) 2021 2020 2019 2018 2017 Prior
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 mention 1,326 2,259 1,782 15,076 2,779 15,519 — 38,741
Substandard 3,904 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
Substandard 444 532 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 — — — — 1 — — 1
Substandard — 26 3 5 8 7 — 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 mention 1,326 2,514 2,862 15,192 5,007 17,497 — 44,398
Substandard 4,348 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 ~~(ACL)~~

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 characteristics 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. ~~See Note 3. “Accounting Standards”~~

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

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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 ~~Consolidated~~allowance when received. Expected recovery amounts may not exceed the aggregate of amounts previously charged-off.

1-4 family residential properties with a call code 1A1, and other construction, all land development and other land loans with 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 each 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 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 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.

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The following table presents the activity in the allowance for credit losses by portfolio segment for the three ~~months~~ and nine months ended September 30, ~~2021~~2022 and ~~the allowance for loan losses for the three months and nine months ended~~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 loans	614		576		113		—		1,303
Provision for credit losses	483		1,663		2,135		19		4,300
Loans charged-off	—		—		(55)		(186)		(241)
Recoveries	292		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 loans	614		576		113		—		1,303
Provision for credit losses	171		2,292		2,197		90		4,750
Loans charged-off	(146)		(27)		(202)		(523)		(898)
Recoveries	388		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)
Recoveries	57		180		39		71		347
Total ending allowance balance	$	3,825	$	17,694	$	10,359	$	540	$	32,418

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($ 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 loans	166		575		372		2		1,115
Provision for credit losses	—		—		—		—		—
Loans charged-off	(1,618)		(3,066)		(282)		(431)		(5,397)
Recoveries	382		473		276		467		1,598
Total ending allowance balance	$	3,825	$	17,694	$	10,359	$	540	$	32,418

The initial ACL on PCD loans recorded in September 30, ~~2020:~~

Three Months Ended September 30, 2021
($ in thousands)

Commercial,

Financial and

Commercial

Consumer

Consumer


Agriculture

Real Estate

Real Estate

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)
Recoveries

57

180

39

71

347
Total ending allowance balance

$
3,825

$
17,694

$
10,359

$
540

$
32,418

Nine Months Ended September 30, 2021
($ in thousands)

Commercial,

Financial and

Commercial

Consumer

Consumer


Agriculture

Real Estate

Real Estate

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 loans

166

575

372

2

1,115
Provision for credit losses

—

—

—

—

—
Loans charged-off

(1,618)

(3,066)

(282)

(431)

(5,397)
Recoveries

382

473

276

467

1,598
Total ending allowance balance

$
3,825

$
17,694

$
10,359

$
540

$
32,418

~~Table~~2022, of ~~Contents~~

Three Months Ended September 30, 2020
($ in thousands)

Commercial,

Commercial

Consumer



Paycheck




Financial and

Real

Real

Consumer

Protection

Agriculture

Estate

Estate

Installment

Program

Unallocated

Total
Allowance for loan losses:

Beginning balance

$
5,208

$
18,526

$
3,741

$
459

$
130

$
0

$
28,064
Provision for loan losses

607

5,371

1,077

(4)

(130)

—

6,921
Loans charged-off

(78)

(769)

(55)

(32)

—

—

(934)
Recoveries

37

18

17

133

—

—

205
Total ending allowance balance

$
5,774

$
23,146

$
4,780

$
556

$
—

$
—

$
34,256

Nine Months Ended September 30, 2020
($ in thousands)

Commercial,

Commercial

Consumer



Paycheck




Financial and

Real

Real

Consumer

Protection

Agriculture

Estate

Estate

Installment

Program

Unallocated

Total
Allowance for loan losses:














Beginning balance

$
3,043

$
8,836

$
1,694

$
296

$
—

$
39

$
13,908
Provision for loan losses

2,936

15,096

3,057

578

—

(39)

21,628
Loans charged-off

(342)

(1,165)

(151)

(645)

—

—

(2,303)
Recoveries

137

379

180

327

—

—

1,023
Total ending allowance balance

$
5,774

$
23,146

$
4,780

$
556

$
—

$
—

$
34,256

$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 0a $4.3 million provision for credit losses for the three ~~and nine~~ months ended September 30, ~~2021,~~2022, compared to ~~$6.9 million~~no provision for the ~~three months ended September 30, 2020 and $21.6~~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, ~~2020. The higher~~2022, compared with no provision ~~in 2020 was related to our estimates of probable incurred losses associated with COVID-19. The improved macroeconomic outlook for 2021 resulted in an overall decrease~~ for credit losses ~~and the Company determined that no further provision adjustment was necessary~~ for the ~~three and nine months ended September 30,~~same period in 2021.

The following table provides the ending balance in the Company’s LHFI and the ACL, broken down by portfolio segment as of September 30, 2022 and December 31, 2021 ($ in thousands).

September 30, 2021

Commercial,

Financial and

Commercial

Consumer

Consumer


Agriculture

Real Estate

Real Estate

Installment

Total
LHFI










Individually evaluated

$
—

$
2,176

$
2,416

$
—

$
4,592
Collectively evaluated

449,098

1,648,285

822,097

36,847

2,956,327
Total

$
449,098

$
1,650,461

$
824,513

$
36,847

$
2,960,919

Allowance for Credit Losses

Individually evaluated

$
—

$
77

$
4

$
—

$
81
Collectively evaluated

3,825

17,617

10,355

540

32,337
Total

$
3,825

$
17,694

$
10,359

$
540

$
32,418


September 30, 2022	Commercial, Financial and Agriculture		Commercial Real Estate		Consumer Real Estate		Consumer Installment		Total
LHFI
Individually evaluated	$	—	$	5,265	$	1,374	$	—	$	6,639
Collectively evaluated	517,197		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	$	—	$	—	$	5	$	—	$	5
Collectively evaluated	5,900		20,925		10,979		547		38,351
Total	$	5,900	$	20,925	$	10,984	$	547	$	38,356


December 31, 2021	Commercial, Financial and Agriculture		Commercial Real Estate		Consumer Real Estate		Consumer Installment		Total
LHFI
Individually evaluated	$	—	$	1,712	$	1,858	$	—	$	3,570
Collectively evaluated	397,516		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	$	—	$	4	$	2	$	—	$	6
Collectively evaluated	4,873		17,548		7,887		428		30,736
Total	$	4,873	$	17,552	$	7,889	$	428	$	30,742

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NOTE 11 - DERIVATIVE FINANCIAL INSTRUMENTS

Interest Rate Swaps

The Company 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 a back-to-back interest rate swap, as such, the net positions are offsetting assets and liabilities, as well as income and expenses. All derivative instruments are recorded in the consolidated statement of financial 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 with related interest rate swaps.

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


($ in thousands)
	September 30, 2022
Notional amount	$	326,156
Weighted average pay rate	4.3		%
Weighted average receive rate	4.3		%
Weighted average maturity in years	6.34

The following table provides the ~~ending balance~~fair value of interest rate swap contracts at September 30, 2022 included in other assets and other liabilities.


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

The Company also enters into a collateral agreement with the counterparty requiring the Company to post cash or

cash equivalent collateral to mitigate the credit risk in the ~~Company’s LHFI and~~transaction. At September 30, 2022, the ~~allowance for loan losses, broken down by portfolio segment as~~Company had $1.0 million of ~~December 31, 2020 ($~~collateral posted with its counterparties, which is included in ~~thousands).~~

December 31, 2020

Commercial,

Financial and

Commercial

Consumer

Consumer


Agriculture

Real Estate

Real Estate

Installment

Total
LHFI










Individually evaluated

$
2,241

$
23,857

$
1,248

$
49

$
27,395
Collectively evaluated

574,152

1,971,292

494,833

41,498

3,081,775
PCI Loans

244

9,056

5,185

23

14,508
Total

$
576,637

$
2,004,205

$
501,266

$
41,570

$
3,123,678

Allowance for Loan Losses

Individually evaluated

$
1,235

$
4,244

$
176

$
14

$
5,669
Collectively evaluated

4,979

20,075

4,560

537

30,151
Total

$
6,214

$
24,319

$
4,736

$
551

$
35,820

~~NOTE 11 – COVID-19 UPDATE~~

~~The COVID-19 pandemic continues to have significant effects on global markets, supply chains, businesses and communities. COVID-19 could potentially impact~~ the ~~Company’s future~~consolidated statement of financial condition as cash and ~~results~~cash equivalents as "restricted cash". The Company also receives a swap spread to compensate it for the credit exposure it takes on the customer-facing portion of ~~operations~~the transaction and this upfront cash payment from the counterparty is recorded in other income, net of 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 the risk of counterparties' failure to fulfill their legal obligations, including, but not limited to, ~~additional credit loss reserves, additional collateral and/~~potential amounts due or ~~modifications~~payable under each derivative contract. Notional principal amounts are often used to ~~debt obligations, liquidity, limited dividend payouts or potential shortages of personnel.~~

~~The pandemic is having an adverse impact on certain industries~~express the Company serves, including hotels, restaurants, retail, and direct energy. As of September 30, 2021, the Company’s aggregate outstanding exposure in these segments was $457.7 million, and total loan modifications resulting from COVID-19 were approximately $710.7 million. While it is still not yet possible to know the full effect that the pandemic will have on the economy, or to what extent this crisis will impact the Company, all available current industry statistics and internal monitoring of loan repayment ability and payment forgiveness across the portfolio has been analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration.

Despite recent improvements in certain economic indicators, significant constraints to commerce remain in place, and significant uncertainty remains over the timing and scope of additional government stimulus packages. The duration and extent of the downturn and speed of the related recovery on our business, customers, and the economy as a whole remains uncertain. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a resultvolume of these ~~conditions, including~~transactions, but the ~~determination~~amounts potentially subject to credit risk are much smaller. The Company assesses the credit risk of ~~the allowance for~~its dealer counterparties by regularly monitoring publicly available credit ~~losses,~~rating information, evaluating other market indicators, and periodically reviewing detailed financials.

The Company records the fair value of ~~financial instruments, impairment of goodwill~~its interest rate swap contracts separately within other assets and other ~~intangible assets~~liabilities as current accounting rules do not permit the netting of customer and ~~income taxes.~~

counterparty fair value amounts in the consolidated statement of financial condition.

NOTE 12 – RECLASSIFICATION

Certain amounts in the ~~2020~~2021 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

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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.

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

FORWARD LOOKING STATEMENTS

Certain statements made or incorporated by reference in this Quarterly Report on Form 10-Q of the Company (the “Report”) which are not statements of historical fact, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Report, constitute forward-looking statements within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, many of which are beyond the Company’s control and which may cause the Company’s actual results, performance or achievements or the financial services industry or economy generally, to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are forward-looking statements. You can identify these forward-looking statements through the Company’s use of words such as “believes,” “anticipates,” “expects,” “may,” “will,” “assumes,” “predicts,” “could,” “should,” “would,” “intends,” “targets,” “estimates,” “projects,” ~~”seek,~~“seek,” “plans,” “potential,” “aim,” and other similar words and expressions of the future or otherwise regarding the outlook for the Company’s future business and financial performance and/or the performance of the financial services industry and economy in general. Forward-looking statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this document. Many of these factors are beyond the Company’s ability to control or predict. The most recent factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the negative impact of the COVID-19 pandemic on our financial statements, including our ability to continue our business activities in certain communities we serve, the duration of the pandemic and its continued effects on financial markets, a reduction in financial transaction and business activities resulting in decreased deposits and reduced loan originations, increases in unemployment rates impacting our borrowers’ ability to repay their loans, our ability to manage liquidity in a rapidly changing and unpredictable market, additional interest rate changes by the Federal Reserve and other government actions in response to the pandemic including additional quarantines, regulations or laws enacted to counter the effects of the COVID-19 pandemic on the economy. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:

●

the negative impacts and disruptions resulting from the outbreak of COVID-19 on the economies and communities we serve, which has had and may continue to have an adverse impact on our business operations and performance, and could have a negative impact on our credit portfolio, stock price, borrowers and the economy as a whole both globally and domestically;

•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 condition, credit quality, results of operations and future growth, including the risk that the strength of the current economic environment could be weakened by the continued impact of rising interest rates, supply chain challenges and inflation;

•disruptions to the financial markets as a result of the current or anticipated impact of military conflict, including 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;

•

●

~~government or regulatory responses to the COVID-19 pandemic;~~

●

the costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto, including the costs and effects of litigation related to our participation in government stimulus programs associated with the COVID-19 pandemic;

●

reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

●

general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

●

~~adverse changes in asset quality and resulting credit risk-related losses and expenses;~~

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●

ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters, public health emergencies and international instability;

●

current or future legislation, regulatory changes or changes in monetary, tax or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the Federal Reserve’s actions with respect to interest rates, the capital requirements promulgated by the Basel Committee on Banking Supervision (“Basel Committee”), potential impacts from the Tax Cuts and Jobs Act, the CARES Act of 2020, and other COVID-19 relief measures, uncertainty relating to calculation of LIBOR and other regulatory responses to economic conditions;

●

~~changes in political conditions or the legislative or regulatory environment;~~

●

~~the adequacy of the level of our allowance for credit losses and the amount of credit loss provisions required to replenish the allowance in future periods;~~

●

~~reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;~~

●

~~changes in the interest rate environment which could reduce anticipated or actual margins;~~

●

~~increased funding costs due to market illiquidity, increased competition for funding, higher interest rates, and increased regulatory requirements with regard to funding;~~

●

results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses through additional credit loss provisions or write-down of our assets;

●

~~the rate of delinquencies and amount of loans charged-off;~~

●

~~the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;~~

●

~~risks and uncertainties relating to not successfully closing and integrating the currently contemplated or completed acquisitions within our currently expected timeframe and other terms;~~

●

~~significant increases in competition in the banking and financial services industries;~~

●

~~changes in the securities markets;~~

●

~~loss of consumer confidence and economic disruptions resulting from national disasters or terrorist activities;~~

●

~~our ability to retain our existing customers, including our deposit relationships;~~

●

~~changes occurring in business conditions and inflation;~~

●

~~changes in technology or risks to cybersecurity;~~

●

~~changes in deposit flows;~~

●

~~changes in accounting principles, policies, or guidelines, including the impact of the new Current Expected Credit Losses (“CECL”) standard;~~

•general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

•adverse changes in asset quality and resulting credit risk-related losses and expenses;

•ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters, public health emergencies and international instability;

•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 or changes in monetary, tax or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the Federal Reserve’s actions with respect to interest rates, the capital requirements promulgated by the Basel Committee on Banking Supervision (“Basel Committee”), potential impacts from the Tax Cuts and Jobs Act, the CARES Act of 2020, and other COVID-19 relief measures, uncertainty relating to calculation of LIBOR and other regulatory responses to economic conditions;

•changes in political conditions or the legislative or regulatory environment;

•the adequacy of the level of our allowance for credit losses and the amount of credit loss provisions required to replenish the allowance in future periods;

•reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

•changes in the interest rate environment which could reduce anticipated or actual margins;

•increased funding costs due to market illiquidity, increased competition for funding, higher interest rates, and increased regulatory requirements with regard to funding;

•results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses through additional credit loss provisions or write-down of our assets;

•the rate of delinquencies and amount of loans charged-off;

•the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;

•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 conditions and inflation;

•changes in technology or risks to cybersecurity;

•changes in deposit flows;

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●

~~our ability to maintain adequate internal control over financial reporting;~~

●

~~risks related to the continued use, availability and reliability of LIBOR and other “benchmark” rates; and~~

●

~~other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”).~~

•changes in accounting principles, policies, or guidelines, including the impact of the Current Expected Credit Losses (“CECL”) standard;

•our ability to maintain adequate internal control over financial reporting;

•risks related to the continued use, availability and reliability of LIBOR and other “benchmark” rates; and

•other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”).

We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in and the assumptions underlying our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved or the assumptions will be accurate. The Company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional information concerning these risks and uncertainties is contained in Item 1A. ~~Risk Factors~~"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 the "Company's 2021 Form 10-K" and in our other filings with the Securities and Exchange Commission, available at the SEC’s website, http://www.sec.gov.

ECONOMIC CONDITIONS

The economic conditions and growth prospects for our markets, even against the headwinds of inflation and recessionary concerns, continue to reflect a solid and positive overall outlook with economic activity close to pre-pandemic levels. Increasing interest rates and rising building costs have caused some slowing of the highly robust single family housing market, however, there continues to be a shortage of housing in several markets in the southeast. Worker shortages especially in the restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers. Overall, the southeast continues to experience economic growth due to company relocations and expansions combined with overall population growth.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. Accounting policies considered critical to our financial results include the allowance for credit losses and related provision, income taxes, goodwill and business combinations. The most critical of these is the accounting policy related to the allowance for credit losses. The allowance is based in large measure upon management’s evaluation of borrowers’ abilities to make loan payments, local and national economic conditions, and other subjective factors. If any of these factors were to deteriorate, management would update its estimates and judgments which may require additional loss provisions. The Company’s critical accounting policies are discussed in detail in Note B “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of the Company’s ~~2020~~2021 Form 10-K.

On January 1, 2021, the Company adopted ASC 326, which changes the accounting for the allowance for credit losses. For a discussion of this new accounting policy, refer to Note 3 “Accounting Standards” to the Consolidated Financial Statements.

As a result of the Company’s immediate response to COVID-19, including loan modifications/payment deferral programs and the Paycheck Protection Program (“PPP), the Company has elected to temporarily suspend the application of one provision of U.S. Generally Accepted Accounting Principles (“GAAP”), as allowed by the CARES Act, which was signed into law by the President on March 27, 2020. Sections 4013 and 4014 of the CARES Act provides the Company with temporary relief from TDRs, which the Company believes prudent to elect in these challenging times to allow us time to provide consistent, high-quality financial information to our investors and other stakeholders.

~~CORONAVIRUS (COVID-19) IMPACT~~

In March 2020, the World Health Organization recognized the novel Coronavirus Disease 2019 as a pandemic. The spread of COVID-19 created a global public health crisis resulting in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. As the restrictive measures began to be eased during the latter part of 2020 and continue to be eased during 2021, the U.S. economy began to improve from 2020, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. Despite the recent progress, the emergence and spread of variants (including the Delta variant, a rapidly spreading strain of coronavirus) remain risks to containing the virus and ending the pandemic. The Company continues to work to adapt to the changing environment and proactively plan for contingencies. To that end, the Company has and is continuing to take steps to protect the health of our employees and to work with our customers experiencing

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difficulties as a result of this virus. We have also been working through loan modifications and payment deferral programs to assist affected customers, and have increased our allowance for loan and lease losses.

The pandemic has had and may continue to have an adverse impact on certain industries the Company serves, including hotels, restaurants, retail, and direct energy. As of September 30, 2021, the Company’s aggregate outstanding exposure in these segments was $457.7 million, or 15.5% of total loans. With the risk of further resurgence and possible reimplementation of restrictions remaining, all available current industry statistics and internal monitoring of loan repayment ability and payment forgiveness across the portfolio continues to be analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration.

On March 27, 2020, the CARES Act was signed into law. The CARES Act is a $2 trillion stimulus package that is intended to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes a $349 billion fund for the creation of the PPP through the Small Business Administration (“SBA”) and Treasury Department. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon borrower providing payroll deductions evidencing their compliant use of funds and otherwise complying with the terms of the program. The PPP was amended in April to include an additional $320 billion in funding. On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) that amends the CARES Act. The PPPFA extended the covered period in which to use PPP loans, extended the forgiveness period from eight weeks to a maximum of 24 weeks and increased flexibility for small businesses that have had issues with rehiring employees and attempting to fill vacant positions due to COVID-19. The program reduced the proportion of proceeds that must be spent on payroll costs from 75% to 60%. In addition, the PPPFA also extended the payment deferral period for the PPP loans until the date when the amount of loan forgiveness is determined and remitted to the lender. For PPP recipients who do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends.

Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDR for a limited period of time to account for the effects of COVID-19. To qualify for Section 4013 of the CARES Act, borrowers must have been current at December 31, 2019. All modifications are eligible as long as they are executed between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) the 60^th day after the end of the COVID-19 national emergency declared by the President of the U.S. Loans that were current as of December 31, 2019 are not TDRs. In addition, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. We began receiving requests from our borrowers for loan and lease deferrals in March 2020. Payment modifications included the deferral of principal payments or the deferral of principal and interest payments for terms generally 90-180 days. Requests were evaluated individually and approved modifications are based on the unique circumstances of each borrower.

On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the “CAA”). The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. In January 2021, we opened the lending portal and started processing second draw PPP loan applications.

On March 11, 2021, the American Rescue Plan Act of 2021 (“ARP”) was signed into law. The $1.9 trillion stimulus aid package builds upon many measures in the CARES Act from March 2020, and in the CAA from December 2020.

As of September 30, 2021, we have modified approximately 1,643 loans for $710.7 million, of which 1,391 loans for $582.3 million were modified to defer monthly principal and interest payments and 252 loans for $128.4 million were modified from monthly principal and interest payments to interest only. At September 30, 2021, there were 2 loans for $4.9 million that were modified to defer principal and interest payments and 18 loans for $23.0 million that were modified from monthly principal and interest payments to interest only that were outstanding. As of September 30, 2021, we have approximately 1,185 PPP loans approved through the SBA for $87.1 million outstanding.

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OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

Third quarter ~~2021~~2022 compared to third quarter ~~2020~~

2021

The Company reported net income available to common shareholders of $14.0 million for the three months ended September 30, 2022, compared with net income available to common shareholders of $16.1 million for the ~~three months ended September 30, 2021, compared with net income available to common shareholders of $11.9 million for the~~ same period last year, ~~an increase of $4.2 million or 35.4%. Provision for credit losses totaled $0 for the quarter ended September 30, 2021,~~ a decrease of ~~$6.9~~$2.1 million or ~~$5.3 million, net of tax, as compared to the third quarter of 2020.~~12.9%. For the third quarter of ~~2021,~~2022, fully diluted earnings per share were ~~$0.76,~~$0.61, compared to ~~$0.55~~$0.76 for the third quarter of ~~2020.~~

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,

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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 totaled $16.1 million compared to $12.1 million for the third quarter of 2020, an increase of $4.0 million or 33.2%. Operating net earnings, which is a non-GAAP financial measure, for the third quarter of 2021 excludes ~~merger-related~~merger and conversion related costs of $4 thousand, net of tax, loss on ~~the~~ sale of fixed assets, ~~of $297 thousand,~~ net of tax, $297 thousand, $1.4 million, net of tax, related to the U.S. Treasury Rapid Response Program ~~(“RRP”~~("RRP"), and $1.0 million, net of tax, in contributions as a result of the RRP grant, to support projects that will benefit the underserved in the communities we serve. Operating net earnings, a non-GAAP financial measure, for the third quarter 2020 excludes merger-related costs of $177 thousand, net of tax.grant. Diluted operating earnings per share, a ~~non-GAPP~~non-GAAP financial measure, ~~were $0.76~~was $0.85 on a fully diluted basis for the third quarter ~~2021,~~2022, compared to ~~$0.56~~$0.76 for the same period in ~~2020,~~2021, excluding the ~~merger-related~~ costs and income described above. See reconciliation of non-GAAP financial measures provided below.

Net interest income for the third quarter ~~2021~~2022 was ~~$40.0~~$49.1 million, an increase of ~~$55 thousand~~$9.1 million or ~~0.1%~~22.8%, ~~for the three months ended September 30, 2021,~~ compared to $40.0 million for the same period in ~~2020.~~2021. Fully tax equivalent (“FTE”) net interest income, which is a non-GAAP measure, totaled ~~$40.7~~$50.1 million and ~~$40.6~~$40.7 million for the third quarter of ~~2021~~2022 and ~~2020,~~2021, respectively. Purchase accounting adjustments decreased ~~$686~~$349 thousand for the third quarter comparisons. Third quarter ~~2021~~2022 FTE net interest margin, which is a non-GAAP measure, ~~of 3.3% included 10~~increased 3.50% including 6 basis points related to purchase accounting adjustments compared to ~~3.6%~~3.25% for the same quarter in ~~2020,~~2021, which included 1710 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the net interest margin ~~decreased 26~~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, ~~2021~~2022 was ~~$9.6~~$9.0 million compared to ~~$8.8~~$9.6 million for the same period in ~~2020,~~2021, reflecting ~~an increase~~a decrease of ~~$792~~$564 thousand or ~~9.0%~~5.9%. This ~~increase is attributed to the $1.8 million RRP grant from the U.S. Treasury and was offset by the~~decrease consisted of $511 thousand decrease in mortgage ~~income of $1.2 million.~~

income.

Pre-tax, pre-provision operating earnings, a non-GAAP measure, ~~decreased 6.9%~~increased 26.2% to ~~$20.5~~$25.9 million for the quarter-ended September 30, ~~2021~~2022 as compared to ~~$22.1~~$20.5 million for the third quarter of ~~2020.~~2021. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the third quarter ~~2021~~2022 excludes ~~merger-related~~merger and conversion related costs ~~$5 thousand, loss on the sale~~ of ~~fixed assets of $397 thousand, $1.8~~$3.6 million, ~~related to the RRP grants, and $1.4~~$4.3 million ~~in contributions, as a result of the RRP grant.~~provision for loan losses. Pre-tax, pre-provision operating earnings, a non-GAAP measure, for the third quarter ~~2020~~of 2021 excludes ~~$238~~merger and conversion related costs of $5 thousand, ~~in acquisition charges~~$397 thousand bargain purchase gain and ~~$6.9~~loss on sale of fixed assets, $1.8 million in ~~provision for loan loss.~~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 ~~$29.1~~$35.9 million for the three months ended September 30, ~~2021,~~2022, an increase of ~~$2.1~~$6.9 million or ~~7.9%~~23.6%, when compared with the same period in ~~2020. Charitable contributions~~2021. Charges related to the acquisition of ~~$1.4~~the Cadence Branches and Beach Bank as well as charter conversion accounted for $3.6 million ~~during~~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 ~~2021 contributed to the increase. These contributions related to the RRP grant and supported projects in underserved communities.~~

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, compared to $984.9 million, or 19.1% of total assets at September 30, 2020.~~2021. The average balance of investment securities increased ~~$406.7~~$727.3 million in prior year quarterly comparison. The average tax equivalent yield on investment securities, which is a non-GAAP measure, 26increased 18 basis points to ~~2.2%~~2.40% from ~~2.5%~~2.22% in prior year quarterly comparison. The investment portfolio had a net unrealized ~~gain~~loss of ~~$18.2~~$216.9 million at September 30, ~~2021~~2022 as compared to a net unrealized gain of ~~$33.2~~$18.2 million at September 30, ~~2020.~~2021. See reconciliation of non-GAAP financial measures provided below.

~~Table of Contents~~

The FTE average yield on all earning assets, a non-GAAP measure, ~~decreased 54~~increased 23 basis points in prior year quarterly comparison, from ~~4.1%~~3.60% for the third quarter of ~~2020~~2021 to ~~3.6%~~3.83% for the third quarter of ~~2021.~~2022. Interest expense on average interest-bearing liabilities decreased 224 basis points from ~~0.6%~~0.52% for the third quarter of ~~2020~~2021 to ~~0.4%~~0.48% for the third quarter of ~~2021.~~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 compared to 47 basis points for the third quarter of 2020.~~2021. See reconciliation of non-GAAP financial measures provided below.

First nine months ~~2021~~2022 compared to first nine months ~~2020~~

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 ~~an increase of $11.2~~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 ~~30.1%~~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-

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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 ~~$37.2 million~~$2.28 for the same period ~~last year. Excluding~~in 2021, excluding the ~~bargain purchase gain~~merger-related costs and income described above. See reconciliation of $7.0 million, net of tax, gain on the sale of land of $463 thousand, net of tax, and the decreased provision expense of $16.7 million, net of tax, recorded during the nine months ended September 2020, net income available to common shareholders increased $2.0 million in the year-over-year comparison.

non-GAAP financial measures provided below.

Net interest income increased ~~$4.1~~by $12.6 million, or ~~3.6%~~10.7%, to $129.9 million for the nine months ended September 30, ~~2021,~~2022, compared to ~~$113.2~~$117.3 million for the same period in ~~2020.~~2021. This increase was primarily due to interest earned on a ~~higher~~high volume of ~~securities and a reduction in interest expense due to changes in rates.~~securities. Average earning assets at September 30, ~~2021,~~2022, increased ~~$755.6~~$752.1 million, or ~~18.2%~~15.3%, and average interest-bearing liabilities ~~increased $711.9~~decreased $597.5 million, or ~~18.8%~~13.3%, when compared to September 30, ~~2020.~~

2021.

Non-interest income for the nine months ended September 30, ~~2021,~~2022, was ~~$27.9~~$28.8 million compared to ~~$30.9~~$27.9 million for the same period in ~~2020,~~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 ~~$3.1 million or 9.9%. Excluding the gains mentioned above, non-interest income increased $4.6~~$3.6 million in ~~year-over-year comparison. Interchange fee income increased $1.7 million and the RRP grant of $1.8 million accounted for the increase in the year-over-year comparison.~~

mortgage income.

The provision for credit losses was $0$4.9 million for the nine months ended September 30, ~~2021,~~2022, compared with ~~$21.6 million~~$0 provision for ~~loan~~credit losses for the same period in ~~2020.~~2021. The allowance for credit losses of ~~$32.4~~$38.4 million at September 30, ~~2021~~2022 (approximately ~~1.1%~~1.0% of total loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. See “Allowance for Credit Losses” in Item 2. ~~– Management’s~~"Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations" for more information on this evaluation.

Non-interest expense was ~~$83.8~~$95.4 million for the nine months ended September 30, ~~2021,~~2022, an increase of ~~$5.3~~$11.7 million or ~~6.8%~~13.9%, when compared with the same period in ~~2020. An~~2021. The increase ~~of $3.7 million in salaries and employee benefits,~~is primarily attributable to an increase of ~~$1.7~~$5.2 million in ~~occupancy expense~~acquisition and ~~the $1.4~~charter conversion expenses and $2.5 million ~~in charitable contributions contributed~~related to the ~~increase.~~

ongoing charges associated with the Cadence Branches and $2.1 million related 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 ~~$5.504~~$6.443 billion at September 30, ~~2021~~2022 compared to ~~$5.145~~$6.067 billion at December 31, ~~2020,~~2021, an increase of ~~$358.9~~$376.5 million. Loans, including loans held for sale, ~~decreased $139.8~~increased $754.4 million to ~~$2.969~~$3.722 billion, or ~~4.5%~~25.4%, during the first nine months of ~~2021.~~2022. Deposits at September 30, ~~2021~~2022 totaled ~~$4.715~~$5.558 billion compared to ~~$4.283~~$5.262 billion at December 31, ~~2020.~~

2021.

For the nine months period ended September 30, ~~2021,~~2022, The First reported net income of ~~$55.2~~$53.6 million compared to ~~$43.0~~$55.2 million for the nine months ended September 30, ~~2020.~~2021. Merger and conversion charges equaled $3.9 million, net of tax, ~~equaled $4 thousand~~ for the first nine months of ~~2021~~2022 as compared to ~~$2.1 million~~$0 for the first nine months of ~~2020.~~

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.

~~Table of Contents~~

NET 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 ~~$55 thousand,~~$12.6 million, or ~~0.1%~~10.7%, to $129.9 million for the ~~third quarter of 2021 relative~~nine month period ending September 30, 2022 compared to the ~~third quarter of 2020.~~same period in 2021. The ~~slight~~ increase ~~was due~~is primarily related to interest income earned on a higher volume of ~~securities and was partially offset by declines in total average~~ loans and ~~earning asset yield as well as declining cost of funds.~~securities. PPP loans totaled ~~$87.1~~$1.5 million as of September 30, ~~2021~~2022, a decrease of ~~$173.1~~$156.3 million or ~~66.5%~~99.0% when compared to the same period last ~~year.~~year due to loan forgiveness under the PPP program. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on nonaccrual status during the reporting period, and the recovery of interest on loans that had been on nonaccrual and were paid off, sold or returned to accrual status.

Table of Contents

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, 2021

September 30, 2020

Tax

Tax

Avg.

Equivalent

Yield/

Avg.

Equivalent

Yield/


Balance

interest

Rate

Balance

interest

Rate

Earning Assets:













Taxable securities

$
986,821

$
5,033

2.04
%
$
616,168

$
3,433

2.23
%
Tax exempt securities

377,610

2,550

2.70
%

341,550

2,512

2.94
%
Total investment securities

1,364,431

7,583

2.22
%

957,718

5,945

2.48
%
Interest bearing deposits in other banks

656,891

17

0.01
%

413,786

29

0.03
%
Loans

2,983,771

37,480

5.02
%

3,165,653

40,999

5.18
%
Total earning assets

5,005,093

45,080

3.60
%

4,537,157

46,973

4.14
%
Other assets

506,134



548,183





Total assets

$
5,511,227



$
5,085,340





Interest-bearing liabilities:













Deposits

$
4,422,690

$
2,588

0.23
%
$
3,960,054

$
4,912

0.50
%
Borrowed funds

206

—

0.00
%

115,935

265

0.91
%
Subordinated debentures

144,630

1,819

5.03
%

81,470

1,188

5.83
%
Total interest-bearing liabilities

4,567,526

4,407

0.39
%

4,157,459

6,365

0.61
%
Other liabilities

279,107



295,354



Shareholders’ equity

664,594



632,527



Total liabilities and shareholders’ equity

$
5,511,227



$
5,085,340



Net interest income

$
40,028





$
39,973



Net interest margin

3.20
%



3.52
%
Net interest income (FTE)*

$
40,673

3.22
%

$
40,608

3.53
%
Net interest margin (FTE)*

3.25
%



3.58
%


($ in thousands)	Three Months Ended
	September 30, 2022						September 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 securities	479,168		3,849		3.21	%	377,610		2,550		2.70	%
Total investment securities	2,091,234		12,572		2.40	%	1,364,431		7,583		2.22	%
Interest bearing deposits in other banks	143,867		2		0.01	%	656,891		17		0.01	%
Loans	3,492,110		42,274		4.84	%	2,983,771		37,480		5.02	%
Total earning assets	5,727,211		54,848		3.83	%	5,005,093		45,080		3.60	%
Other assets	645,661						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 funds	13,261		92		2.78	%	206		—		—	%
Subordinated debentures	144,910		1,886		5.21	%	144,630		1,819		5.03	%
Total interest-bearing liabilities	3,935,230		4,726		0.48	%	3,419,093		4,407		0.52	%
Other liabilities	1,806,898						1,427,540
Shareholders’ equity	630,744						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	%

Table of Contents

($in thousands)

Nine Months Ended

September 30, 2021

September 30, 2020

Tax

Tax

Avg.

Equivalent

Yield/

Avg.

Equivalent

Yield/


Balance

interest

Rate

Balance

interest

Rate

Earning Assets:













Taxable securities

$
847,745

$
12,641

1.99
%
$
594,216

$
10,815

2.43
%
Tax exempt securities

370,706

7,693

2.77
%

289,087

6,674

3.08
%
Total investment securities

1,218,451

20,334

2.23
%

883,303

17,489

2.64
%

Interest bearing deposits in other banks

644,074

103

0.02
%

288,898

337

0.16
%
Loans

3,040,818

114,368

5.01
%

2,975,535

117,597

5.27
%
Total earning assets

4,903,343

134,805

3.67
%

4,147,736

135,423

4.35
%
Other assets

532,968

516,956

Total assets

$
5,436,311

$
4,664,692

Interest-bearing liabilities:

Deposits

$
4,324,047

$
9,752

0.30
%
$
3,584,416

$
15,544

0.58
%
Borrowed funds

34,202

339

1.32
%

125,608

1,406

1.49
%
Subordinated debentures

144,604

5,462

5.04
%

80,969

3,567

5.87
%
Total interest-bearing liabilities

4,502,853

15,553

0.46
%

3,790,993

20,517

0.72
%
Other liabilities

280,930

277,911

Shareholders’ equity

652,528

595,788

Total liabilities and shareholders’ equity

$
5,436,311

$
4,664,692

Net interest income

$
117,307



$
113,217

Net interest margin

3.19
%



3.64
%
Net interest income (FTE)*

$
119,253

3.21
%

$
114,906

3.63
%
Net interest margin (FTE)*

3.24
%





3.69
%


($ in thousands)	Nine Months Ended
	September 30, 2022						September 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 securities	485,101		10,812		2.97	%	370,706		7,693		2.77	%
Total investment securities	2,038,921		34,059		2.23	%	1,218,451		20,334		2.23	%
Interest bearing deposits in other banks	465,312		47		0.01	%	644,074		103		0.02	%
Loans	3,151,197		111,091		4.70	%	3,040,818		114,368		5.01	%
Total earning assets	5,655,430		145,197		3.42	%	4,903,343		134,805		3.67	%
Other assets	572,623						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 funds	4,469		92		2.74	%	34,202		339		1.32	%
Subordinated debentures	144,835		5,546		5.11	%	144,604		5,462		5.04	%
Total interest-bearing liabilities	3,905,381		12,574		0.43	%	4,502,853		15,553		0.46	%
Other liabilities	1,692,565						280,930
Shareholders’ equity	630,107						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	%

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

Table of Contents

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

The following table provides details on the Company’s non-interest income and non-interest expense for the three and nine months ended September 30, ~~2021~~2022 and ~~2020:~~

2021:


($ in thousands)	Three Months Ended
EARNINGS STATEMENT	September 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 income	1,221		13.5	%	1,732		18.1	%
Interchange fee income	3,310		36.7	%	2,744		28.6	%
(Loss) gain on securities, net	1		—	%	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	%
Other	2,271		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 expense	3,826		10.7	%	3,922		13.5	%
FDIC/OCC premiums	496		1.4	%	532		1.8	%
Marketing	50		0.1	%	78		0.3	%
Amortization of core deposit intangibles	1,227		3.4	%	1,052		3.6	%
Other professional services	1,256		3.5	%	934		3.2	%
Other non-interest expense	6,309		17.6	%	6,284		21.6	%
Acquisition and charter conversion charges	3,640		10.1	%	5		0.0	%
Total non-interest expense	$	35,903	100	%	$	29,053	100	%

Table of Contents

($ in thousands)

Three Months Ended

Nine Months Ended

EARNINGS STATEMENT

9/30/21

% of Total

9/30/20

% of Total


9/30/21

% of Total

9/30/20

% of Total

Non-interest income:

Service charges on deposit accounts

$
1,846

19.3
%
$
1,779

20.2
%

$
5,363

19.2
%
$
5,289

29.6
%
Mortgage fee income

1,732

18.1
%

2,961

33.7
%

7,266

26.1
%

7,174

23.2
%
Interchange fee income

2,744

28.6
%

2,491

28.3
%

8,533

30.6
%

6,872

22.2
%
Gain on securities, net

11

0.1
%

32

0.4
%

107

0.4
%

278

0.9
%
Gain on acquisition

—

—
%

—

—
%

—

—
%

7,023

22.7
%
(Loss) gain on sale of premises and equipment

(397)

(4.1)
%

—

—
%

(383)

(1.4)
%

461

2.0
%
RRP Grant

1,826

19.0
%

—

—
%

1,826

19.0
%

—

—
%
Other

1,824

19.0
%

1,531

17.4
%

5,169

18.5
%

3,851

11.9
%
Total non-interest income

$
9,586

100
%
$
8,794

100
%

$
27,881

100
%
$
30,948

100
%

Non-interest expense:

Salaries and employee benefits

$
16,246

56.0
%
$
15,494

57.5
%

$
48,337

57.7
%
$
44,589

56.8
%
Occupancy expense

3,922

13.5
%

3,826

14.2
%

11,614

13.9
%

9,943

12.7
%
FDIC/OCC premiums

532

1.8
%

447

1.7
%

1,524

1.8
%

831

1.1
%
Marketing

78

0.3
%

24

0.1
%

277

0.3
%

262

0.3
%
Amortization of core deposit intangibles

1,052

3.6
%

1,052

3.9
%

3,155

3.8
%

3,041

3.9
%
Other professional services

934

3.2
%

990

3.7
%

2,917

3.5
%

2,848

3.6
%
Other non-interest expense

6,284

21.6
%

4,865

18.0
%

15,941

19.0
%

13,658

17.4
%
Acquisition and integration charges

5

—
%

238

0.9
%

5

—
%

3,273

4.2
%
Total non-interest expense

$
29,053

100
%
$
26,936

100
%

$
83,770

100
%
$
78,445

100
%

($ in thousands) Nine Months Ended
EARNINGS STATEMENT September 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 income 3,678 12.8 % 5,534 30.2 %
Interchange fee income 9,609 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 acquisition 281 1.0 % — 0.0 %
Government awards/grants 873 3.0 % — 0.0 %
BOLI income from death proceeds 1,630 5.7 % — 0.0 %
Other 6,671 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 expense 11,530 12.1 % 7,692 14.1 %
FDIC/OCC premiums 1,608 1.7 % 993 1.8 %
Marketing 258 0.3 % 199 0.4 %
Amortization of core deposit intangibles 3,355 3.5 % 2,104 3.8 %
Other professional services 2,587 2.7 % 1,983 3.6 %
Other non-interest expense 17,755 18.6 % 9,655 17.6 %
Acquisition and charter conversion charges 5,220 5.5 % — 0.0 %
Total non-interest expense $ 95,448 100 % $ 54,717 100 %

PROVISION FOR INCOME TAXES

The Company sets aside a provision for income taxes on a monthly basis. The amount of the provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits if applicable. Permanent differences include but are not limited to tax-exempt interest income, bank-owned life insurance cash surrender value income, and certain book expenses that are not allowed as tax deductions.

The Company’s provision for income taxes was $3.9 million or 21.8% of earnings before income taxes for the third quarter 2022, compared to $4.4 million or 21.5% of earnings before income taxes for the ~~third quarter 2021, compared to $3.0 million or 20.1% of earnings before income taxes for the~~ same period in ~~2020.~~2021. The provision for the nine months ended September 30, ~~2021~~2022 was ~~$13.0~~$11.8 million or ~~21.2%~~20.1% of earnings before income taxes compared to ~~$6.9~~$13.0 million or ~~15.7%~~21.2% for the same period in 2020. The effective tax rate for 2020 includes any provisions related to the CARES Act that was signed into law on March 27, 2020 and the $7.0 million, non-taxable, bargain purchase gain related to the acquisition of Southwest Georgia Financial Corporation (“SWG”). The CARES Act includes several significant provisions for corporations including increasing the amount of deductible interest under section 163(j) of the Internal Revenue Code of 1986, as amended, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss that corporations can use to offset income.

2021.

~~Table of Contents~~

BALANCE SHEET ANALYSIS

EARNING ASSETS

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

INVESTMENTS

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

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our Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. Surplus FRB balances and federal funds sold to correspondent banks represent the temporary investment of excess liquidity. The Company’s investments serve several purposes: 1) they provide liquidity to even out cash flows from the loan and deposit activities of customers; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with maturity and interest rate characteristics that can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; 4) they are another interest-earning option for surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. Total securities, excluding other securities, totaled ~~$1.463~~$1.973 billion, or ~~26.5%~~30.6% of total assets at September 30, ~~2021~~2022 compared to ~~$1.022~~$1.752 billion, or ~~19.8%~~28.8% of total assets at December 31, ~~2020.~~

2021.

There were no$10.0 million federal funds sold at September 30, ~~2021~~2022 and $0 at December 31, ~~2020;~~2021; and interest-bearing balances at other banks ~~increased~~decreased to ~~$544.1~~$92.3 million at September 30, ~~2021~~2022 from ~~$424.9~~$804.5 million at December 31, ~~2020.~~2021. The decrease in interest-bearing balances is primarily related to a $721.7 million decrease in the Federal Reserve Bank 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 ~~$435.8~~$230.0 million, or ~~41.5%~~13.0%, to ~~a total fair market value of $1.485~~$2.004 billion at September 30, ~~2021~~2022 compared to December 31, ~~2020.~~2021. The increase in the portfolio is related to purchases that were made in the first nine months of 2022 offset by a decrease in the fair market value of $227.6 million. The Company carries available-for-sale investments at their fair market values and held-to-maturity investments at their amortized costs. The fair value of available-for-sale securities totaled $1.379 billion at September 30, 2022 compared to $1.752 billion at December 31, 2021. The ~~Company’s~~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.

Refer to the tables shown in Note 9 – Securities to the Consolidated Financial Statements for information on the Company’s amortized cost and fair market value of its investment portfolio by investment type.

LOAN PORTFOLIO

Loans Held for Sale ~~(LHFS)~~

(“LHFS”)

The Bank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and concurrently “locks in” with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the mortgage servicing rights being retained by the Bank. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors. Associated servicing rights are not retained. At September 30, ~~2021,~~2022, LHFS totaled ~~$8.5~~$2.2 million, compared to ~~$21.4~~$7.7 million at December 31, ~~2020.~~

2021.

Loans Held for Investment ~~(LHFI)~~

(“LHFI”)

LHFI, net of deferred fees and costs, were ~~$2.929~~$3.681 billion at September 30, ~~2021, a decrease~~2022, an increase of ~~$159.4~~$752.2 million, or ~~5.4%~~25.7%, from ~~$3.088~~$2.929 billion at December 31, ~~2020.~~2021. The ~~Company experienced a decrease in~~acquisition of BBI accounted for approximately $502.3 million of the ~~commercial, financial, and agriculture loan portfolio related to PPP loans forgiven since December 31, 2020.~~increase. PPP loans were ~~$87.1~~$1.5 million at September 30, ~~2021,~~2022, a decrease of ~~$152.6~~$39.6 million, or ~~63.7%~~96.3%, from ~~$239.7~~$41.1 million at December 31, ~~2020.~~

2021.

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The following table presents the Company’s composition of LHFI, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans ($ in thousands):


	September 30, 2022				December 31, 2021
	Amount		Percent of Total		Amount		Percent of Total
Commercial, financial and agriculture (1)	$	517,197	13.9	%	$	397,516	13.4	%
Commercial real estate	2,125,471		57.1	%	1,683,698		57.0	%
Consumer real estate	1,032,343		27.8	%	838,654		28.3	%
Consumer installment	44,377		1.2	%	39,685		1.3	%
Total loans	3,719,388		100	%	2,959,553		100	%
Allowance for credit losses	(38,356)				(30,742)
Net loans	$	3,681,032			$	2,928,811

September 30, 2021 (1)

December 31, 2020



Percent

Percent

Amount

of Total

Amount

of Total

Commercial, financial and agriculture (2)

$
449,098

15.2
%
$
579,443

18.6
%
Commercial real estate

1,650,461

55.8
%

1,652,993

52.9
%
Consumer real estate

824,513

27.8
%

850,206

27.2
%
Consumer installment

36,847

1.2
%

41,036

1.3
%
Total loans

2,960,919

100
%

3,123,678

100
%
Allowance for credit losses

(32,418)

(35,820)



Net loans

$
2,928,501

$
3,087,858

(1)~~Effective January 1, 2021, The Company adopted ASC 326 using the modified retrospective approach; therefore, prior period balances are presented under legacy GAAP.~~

~~(2)~~Loan amount includes ~~$87.1~~$1.5 million and ~~$239.7~~$41.1 million in PPP loans at September 30, ~~2021~~2022 and December 31, ~~2020,~~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.

LOAN CONCENTRATIONS

Diversification within the loan portfolio is an important means of reducing inherent lending risk. As of September 30, ~~2021,~~2022, management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area.

NON-PERFORMING ASSETS

Non-performing assets (“NPAs”) are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and other ~~OREO.~~real estate owned. Loans are placed on nonaccrual status when they become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans totaled ~~$25.0~~$15.8 million at September 30, ~~2021,~~2022, a decrease of ~~$8.8~~$12.2 million from December 31, ~~2020.~~

2021.

Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled ~~$2.6~~$10.3 million at September 30, ~~2021~~2022, an increase of $7.8 million as compared to ~~$5.8~~$2.6 million at December 31, ~~2020.~~

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 it would not otherwise consider but for the borrower’s financial difficulty. At September 30, ~~2021,~~2022, the Bank had ~~$25.9~~$23.4 million in loans that were classified as TDRs, of which ~~$10.6~~$15.8 million were performing as agreed with modified terms. At December 31, ~~2020,~~2021, the Bank had ~~$27.5~~$24.2 million in loans that were classified as TDRs of which ~~$6.2~~$5.2 million were performing as agreed with modified terms. TDRs may be classified as either non-performing or performing loans depending on their accrual status. As of September 30, ~~2021, $15.3~~2022, $7.7 million in loans categorized as TDRs were classified as non-performing as compared to ~~$21.3~~$18.9 million at December 31, ~~2020.~~

2021.

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The following table presents comparative data for the Company’s non-performing assets and performing TDRs as of the dates ~~noted ($ in thousands):~~

9/30/21 (1)

12/31/20

Nonaccrual Loans

Commercial, financial and agriculture

$
228

$
2,418

Commercial real estate

17,715

22,887

Consumer real estate

7,046

8,434

Consumer installment

23

35

Total Nonaccrual Loans

25,012

33,774

Other real-estate owned

2,580

5,802

Total NPAs

$
27,592

$
39,576

Performing TDRs

$
10,621

$
6,201

Past due 90 days or more and still accruing

$
456

$
2,692

Total NPA’s as a % of total loans & leases net of unearned income

0.9
%

1.3
%
Total nonaccrual loans as a % of total loans & leases net of unearned income

0.8
%

1.1
%

noted.

~~(1)Effective January 1, 2021, The Company adopted ASC 326 using the modified retrospective approach; therefore, prior period balances are presented under legacy GAAP.~~


($ in thousands)	September 30, 2022			December 31, 2021
Nonaccrual Loans
Commercial, financial and agriculture	$	29		$	190
Commercial real estate	11,452			21,527
Consumer real estate	4,361			6,288
Consumer installment	2			8
Total Nonaccrual Loans	15,844			28,013

Other real-estate owned	10,328			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 income	0.7		%	1.0		%
Total nonaccrual loans as a % of total loans & leases net of unearned income	0.4		%	0.9		%

NPAs totaled ~~$27.6~~$26.2 million at September 30, ~~2021,~~2022, compared to ~~$39.6~~$30.6 million at December 31, ~~2020,~~2021, a decrease of ~~$12.0~~$4.4 million. The ACL/total loans ratio was ~~1.1%~~1.03% at September 30, ~~2021,~~2022, and ~~the ALLL/total loans ratio was 1.2%~~1.04% at December 31, ~~2020. The decrease in the ACL/total loans ratio is primarily attributable to the $3.8 million in net charge-offs recorded during the nine months ended September 30,~~ 2021. Total valuation accounting adjustments were ~~$4.7~~$11.5 million on acquired loans at September 30, ~~2021.~~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%~~(0.04)% for the quarter ended September 30, ~~2021~~2022 compared to ~~0.25%~~0.03% for the year ended December 31, ~~2020.~~

2021.

ALLOWANCE FOR CREDIT LOSSES

On January 1, 2021, the Company adopted the ASC 326. The FASB issued ASC 326 to replace the incurred loss model for loans and other financial assets with an expected loss model and requires consideration of a wider range of reasonable and supportable information to determine credit losses. In accordance with ASC 326, the Company has developed an ACL methodology effective January 1, 2021, which replaces its previous allowance for loan losses methodology. The ACL is a valuation account that is deducted from loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environment conditions, such as changes in unemployment rates, property values, or other relevant factors. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Management evaluates the adequacy of the ACL quarterly and makes provisions for credit losses based on this evaluation. See Note ~~3 “Accounting Standards”~~10 “Loans” for a ~~complete~~ description of the Company’s methodology and the quantitative and qualitative factors included in the calculation.

~~Upon the adoption of ASC 326, the Company recorded a $397 thousand increase to the ACL.~~

At September 30, ~~2021,~~2022, the ACL was ~~$32.4~~$38.4 million, or ~~1.1%~~1.0% of LHFI, ~~a decrease~~an increase of ~~$3.4~~$7.6 million, or ~~9.5%~~24.8% when compared to December 31, ~~2020.~~2021. The ~~decrease is related to charge-offs taken~~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 ~~several~~PCD loans ~~during 2021 and was offset by a slight increase related to~~acquired in the ~~ASC 326 transition entry.~~BBI merger. At December 31, ~~2020,~~2021, the allowance for loan losses was approximately ~~$35.8~~$30.7 million, which was ~~1.2%~~1.0% of LHFI.

~~Table of Contents~~

At September 30, ~~2021,~~2022, management believes the allowance is appropriate and should any of the factors considered by management in evaluating the appropriateness of the allowance for credit losses change, management’s

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estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for credit losses.

The table that follows summarizes the activity in the allowance for credit losses for the three and nine months ended September 30, ~~2021~~2022 and ~~the allowance for loan losses for the three and nine months ended September 30, 2020~~2021 ($ in thousands):

Allowance for Credit Losses


Three Months

Three Months

Nine Months

Nine Months


Ended

Ended

Ended

Ended

9/30/21

9/30/20

9/30/21

9/30/20

Average LHFI outstanding during period:

$
2,983,771

$
3,165,653

$
3,040,818

$
2,975,535

LHFI outstanding at end of period:

2,960,919

3,178,414

2,960,919

3,178,414

Allowance for Credit Losses:

Balance at beginning of period

$
32,457

$
28,064

$
35,820

$
13,908

ASC 326 adoption adjustment

—

—

397

—

Provision charged to expense

—

6,921

—

21,628

Charge-offs:

Commercial, financial and agriculture

142

78

1,618

342

Commercial real estate

59

769

3,066

1,165

Consumer real estate

19

55

282

151

Consumer installment

166

32

431

645

Total Charge-offs

386

934

5,397

2,303

Recoveries:

Commercial, financial and agriculture

57

37

382

137

Commercial real estate

180

18

473

379

Consumer real estate

39

17

276

180

Consumer installment

71

133

467

327

Total Recoveries

347

205

1,598

1,023

Net loan charge offs (recoveries)

39

729

3,799

1,280

Balance at end of period

$
32,418

$
34,256

$
32,418

$
34,256

RATIOS



Net Charge-offs (recoveries) to average LHFI (annualized)

0.0
%

0.1
%

0.2
%

0.1
%
ACL to LHFI at end of period

1.1
%

1.1
%

1.1
%

1.1
%
Net Loan Charge-offs (recoveries) to PCL

0.0
%

10.5
%

0.0
%

5.9
%


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 loans	1,303			—			1,303			—
Provision:
Initial provision for acquired non-PCD loans	3,855			—			3,855			—
Provision for credit losses charged to expense	445			—			895			—
Charge-offs:
Commercial, financial and agriculture	—			142			146			1,618
Commercial real estate	—			59			27			3,066
Consumer real estate	55			19			202			282
Consumer installment	186			166			523			431
Total Charge-offs	241			386			898			5,397
Recoveries:
Commercial, financial and agriculture	292			57			388			382
Commercial real estate	18			180			532			473
Consumer real estate	39			39			987			276
Consumer installment	245			71			552			467
Total Recoveries	594			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 period	1.0		%	1.1		%	1.0		%	1.1		%
Net Loan Charge-offs (recoveries) to PCL	(79.3)		%	0.0		%	(174.4)		%	0.0		%

The Company recorded noa $4.3 million and $4.8 million provision for credit losses for the three and nine months ended September 30, ~~2021, compared to $6.9 million for the three months ended September 30, 2020~~2022 and $21.6 million for the nine months ended September 30, 2020. The higher provision in 2020 was related to our estimates of probable incurred losses associated with COVID-19. The improved macroeconomic outlook for 2021 and the Company’s ACL calculation under ASC 326 resulted in no further provision adjustment$0 for the three and nine months ended September 30, ~~2021.~~

2021, respectively. An initial provision for acquired non-PCD loans of $3.9 million and an initial allowance on PCD loans of $1.3 million was recorded as of September 30, 2022 due to the acquisition of BBI.

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The following tables summarizes the ACL at September 30, ~~2021~~2022 and ~~the allowance for loan and lease losses (“ALLL”)~~ at December 31, ~~2020.~~

($ in thousands)

September 30, 2021

December 31, 2020


Amount

Amount
Commercial, financial and agriculture

$
3,825

$
6,214
Commercial real estate

17,694

24,319
Consumer real estate

10,359

4,736
Consumer installment

540

551
Total

$
32,418

$
35,820

2021.


($ in thousands)	September 30, 2022		December 31, 2021
Commercial, financial and agriculture	$	5,900	$	4,873
Commercial real estate	20,925		17,552
Consumer real estate	10,984		7,889
Consumer installment	547		428
Total	$	38,356	$	30,742

~~Table of Contents~~

ALLOWANCE FOR CREDIT LOSSES ON OBSC EXPOSURES

~~On January 1, 2021, the Company adopted ASC 326.~~

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on OBSC exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. ~~Upon adoption of ASC 326, the Company recorded an ACL on unfunded commitments of $718 thousand.~~ The Company recorded no$150 thousand provision for credit losses on OBSC exposures for the ~~three and~~ nine ~~months~~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 ~~$113.2~~$71.6 million at September 30, ~~2021~~2022 and ~~$137.7~~$115.2 million at December 31, ~~2020.~~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 (“FHLB”). Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, the Company will let brokered deposits or other wholesale borrowings roll off as they mature, or might invest excess liquidity in higher-yielding, longer-term bonds.

Total other securities ~~decreased $5.3~~increased $8.8 million ~~or 19.1%,~~ to ~~$22.2~~$31.1 million at September 30, ~~2021~~2022 compared to ~~$27.5~~$22.2 million at December 31, 2021. ~~The decrease~~A majority of the increase in other securities is ~~due~~related to ~~a reduction~~an increase in ~~FHLB stock.~~stock held at the FHLB. The Company’s net premises and equipment at September 30, ~~2021~~2022 was ~~$116.9~~$140.5 million and ~~$114.8~~$126.0 million at December 31, ~~2020;~~2021; anincreaseof ~~$2.1~~$14.6 million, or ~~1.8%~~12% for the first nine months of ~~2021.~~2022. The increase is attributed to the BBI acquisition. Operating right-of-use assets at September 30, ~~2021,~~2022 totaled ~~$4.2~~$7.9 million compared to ~~$6.0~~$4.1 million at December 31, ~~2020, a decrease~~2021, an increase of ~~$1.8~~$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, ~~2021,~~2022 totaled ~~$2.5~~$2.0 million compared to ~~$2.7~~$2.4 million at December 31, ~~2020,~~2021, a decrease of ~~$184~~$348 thousand. Bank-owned life insurance at September 30, ~~2021~~2022 totaled ~~$87.5~~$95.4 million compared to ~~$73.7~~$87.4 million at December 31, ~~2020,~~2021, an increase of ~~$13.8~~$7.9 million. The ~~majority~~increase in bank-owned life insurance is attributed to $10.1 million of insurance included in the ~~increase was due to the purchase~~acquisition of ~~$12.3 million~~BBI offset by a decrease in ~~BOLI contracts~~death benefits received in the first quarter of ~~2021.~~2022. Goodwill at September 30, ~~2021 remained unchanged at $156.9~~2022 increased $22.1 million ~~when~~to $178.8 million compared to $156.7 million at December 31, ~~2020.~~2021 as a result of the BBI acquisition. Other intangible assets, consisting primarily of the Company’s core deposit intangible (“CDI”), ~~decreased~~increased by ~~$3.2~~$6.4 million to ~~$27.6~~$35.9 million as of September 30, ~~2021,~~2022, compared to ~~$30.8~~$29.5 million at December 31, ~~2020.~~

2021, due to the BBI acquisition.

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually, and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. At September 30, ~~2021,~~2022, management has determined that no impairment exists.

Other real estate owned ~~decreased~~increased by ~~$3.2~~$7.8 million, or ~~55.5%~~303%, to ~~$2.6~~$10.3 million at September 30, ~~2021~~2022 as compared to December 31, ~~2020.~~

2021. The acquisition of BBI accounted for approximately $8.1 million of the increase.

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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 ~~$549.0~~$630.2 million at September 30, ~~2021~~2022 and ~~$466.2~~$627.8 million at December 31, ~~2020,~~2021, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately ~~18.5%~~16.9% of gross loans at September 30, ~~2021~~2022 and ~~14.9%~~21.2% at December 31, ~~2020.~~2021. The Company also had undrawn similar standby letters of credit to customers totaling ~~$11.8~~$14.5 million at September 30, ~~2021~~2022 and ~~$15.7~~$12.3 million at December 31, ~~2020.~~2021. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments. For more information regarding the Company’s off-balance sheet arrangements, see Note 7 ~~– Financial~~"Financial Instruments with Off-Balance ~~Risk~~Risk" to the Consolidated Financial Statements.

~~Table of Contents~~

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, ~~2021.~~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 ~~$1.470~~$1.494 billion at September 30, ~~2021.~~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, ~~2021,~~2022, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised ~~$755.4 million~~$1.097 billion of the Company’s investment balances, compared to ~~$513.2~~$985.4 million at December 31, ~~2020.~~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, ~~2021~~2022 was ~~34.1%~~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, 2021

Policy Maximum

Policy Compliance
Loans to Deposits (including FHLB advances)

62.3
%
90.0
%
In Policy
Net Non-core Funding Dependency Ratio

(10.0)
%
20.0
%
In Policy
Fed Funds Purchased / Total Assets

0.0
%
10.0
%
In Policy
FHLB Advances / Total Assets

0.0
%
20.0
%
In Policy
FRB Advances / Total Assets

0.0
%
10.0
%
In Policy
Pledged Securities to Total Securities

52.5
%
90.0
%
In Policy


	September 30, 2022		Policy Maximum		Policy Compliance
Loans to Deposits (including FHLB advances)	66.4	%	90.0	%	In Policy
Net Non-core Funding Dependency Ratio	1.3	%	20.0	%	In Policy
Fed Funds Purchased / Total Assets	0.2	%	10.0	%	In Policy
FHLB Advances / Total Assets	1.2	%	20.0	%	In Policy
FRB Advances / Total Assets	0.0	%	10.0	%	In Policy
Pledged Securities to Total Securities	45.6	%	90.0	%	In Policy

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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, ~~2021,~~2022, cash and cash equivalents were ~~$657.3~~$163.8 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately ~~$559.3~~$915.0 million at September 30, ~~2021.~~2022. Approximately ~~$560.8~~$630.2 million in loan commitments could fund within the next three months and includes other commitments, primarily commercial and ~~$11.8~~$14.5 million similar letters of credit, at September 30, ~~2021.~~

2022.

Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs. During March 2020, in response to COVID-19, the Federal Reserve lowered the primary credit rate by 150 basis points to 0.25 percent and extended terms to 90 days to enhance market liquidity and encourage use of the discount window. In addition, the Federal Reserve announced it would begin quantitative easing, or large-scale asset purchases, consisting primarily of Treasury securities and mortgage-backed securities to stem the effects of the pandemic on the financial markets. Failure to continue to contain the COVID-19 pandemic could cause a widespread liquidity crisis, and the availability of these funds or the options to sell securities currently held could be hindered. The full impact and duration of COVID-19 on our business is unknown but if it continues to curtail economic activity, it could impact our ability to obtain funding and result in the reduction of or the cessation of dividends.

The Company’s primary uses of funds are ordinary operating expenses and shareholder dividends, and its primary source of funds is dividends from the Bank since the Company does not conduct regular banking operations. Both the Company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 1. Business ~~– Supervision~~"Supervision and ~~Regulation~~Regulation" in the Company’s ~~Annual Report on~~2021 Form ~~10-K for the year ended December 31, 2020.~~

10-K.

DEPOSITS

Deposits are another key balance sheet component impacting the Company’s net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates for the ~~nine-month~~nine month periods ended September 30, ~~2021~~2022 and ~~2020~~2021 is included in the Average Balances, Tax Equivalent Interest and Yield/Rates tables appearing above, under the heading “Net Interest Income and Net Interest Margin.” ~~The~~

In the third quarter of 2022, the Company ~~implemented~~ceased the Deposit Reclassification program it implemented at the beginning of 2020. ~~This~~The program ~~reclassifies~~reclassified non-interest bearing ~~deposits~~ and NOW deposit balances to money market accounts. This program reduces our reserve balance required at the Federal Reserve Bank of Atlanta and provides additional funds for liquidity or lending. At quarter-end September 30, 2021, $828.1 million in non-interest deposit balances and $854.0 million in NOW deposit accounts were reclassified as money market accounts. A distribution of the Company’s deposits ~~without reclassification~~ showing the year-to-date average balance and percentage of total deposits by type is presented for the noted periods in the following table.

Deposit Distribution

September 30, 2021

December 31, 2020

Percent of

Percent of

($ in thousands)

Amount

Total

Amount

Total

Non-interest bearing demand deposits

$
1,424,208

30.5
%
$
1,185,980

28.1
%
NOW accounts and Other

1,524,935

32.6
%

1,347,778

32.0
%
Money Market accounts

758,724

16.3
%

705,357

16.7
%
Savings accounts

455,287

9.7
%

395,116

9.4
%
Time Deposits of less than $250,000

390,289

8.4
%

218,418

5.2
%
Time Deposits of $250,000 or more

119,098

2.5
%

362,631

8.6
%
Total deposits

$
4,672,541

100
%
$
4,215,280

100
%

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


Deposit Distribution	September 30, 2022				December 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 other	1,836,462		0.34	%	1,529,293		0.48	%
Money market accounts	825,400		0.11	%	756,951		0.20	%
Savings accounts	531,304		0.02	%	440,977		0.03	%
Time deposits	562,912		0.35	%	537,538		0.59	%
Total interest-bearing deposits	3,756,078		0.25	%	3,264,759		0.37	%
Total deposits	$	5,403,283	0.17	%	$	4,631,288	0.26	%

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As of September 30, ~~2021,~~2022, average deposits increased by ~~$457.3~~$772.0 million, or ~~10.9%~~16.7% to ~~$4.673~~$5.403 billion from ~~$4.215~~$4.631 billion at December 31, ~~2020. Transaction account balances were above normal as~~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 ~~due~~was related to ~~PPP loan proceeds and~~ the ~~distribution~~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 ~~federal emergency stimulus funds.~~

2022.

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OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include federal funds purchased from correspondent banks, borrowings from the FHLB, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and federal funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

Total ~~non-deposit interest-bearing~~noninterest-bearing deposit liabilities ~~decreased~~increased by ~~$114.6~~$220.5 million, or ~~44.2%~~14.2%, in the first nine months of ~~2021, due~~2022. 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 ~~a decrease~~money market accounts. The increase in ~~notes payable of $110.2 million~~noninterest-bearing deposits is related to the ~~FHLB and $4.4 million to First Horizon Bank.~~ending of the Deposit Reclassification program coupled with the BBI acquisition. As of September 30, ~~2021,~~2022, junior subordinated debentures increased ~~$58~~$226 thousand, net of issuance costs, to ~~$144.7~~$145.0 million. Subordinated debt is discussed more fully in the below Capital section of this report.

LEASE LIABILITIES

As of September 30, ~~2021,~~2022, operating lease liabilities ~~decreased $1.7~~increased $3.9 million, or ~~28.1%~~93.0% to ~~$4.3~~$8.1 million from ~~$6.0~~$4.2 million at December 31, ~~2020. A majority of the decrease~~2021. The increase in operating lease liabilities is ~~related to a building lease that was terminated due~~attributed to the ~~Bank purchasing the facility.~~acquisition of BBI. Finance lease liabilities decreased ~~$141~~$132 thousand, or ~~6.2%~~6.3% to ~~$2.1~~$2.0 million from ~~$2.3~~$2.1 million at December 31, ~~2020.~~

2021.

OTHER LIABILITIES

Other liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities ~~decreased~~increased by ~~$5.6~~$13.6 million, or ~~22.2%~~58.1%, during the first nine months of ~~2021.~~2022. The increase is primarily related to the acquisition of BBI. As of September 30, ~~2021,~~2022, accrued interest payable decreased ~~$758~~$346 thousand, or ~~35.5%~~20.2% to $1.4 million from ~~$2.1~~$1.7 million at December 31, ~~2020. Other accrued but unpaid expenses decreased $4.8 million, or 21.0%~~2021. The ACL on OBSC exposures increased $150 thousand to ~~$18.2~~$1.2 million at September 30, ~~2021. The decrease is related~~2022 when compared to ~~a $4.4 million decrease in deferred taxes on AFS securities gains.~~

December 31, 2021.

CAPITAL

At September 30, ~~2021,~~2022, the Company had total shareholders’ equity of ~~$668.7~~$621.5 million, comprised of ~~$21.7~~$25.3 million in common stock, ~~$18.9~~$41.1 million in treasury stock, ~~$458.5~~$558.2 million in surplus, ~~$193.8~~$241.1 million in undivided profits and ~~$13.6~~$162.0 million in accumulated comprehensive ~~income~~loss on available-for-sale securities. Total shareholders’ equity at the end of ~~2020~~2021 was ~~$644.8~~$676.2 million. The ~~increase~~decrease of ~~$23.9~~$54.7 million, or ~~3.7%~~8.1%, in shareholders’ equity during the first nine months of ~~2021~~2022 is primarily ~~comprised~~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 capital added through net earnings of $48.4 million, and offset by $12.2 million decrease in accumulated comprehensive income for available-for-sale securities, treasury stock acquired of $5.2 million and $8.8 million in cash dividends paid.

$46.6 million.

On ~~May 7,~~December 16, 2020, the Company announced ~~the renewal~~that its Board of ~~its~~Directors has authorized a share repurchase program ~~that previously expired on December 31, 2019.~~(the “2021 Repurchase Program”), pursuant to which the Company may purchase up to an aggregate of $30 million in shares of the Company’s issued and outstanding common stock. Under the program, the Company could, but is not required to, from time to time repurchase up ~~to $15~~$30 million of ~~shares of~~ its own common stock in any manner determined appropriate by the Company’s management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, was be determined by management at ~~its~~is discretion and ~~will depend~~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 ~~renewed share repurchase program~~2021 Repurchase Program expired on December 31, ~~2020,~~2021. The Company repurchased ~~289,302~~165,623 shares in ~~2020~~2021 pursuant to ~~a previous share~~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 ~~program.~~

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 $22.2 million under the 2021 Repurchase Program in the first quarter of 2022.

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On ~~December 16, 2020,~~March 9, 2022, the Company announced that its Board of Directors has authorized a new share repurchase program (the ~~“Repurchase~~“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.~~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 inof shares of its own common stock in any manner determined appropriate by the Company’s management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, will be determined by management at ~~its~~is discretion and will depend on a number of factors, including the market price of the Company’s

~~Table of Contents~~

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, ~~2021.~~ 2022.

The ~~Company~~Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased ~~165,623 shares for $5.2 million under~~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 ~~Repurchase Program in the first quarter~~new excise tax, we do not expect a material impact to our statement of ~~2021.~~

condition or result of operations.

The Company uses a variety of measures to evaluate its capital adequacy, including risk-based capital and leverage ratios that are calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the requirement of the standards initially adopted by the Basal Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) to include accumulated other comprehensive income in risk-based capital. The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of the dates indicated.

Minimum

September 30,

December 31,

Required to be

Regulatory Capital Ratios The First, A National Banking Association

2021

2020

Well Capitalized

Common Equity Tier 1 Capital Ratio

16.9
%
15.8
%
6.5
%
Tier 1 Capital Ratio

16.9
%
15.8
%
8.0
%
Total Capital Ratio

17.9
%
16.9
%
10.0
%
Tier 1 Leverage Ratio

10.8
%
10.4
%
5.0
%

Minimum

September 30,

December 31,

Required to be
Regulatory Capital Ratios The First Bancshares, Inc.

2021

2020

Well Capitalized
Common Equity Tier 1 Capital Ratio*

14.1
%
13.5
%
N/A
Tier 1 Capital Ratio**

14.5
%
14.0
%
N/A
Total Capital Ratio

19.3
%
19.1
%
N/A
Tier 1 Leverage Ratio

9.2
%
9.2
%
N/A


Regulatory Capital Ratios The First Bank	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	15.5	%	16.6	%	6.5	%	7.0	%
Tier 1 Capital Ratio	15.5	%	16.6	%	8.0	%	8.5	%
Total Capital Ratio	16.4	%	17.4	%	10.0	%	10.5	%
Tier 1 Leverage Ratio	10.6	%	10.8	%	5.0	%	7.0	%

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

**	~~The numerator includes Trust Preferred.~~


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/A	N/A
Tier 1 Capital Ratio**	12.9	%	14.1	%	N/A	N/A
Total Capital Ratio	16.7	%	18.6	%	N/A	N/A
Tier 1 Leverage Ratio	9.3	%	9.2	%	N/A	N/A

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

**The numerator includes Trust Preferred.

Our capital ratios remain very strong relative to the median for peer financial institutions, and at September 30, ~~2021~~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.

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As of September 30, ~~2021,~~2022, management believes that each of the Bank and the Company met all capital adequacy requirements to which they are subject. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.

Total consolidated equity capital at September 30, ~~2021~~2022 was ~~$668.7~~$621.5 million, or approximately ~~12.1%~~9.6% of total assets. The Company currently has adequate capital to meet the minimum capital requirements for 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 obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of Trust 2’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (“LIBOR”) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.

~~Table of Contents~~

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 provisions of ASC 810, Consolidation, the trusts are not included in the consolidated financial statements.

On August 25, 2021, the Bank applied for the U.S. Department of the Treasury’s Emergency Capital Investment Program (“ECIP”) for up to $250.0 million in non-dilutive, low-cost Tier 1 perpetual preferred capital. Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions to augment their efforts to support small businesses and consumers in their communities. There can be no assurance that the Bank will be awarded capital under ECIP.

Subordinated Notes

On April 30, 2018, ~~The~~the Company entered into two Subordinated Note Purchase Agreements pursuant to which 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 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 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.

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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 ~~$144.7~~$145.0 million of subordinated debt, net of deferred issuance costs ~~$2.2~~$1.9 million and unamortized fair value mark ~~$817~~$606 thousand, at September 30, ~~2021,~~2022, compared to ~~$144.6~~$144.7 million, net of deferred issuance costs ~~$2.2~~$2.1 million and unamortized fair value mark ~~$700~~$646 thousand, at December 31, ~~2020.~~

2021.

~~Table of Contents~~

Reconciliation of Non-GAAP Financial Measures

Our accounting and reporting policies conform to ~~generally accepted accounting principles (“GAAP”)~~GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. This Quarterly Report on Form 10-Q includes operating net earnings; diluted operating earnings per share; net interest income, FTE; pre-tax, pre-provision operating earnings; total interest income, FTE; interest income investment securities, FTE and certain ratios derived from these non-GAAP financial measures. The Company believes that the non-GAAP financial measures included in this Quarterly Report on Form 10-Q allow management and investors to understand and compare results in a more consistent manner for the periods presented herein. The tax equivalent adjustment to net interest income, ~~and~~ 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 ~~on acquisition,~~and loss on sale of ~~premises and equipment,~~fixed assets, Treasury awards, BOLI income from death proceeds, and ~~charitable~~ contributions related to the Treasury awards. Pre-tax, pre-provision operating earnings excludes acquisition and charter conversion charges, provision for credit losses, ~~Treasury awards~~bargain purchase gain and ~~gains,~~ loss on sale of ~~premises and equipment,~~fixed assets, Treasury awards, BOLI income from death proceeds, and charitable contributions related to ~~the~~ 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

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

September 30,

September 30,

September 30,

September 30,

2021

2020

2021

2020
Net income available to common shareholders

$
16,132

$
11,917

$
48,376

$
37,171
Effect of acquisition charges

5

238

5

3,273
Tax on acquisition charges

(1)

(61)

(1)

(743)
Gain on acquisition and loss on sale of premises and equipment

397

—

397

(7,643)
Tax on loss from the sale of premises and equipment

(100)

—

(100)

157
Treasury awards

(1,826)

—

(1,826)

—
Tax on Treasury awards

462

—

462

—
Contributions related to Treasury awards

1,400

—

1,400

—
Tax on Contributions related to Treasury awards

(354)

—

(354)

—
Net earnings available to common shareholders, operating

$
16,115

$
12,094

$
48,359

$
32,215


($ in thousands)	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021

Net income available to common shareholders	$	14,043	$	16,132	$	46,624	$	48,376
Acquisition and charter conversion charges	3,640		5		5,220		5
Tax on acquisition and charter conversion charges	(919)		(1)		(1,318)		(1)
Initial provision for acquired loans	3,855		—		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

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Diluted Operating Earnings per Share

($ in thousands)

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

September 30,

September 30,

September 30,

September 30,

2021

2020

2021

2020
Diluted earnings per share

$
0.76

$
0.55

$
2.28

$
1.80
Effect of acquisition charges

—

0.01

—

0.16
Tax on acquisition charges

—

—

—

(0.03)
Effect of bargain purchase gain and loss on premises and equipment

0.02

—

0.02

(0.38)
Tax on loss from sale of premises and equipment

—

—

—

0.01
Effect of Treasury awards

(0.09)

—

(0.09)

—
Tax on Treasury awards

0.02

—

0.02

—
Effect on Contributions related to Treasury awards

0.07

—

0.07

—
Tax on Contributions related to Treasury awards

(0.02)

—

(0.02)

—
Diluted earnings per share, operating

$
0.76

$
0.56

$
2.28

$
1.56


($ in thousands)	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021

Diluted earnings per share	$	0.61	$	0.76	$	2.17	$	2.28
Acquisition and charter conversion charges	0.16		—		0.24		—
Tax on acquisition and charter conversion charges	(0.05)		—		(0.06)		—
Initial provision for acquired loans	0.17		—		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

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Net interest income

$
40,028

$
39,973

$
117,307

$
113,217

Tax exempt investment income

(1,905)

(1,877)

(5,748)

(4,985)

Taxable investment income

2,550

2,513

7,694

6,674

Net interest income, FTE

$
40,673

$
40,609

$
119,253

$
114,906

Average earning assets

$
5,005,093

$
4,537,157

$
4,903,343

$
4,147,736

Net interest margin, FTE

3.25
%

3.58
%

3.24
%

3.69
%


($ in thousands)	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine 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 income	3,849			2,550			10,812			7,694
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, FTE	3.50		%	3.25		%	3.13		%	3.24		%

Pre-Tax Pre-Provision Operating Earnings


($ in thousands)	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021

Earnings before income taxes	$	17,967	$	20,561	$	58,382	$	61,418
Acquisition and charter conversion charges	3,640		5		5,220		5
Provision for credit loss	4,300		—		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

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($ in thousands)

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020
Earnings before income taxes

$
20,561

$
14,910

$
61,418

$
44,092
Acquisition charges

5

238

5

3,273
Provision for credit losses

—

6,921

—

21,628
Loss on sale of premises and equipment

397

—

397

—
Treasury awards and gains

(1,826)

—

(1,826)

(7,643)
Charitable contributions related to Treasury awards

1,400

—

1,400

—
Pre-Tax, Pre-Provision Operating Earnings

$
20,537

$
22,069

$
61,394

$
61,350

Total Interest Income, Fully Tax Equivalent

($ in thousands)

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Total interest income

$
44,435

$
46,337

$
132,860

$
133,734

Tax-exempt investment income

(1,905)

(1,877)

(5,748)

(4,985)

Taxable investment income

2,550

2,513

7,694

6,674

Total interest income, FTE

$
45,080

$
46,973

$
134,806

$
135,423

Yield on average earning assets, FTE

3.60
%

4.14
%

3.67
%

4.35
%


($ in thousands)	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine 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 income	3,849			2,550			10,812			7,694
Total interest income, FTE	$	54,848		$	45,080		$	145,197		$	134,806

Yield on average earning assets, FTE	3.83		%	3.60		%	3.42		%	3.67		%

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Interest Income Investment Securities, Fully Tax Equivalent

($ in thousands)

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Interest income investment securities

$
6,938

$
5,309

$
18,389

$
15,800

Tax-exempt investment income

(1,905)

(1,877)

(5,748)

(4,985)

Taxable investment income

2,550

2,513

7,694

6,674

Interest income investment securities, FTE

$
7,583

$
5,945

$
20,335

$
17,489

Average investment securities

$
1,364,461

$
957,718

$
1,218,451

$
883,303

Yield on investment securities, FTE

2.22
%

2.48
%

2.23
%

2.64
%


($ in thousands)	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine 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 income	3,849			2,550			10,812			7,694
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, FTE	2.40		%	2.15		%	2.23		%	2.23		%

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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’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, 2021

Net Interest Income at Risk

Market Value of Equity

Change in Interest

% Change



% Change


Rates

from Base

Policy Limit

from Base

Policy Limit

Up 400 bps

11.2
%
(20.0)
%
25.7
%
(40.0)
%
Up 300 bps

9.9
%
(15.0)
%
23.3
%
(30.0)
%
Up 200 bps

7.7
%
(10.0)
%
18.5
%
(20.0)
%
Up 100 bps

4.4
%
(5.0)
%
10.8
%
(10.0)
%
Down 100 bps

(3.1)
%
(5.0)
%
(16.3)
%
(10.0)
%
Down 200 bps

(4.2)
%
(10.0)
%
(35.0)
%
(20.0)
%


September 30, 2022	Net Interest Income at Risk				Market 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 bps	0.9	%	(15.0)	%	(6.3)	%	(30.0)	%
Up 200 bps	2.2	%	(10.0)	%	(2.5)	%	(20.0)	%
Up 100 bps	1.9	%	(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,

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~~2021,~~ 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, 2021

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

132,668

134,268

138,501

144,549

149,211

152,167

153,943

Dollar Change

(5,833)

(4,233)

6,048

10,709

13,666

15,442

NII @ Risk - Sensitivity Y1

(4.2)
%
(3.1)
%

4.4
%
7.7
%
9.9
%
11.2
%
Policy Limits

(10.0)
%
(5.0)
%

(5.0)
%
(10.0)
%
(15.0)
%
(20.0)
%


September 30, 2022	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	193,088		205,914		215,168	219,276		219,795		217,136		211,335
Dollar Change	(22,080)		(9,254)			4,108		4,627		1,968		(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 ~~$5.8~~$22.1 million lower than in a stable interest rate scenario, for a negative variance of ~~4.2%~~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.

Net interest income would likely improve by ~~$10.7~~$4.6 million, or ~~7.7 %,~~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 would expect to benefit from a material upward shift in the yield curve.

The Company’s one-year cumulative GAP ratio is approximately ~~181.1%~~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 financial 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.

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

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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’s best estimates. The table below shows estimated changes in the Company’s EVE as of September 30, ~~2021,~~2022, under different interest rate scenarios relative to a base case of current interest rates:

September 30, 2021

Balance Sheet Shock

STATIC

($ in thousands)

-200 bp

-100 bp

(Base)

+100 bp

+200 bp

+300 bp

+400 bp

Market Value of Equity

729,025

939,878

1,122,239

1,243,566

1,329,343

1,384,087

1,410,164

Change in EVE from base

(393,214)

(182,361)

121,327

207,104

261,848

287,925

% Change

(35.0)
%
(16.3)
%

10.8
%
18.5
%
23.3
%
25.7
%
Policy Limits

(20.0)
%
(10.0)
%

(10.0)
%
(20.0)
%
(30.0)
%
(40.0)
%


September 30, 2022	Balance Sheet Shock
($ in thousands)	-200 bp		-100 bp		STATIC (Base)	+100 bp		+200 bp		+300 bp		+400 bp
Market Value of Equity	1,269,941		1,336,504		1,369,428	1,363,441		1,335,225		1,282,932		1,210,445
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. 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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, ~~2021,~~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 Exchange 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 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the 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

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

Changes in Internal Control over Financial Reporting

Effective January 1, 2021, the Company adopted ASC 326. The Company designed new controls and modified existing controls as part of the adoption. Management revised previous internal controls used under legacy GAAP and incorporated new internal controls related to the methodology of the new allowance for credit losses.

There ~~were~~have been no ~~other~~ changes in ~~the Company’s~~our internal control over financial reporting, ~~that occurred~~as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the ~~period covered by this report~~fiscal quarter ended September 30, 2022 that have materially affected, or that are reasonably likely to materially affect, ~~the Company’s~~our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 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. 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 have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~

2021.

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

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

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ITEM 6. EXHIBITS

(a)Exhibits~~Exhibits~~


Exhibit No.						Description
~~3.1~~ 2.1						Agreement and Plan of Merger, dated as of April 26, 2022, by and between The Fist Bancshares, Inc. and Beach Bancorp, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on May 2, 2022).
2.2						Agreement and Plan of Merger, dated as of July 27, 2022, by and between The First Bancshares, Inc. and Heritage Southeast Bancorporation, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on August 1, 2022).
3.1						Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on July 28, 2016).
3.2						Amendment to the Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2018).
3.3						Amended and Restated Bylaws of The First Bancshares, Inc. effective as of March 17, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on March 18, 2016).
3.4						Amendment No. 1 to the Amended and Restated Bylaws of The First Bancshares, Inc. effective as of May 7, 2020 (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q filed on May 11, 2020).
4.1						Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement No. 333-220491 on Form S-3 filed on September 15, 2017).
4.2						Form of Global Subordinated Note for The First Bancshares, Inc. 5.875% Fixed-to-Floating Rate Subordinated Notes Due 2028 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 1, 2018).
4.3						Form of Global Subordinated Note for The First Bancshares, Inc. 6.4% Fixed-to-Floating Rate Subordinated Notes Due 2033 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May 1, 2018).
4.4						Indenture by and between The First Bancshares, Inc. and U.S. Bank National Association, dated September 25, 2020 (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on September 25, 2020).
4.5						Form of Global Subordinated Note for The First Bancshares, Inc. 4.25% Fixed-to-Floating Rate Subordinated Notes Due 2030 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on September 25, 2020).
31.1						Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2						Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1						Certification of principal executive officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2						Certification of principal financial officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
						101.INS XBRL Instance Document
						101.SCH XBRL Taxonomy Extension Schema
						101.CAL XBRL Taxonomy Extension Calculation Linkbase
						101.DEF XBRL Taxonomy Extension Definition Linkbase
						101.LAB XBRL Taxonomy Extension Label Linkbase
						101.PRE XBRL Taxonomy Extension Presentation Linkbase

* Filed herewith.

** Furnished herewith~~Filed herewith.~~.

*	~~Furnished herewith~~.

Table of Contents

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, 2021~~	M. Ray (Hoppy) Cole, Jr.
~~(Date)~~	Chief Executive Officer
(Date)


November 9, 2022		/s/ DONNA T. (DEE DEE) LOWERY
~~November 9, 2021~~	Donna T. (Dee Dee) Lowery, Executive
~~(Date)~~	Vice President and Chief Financial Officer
(Date)


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


	(Unaudited)
	September 30,		December 31,
	2021		2020
ASSETS
Cash and due from banks	$	113,170	$	137,684
Interest-bearing deposits with banks		544,126		424,870
Total cash and cash equivalents		657,296		562,554
Debt securities available-for-sale, at fair value		1,463,255		1,022,182
Other securities		22,225		27,475
Total securities		1,485,480		1,049,657
Loans held for sale		8,540		21,432
Loans held for investment		2,960,919		3,123,678
Allowance for credit losses (1)		(32,418)		(35,820)
Net loans held for investment		2,928,501		3,087,858
Interest receivable		23,144		26,344
Premises and equipment		116,875		114,823
Operating lease right-of-use assets		4,245		5,969
Finance lease right-of-use assets		2,474		2,658
Cash surrender value of bank-owned life insurance		87,469		73,732
Goodwill		156,944		156,944
Other real estate owned		2,580		5,802
Other assets		38,336		44,987
Total assets	$	5,511,884	$	5,152,760
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	596,126	$	571,079
Interest-bearing		4,076,415		3,644,201
Total deposits		4,672,541		4,215,280
Interest payable		1,376		2,134
Borrowed funds		0		114,647
Subordinated debentures		144,650		144,592
Operating lease liabilities		4,335		6,031
Finance lease liabilities		2,140		2,281
Allowance for credit losses on off-balance sheet credit exposures (1)		718		0
Other liabilities		17,441		22,980
Total liabilities		4,843,201		4,507,945
Shareholders' equity:
Common stock, par value $1 per share, 40,000,000 shares authorized;21,669,504 shares issued at September 30, 2021, and 21,598,993 shares issued at December 31, 2020, respectively		21,670		21,599
Additional paid-in capital		458,512		456,919
Retained earnings		193,800		154,241
Accumulated other comprehensive income		13,632		25,816
Treasury stock, at cost, 649,607 shares at September 30, 2021 and 483,984 shares at December 31, 2020		(18,931)		(13,760)
Total shareholders' equity		668,683		644,815
Total liabilities and shareholders' equity	$	5,511,884	$	5,152,760


								Accumulated
				Additional				Other
	Common Stock			Paid-in		Retained		Comprehensive		Treasury Stock
	Shares	Amount		Capital		Earnings		Income		Shares	Amount		Total
Balance, January 1, 2020	18,996,948	$	18,997	$	409,805	$	110,460	$	10,089	(194,682)	$	(5,693)	$	543,658
Net income	—		—		—		8,311		—	—		—		8,311
Other comprehensive income	—		—		—		—		5,742	—		—		5,742
Dividends on common stock, $0.10 per share	—		—		—		(1,885)		—	—		—		(1,885)
Issuance of restricted stock grants	60,680		61		(61)		—		—	—		—		—
Repurchase of restricted stock for payment of taxes	(10,991)		(11)		(367)		—		—	—		—		(378)
Compensation expense	—		—		478		—		—	—		—		478
Balance, March 31, 2020	19,046,637	$	19,047	$	409,855	$	116,886	$	15,831	(194,682)	$	(5,693)	$	555,926
Net income	—		—		—		16,943		—	—		—		16,943
Other comprehensive income	—		—		—		—		8,719	—		—		8,719
Dividends on common stock, $0.10 per share	—		—		—		(2,131)		—	—		—		(2,131)
Issuance of common shares for SWG acquisition	2,546,967		2,547		45,311		—		—	—		—		47,858
Repurchase of restricted stock for payment of taxes	(2,652)		(3)		(56)		—		—	—		—		(59)
Issuance of restricted stock grants	3,750		4		(4)		—		—	—		—		—
Restricted stock grants forfeited	(4,762)		(5)		5		—		—	—		—		—
Compensation expense	—		—		539		—		—	—		—		539
Balance, June 30, 2020	21,589,940	$	21,590	$	455,650	$	131,698	$	24,550	(194,682)	$	(5,693)	$	627,795

Net income	—		—		—		11,917		—	—		—		11,917
Other comprehensive income	—		—		—		—		251	—		—		251
Dividends on common stock, $0.10 per share	—		—		—		(2,141)		—	—		—		(2,141)
Issuance of restricted stock grants	13,259		13		(13)		—		—	—		—		—
Restricted stock grants forfeited	(500)		—		—		—		—	—		—		—
Compensation expense	—		—		547		—		—	—		—		547
Balance, September 30, 2020	21,602,699	$	21,603	$	456,184	$	141,474	$	24,801	(194,682)	$	(5,693)	$	638,369

Balance, January 1, 2021	21,598,993	$	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 grants	84,578		85		(85)		—		—	—		—		—
Restricted stock grants forfeited	(500)		(1)		1		—		—	—		—		—
Repurchase of restricted stock for payment of taxes	(14,720)		(15)		(426)		—		—	—		—		(441)
Compensation expense	—		—		440		—		—	—		—		440
Balance, March 31, 2021	21,668,351	$	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 grants	3,000		3		(3)		—		—	—		—		—
Restricted stock grants forfeited	(1,021)		(1)		1		—		—	—		—		—
Compensation expense	—		—		549		—		—	—		—		549
Balance, June 30, 2021	21,670,330	$	21,670	$	457,396	$	180,820	$	19,097	(649,607)	$	(18,931)	$	660,052
Net income	—		—		—		16,132		—	—		—		16,132
Other comprehensive loss	—		—		—		—		(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, 2021	21,669,504	$	21,670	$	458,512	$	193,800	$	13,632	(649,607)	$	(18,931)	$	668,683


($ in thousands)					January 1,
	December 31,				2021
	2020				As Reported
	Pre-ASC 326		Transition		Under
Assets:	Adoption		Adjustment		ASC 326
Loans
Commercial, financial, and agriculture	$	6,214	$	(1,153)	$	5,061
Commercial real estate		24,319		(4,032)		20,287
Consumer real estate		4,736		5,629		10,365
Consumer installment		551		(47)		504
Allowance for credit losses on loans	$	35,820	$	397	$	36,217
Liabilities:
Allowance for credit losses on OBSC exposures		0		718		718
Total allowance for credit losses	$	35,820	$	1,115	$	36,935


	For the Three Months Ended					For the Three Months Ended
	September 30, 2021					September 30, 2020
	Net Income		Shares	Per		Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Data		(Numerator)		(Denominator)	Share Data
Basic earnings per share	$	16,132	21,020,128	$	0.77	$	11,917	21,405,309	$	0.56
Effect of dilutive shares:
Restricted stock grants			190,763					108,400
Diluted earnings per share	$	16,132	21,210,891	$	0.76	$	11,917	21,513,709	$	0.55


	For the Nine Months Ended					For the Nine Months Ended
	September 30, 2021					September 30, 2020
	Net Income		Shares	Per		Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Data		(Numerator)		(Denominator)	Share Data
Basic earnings per share	$	48,376	21,015,996	$	2.30	$	37,171	20,521,779	$	1.81
Effect of dilutive shares:
Restricted stock grants			186,661					125,466
Diluted earnings per share	$	48,376	21,202,657	$	2.28	$	37,171	20,647,245	$	1.80


($ in thousands)	September 30, 2021				December 31, 2020
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	75,040	$	14,318	$	97,738	$	16,203
Unused lines of credit		188,156		271,516		157,006		195,221
Standby letters of credit		2,194		9,586		4,182		11,486


($ in thousands)			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			For		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Available-for-sale
U.S. Treasury	$	36,831	$	36,831	$	0	$	0
Obligations of U.S. Government agencies and sponsored entities		190,134		0		190,134		0
Municipal securities		560,654		0		541,289		19,365
Mortgage-backed securities		644,459		0		644,459		0
Corporate obligations		31,177		0		30,951		226
Total available-for-sale	$	1,463,255	$	36,831	$	1,406,833	$	19,591


	Bank-Issued Trust
	Preferred Securities
($ in thousands)	2021		2020
Balance, January 1	$	235	$	408
Paydowns		(64)		(273)
Unrealized gain included in comprehensive income		55		106
Balance at September 30	$	226	$	241


				Significant Unobservable
Trust Preferred Securities	Fair Value		Valuation Technique	Inputs	Range of Inputs
September 30, 2021	$	226	Discounted cash flow	Probability of default	0.99% - 2.39%
December 31, 2020	$	235	Discounted cash flow	Probability of default	1.08% - 2.48%


($ in thousands)	September 30, 2021
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale securities:
U.S. Treasury	$	36,769	$	155	$	93	$	36,831
Obligations of U.S. government agencies and sponsored entities		188,372		2,140		378		190,134
Tax-exempt and taxable obligations of states and municipal subdivisions		552,023		11,873		3,242		560,654
Mortgage-backed securities - residential		409,548		5,611		1,755		413,404
Mortgage-backed securities - commercial		228,392		4,087		1,424		231,055
Corporate obligations		29,902		1,280		5		31,177
Total	$	1,445,006	$	25,146	$	6,897	$	1,463,255


December 31, 2020							Average		Interest
($ in thousands)							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
Impaired loans with no related allowance:
Commercial, financial and agriculture	$	—	$	—	$	—	$	198	$	—
Commercial real estate		5,884		6,087		—		11,433		47
Consumer real estate		712		758		—		790		5
Consumer installment		23		24		—		17		—
Total	$	6,619	$	6,869	$	—	$	12,438	$	52

Impaired loans with a related allowance:
Commercial, financial and agriculture	$	2,241	$	2,254	$	1,235	$	2,186	$	58
Commercial real estate		17,973		18,248		4,244		13,687		36
Consumer real estate		536		544		176		734		4
Consumer installment		26		26		14		86		—
Total	$	20,776	$	21,072	$	5,669	$	16,693	$	98

Total impaired loans:
Commercial, financial and agriculture	$	2,241	$	2,254	$	1,235	$	2,384	$	58
Commercial real estate		23,857		24,335		4,244		25,120		83
Consumer real estate		1,248		1,302		176		1,524		9
Consumer installment		49		50		14		103		—
Total Impaired Loans	$	27,395	$	27,941	$	5,669	$	29,131	$	150


	Three Months Ended September 30,
		Outstanding		Outstanding
		Recorded		Recorded
	Number of	Investment		Investment
2021	Loans	Pre-Modification		Post-Modification
Commercial, financial and agriculture	3	$	4,914	$	4,914
Commercial real estate	1		38		38
Consumer installment	2		113		151
Total	6	$	5,065	$	5,103

2020
Commercial real estate	2	$	573	$	602
Total	2	$	573	$	602


September 30, 2021					Past Due 90
	Current		Past Due		days and still
($ in thousands)	Loans		30‑89		accruing		Nonaccrual		Total
Commercial, financial and agriculture	$	74	$	—	$	—	$	127	$	201
Commercial real estate		8,324		—		—		13,092		21,416
Consumer real estate		2,203		54		—		2,026		4,283
Consumer installment		21		—		—		—		21
Total	$	10,622	$	54	$	—	$	15,245	$	25,921
Allowance for credit losses	$	135	$	—	$	—	$	2,872	$	3,007


September 30, 2022	Current Loans		Past Due 30-89		Past Due 90 days and still accruing		Nonaccrual		Total
($ in thousands)
Commercial, financial and agriculture	$	681	$	—	$	—	$	—	$	681
Commercial real estate	13,661		—		—		6,847		20,508
Consumer real estate	1,411		51		—		778		2,240
Consumer installment	15		—		—		—		15
Total	$	15,768	$	51	$	—	$	7,625	$	23,444
Allowance for credit losses	$	223	$	—	$	—	$	481	$	704


($ in thousands)	Term Loans Amortized Cost Basis by Origination Year
													Revolving
As of September 30, 2021	2021		2020		2019		2018		2017		Prior		Loans		Total
Commercial, financial and:
agriculture
Risk Rating
Pass	$	180,872	$	64,986	$	57,228	$	52,121	$	27,160	$	48,124	$	108	$	430,599
Special mention		—		266		1,301		102		100		182		—		1,951
Substandard		—		15		1,432		6,296		377		8,428		—		16,548
Doubtful		—		—		—		—		—		—		—		—
Total commercial, financial
and agriculture	$	180,872	$	65,267	$	59,961	$	58,519	$	27,637	$	56,734	$	108	$	449,098

Commercial real estate:
Risk Rating
Pass	$	275,202	$	334,184	$	234,725	$	201,575	$	142,712	$	346,672	$	—	$	1,535,070
Special mention		—		2,254		2,585		13,236		5,303		21,163		—		44,541
Substandard		183		3,261		1,985		17,357		18,684		29,380		—		70,850
Doubtful		—		—		—		—		—		—		—		—
Total commercial real estate	$	275,385	$	339,699	$	239,295	$	232,168	$	166,699	$	397,215	$	—	$	1,650,461

Consumer real estate:
Risk Rating
Pass	$	173,505	$	185,892	$	79,379	$	74,386	$	59,082	$	133,634	$	95,284	$	801,162
Special mention		—		—		336		27		1,781		1,985		—		4,129
Substandard		454		536		815		3,461		1,435		11,276		1,245		19,222
Doubtful		—		—		—		—		—		—		—		—
Total consumer real estate	$	173,959	$	186,428	$	80,530	$	77,874	$	62,298	$	146,895	$	96,529	$	824,513

Consumer installment:
Risk Rating
Pass	$	12,401	$	10,470	$	5,436	$	2,084	$	1,239	$	1,755	$	3,424	$	36,809
Special mention		—		—		—		—		2		1		—		3
Substandard		—		—		16		—		11		8		—		35
Doubtful		—		—		—		—		—		—		—		—
Total consumer installment	$	12,401	$	10,470	$	5,452	$	2,084	$	1,252	$	1,764	$	3,424	$	36,847

Total
Pass	$	641,980	$	595,532	$	376,768	$	330,166	$	230,193	$	530,185	$	98,816	$	2,803,640
Special mention		—		2,520		4,222		13,365		7,186		23,331		—		50,624
Substandard		637		3,812		4,248		27,114		20,507		49,092		1,245		106,655
Doubtful		—		—		—		—		—		—		—		—
Total	$	642,617	$	601,864	$	385,238	$	370,645	$	257,886	$	602,608	$	100,061	$	2,960,919


	Commercial,
December 31, 2020	Financial and		Commercial		Consumer		Consumer
($ in thousands)	Agriculture		Real Estate		Real Estate		Installment		Total
Pass	$	563,772	$	1,530,366	$	834,920	$	40,884	$	2,969,942
Special Mention		2,143		64,012		1,889		20		68,064
Substandard		11,875		66,535		13,397		132		91,939
Doubtful		1,653		23		—		—		1,676
Subtotal	$	579,443	$	1,660,936	$	850,206	$	41,036	$	3,131,621
Less: Unearned discount		—		7,943		—		—		7,943

LHFI, net of unearned discount	$	579,443	$	1,652,993	$	850,206	$	41,036	$	3,123,678


As of December 31, 2021	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Total
($ in thousands)	2021		2020		2019		2018		2017		Prior
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 mention	1,326		2,259		1,782		15,076		2,779		15,519		—		38,741
Substandard	3,904		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
Substandard	444		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	—		—		—		—		1		—		—		1
Substandard	—		26		3		5		8		7		—		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 mention	1,326		2,514		2,862		15,192		5,007		17,497		—		44,398
Substandard	4,348		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


	Three Months Ended September 30, 2020
($ in thousands)	Commercial,		Commercial		Consumer				Paycheck
	Financial and		Real		Real		Consumer		Protection
	Agriculture		Estate		Estate		Installment		Program		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	5,208	$	18,526	$	3,741	$	459	$	130	$	0	$	28,064
Provision for loan losses		607		5,371		1,077		(4)		(130)		—		6,921
Loans charged-off		(78)		(769)		(55)		(32)		—		—		(934)
Recoveries		37		18		17		133		—		—		205
Total ending allowance balance	$	5,774	$	23,146	$	4,780	$	556	$	—	$	—	$	34,256


	Nine Months Ended September 30, 2020
($ in thousands)	Commercial,		Commercial		Consumer				Paycheck
	Financial and		Real		Real		Consumer		Protection
	Agriculture		Estate		Estate		Installment		Program		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,043	$	8,836	$	1,694	$	296	$	—	$	39	$	13,908
Provision for loan losses		2,936		15,096		3,057		578		—		(39)		21,628
Loans charged-off		(342)		(1,165)		(151)		(645)		—		—		(2,303)
Recoveries		137		379		180		327		—		—		1,023
Total ending allowance balance	$	5,774	$	23,146	$	4,780	$	556	$	—	$	—	$	34,256


($in thousands)	Nine Months Ended
	September 30, 2021						September 30, 2020
			Tax						Tax
	Avg.		Equivalent		Yield/		Avg.		Equivalent		Yield/
	Balance		interest		Rate		Balance		interest		Rate
Earning Assets:
Taxable securities	$	847,745	$	12,641	1.99	%	$	594,216	$	10,815	2.43	%
Tax exempt securities		370,706		7,693	2.77	%		289,087		6,674	3.08	%
Total investment securities		1,218,451		20,334	2.23	%		883,303		17,489	2.64	%

Interest bearing deposits in other banks		644,074		103	0.02	%		288,898		337	0.16	%
Loans		3,040,818		114,368	5.01	%		2,975,535		117,597	5.27	%
Total earning assets		4,903,343		134,805	3.67	%		4,147,736		135,423	4.35	%
Other assets		532,968						516,956
Total assets	$	5,436,311					$	4,664,692

Interest-bearing liabilities:
Deposits	$	4,324,047	$	9,752	0.30	%	$	3,584,416	$	15,544	0.58	%
Borrowed funds		34,202		339	1.32	%		125,608		1,406	1.49	%
Subordinated debentures		144,604		5,462	5.04	%		80,969		3,567	5.87	%
Total interest-bearing liabilities		4,502,853		15,553	0.46	%		3,790,993		20,517	0.72	%
Other liabilities		280,930						277,911
Shareholders’ equity		652,528						595,788
Total liabilities and shareholders’ equity	$	5,436,311					$	4,664,692

Net interest income			$	117,307					$	113,217
Net interest margin					3.19	%					3.64	%
Net interest income (FTE)*			$	119,253	3.21	%			$	114,906	3.63	%
Net interest margin (FTE)*					3.24	%					3.69	%


	September 30, 2021 (1)					December 31, 2020
			Percent					Percent
	Amount		of Total			Amount		of Total
Commercial, financial and agriculture (2)	$	449,098		15.2	%	$	579,443	18.6	%
Commercial real estate		1,650,461		55.8	%		1,652,993	52.9	%
Consumer real estate		824,513		27.8	%		850,206	27.2	%
Consumer installment		36,847		1.2	%		41,036	1.3	%
Total loans		2,960,919		100	%		3,123,678	100	%
Allowance for credit losses		(32,418)					(35,820)
Net loans	$	2,928,501				$	3,087,858


	9/30/21 (1)			12/31/20
Nonaccrual Loans
Commercial, financial and agriculture	$	228		$	2,418
Commercial real estate		17,715			22,887
Consumer real estate		7,046			8,434
Consumer installment		23			35
Total Nonaccrual Loans		25,012			33,774

Other real-estate owned		2,580			5,802

Total NPAs	$	27,592		$	39,576
Performing TDRs	$	10,621		$	6,201
Past due 90 days or more and still accruing	$	456		$	2,692
Total NPA’s as a % of total loans & leases net of unearned income		0.9	%		1.3	%
Total nonaccrual loans as a % of total loans & leases net of unearned income		0.8	%		1.1	%


Allowance for Credit Losses
	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	9/30/21			9/30/20			9/30/21			9/30/20
Average LHFI outstanding during period:	$	2,983,771		$	3,165,653		$	3,040,818		$	2,975,535
LHFI outstanding at end of period:		2,960,919			3,178,414			2,960,919			3,178,414
Allowance for Credit Losses:
Balance at beginning of period	$	32,457		$	28,064		$	35,820		$	13,908
ASC 326 adoption adjustment		—			—			397			—
Provision charged to expense		—			6,921			—			21,628
Charge-offs:
Commercial, financial and agriculture		142			78			1,618			342
Commercial real estate		59			769			3,066			1,165
Consumer real estate		19			55			282			151
Consumer installment		166			32			431			645
Total Charge-offs		386			934			5,397			2,303
Recoveries:
Commercial, financial and agriculture		57			37			382			137
Commercial real estate		180			18			473			379
Consumer real estate		39			17			276			180
Consumer installment		71			133			467			327
Total Recoveries		347			205			1,598			1,023
Net loan charge offs (recoveries)		39			729			3,799			1,280
Balance at end of period	$	32,418		$	34,256		$	32,418		$	34,256
RATIOS
Net Charge-offs (recoveries) to average LHFI (annualized)		0.0	%		0.1	%		0.2	%		0.1	%
ACL to LHFI at end of period		1.1	%		1.1	%		1.1	%		1.1	%
Net Loan Charge-offs (recoveries) to PCL		0.0	%		10.5	%		0.0	%		5.9	%


					Minimum
	September 30,		December 31,		Required to be
Regulatory Capital Ratios The First, A National Banking Association	2021		2020		Well Capitalized
Common Equity Tier 1 Capital Ratio	16.9	%	15.8	%	6.5	%
Tier 1 Capital Ratio	16.9	%	15.8	%	8.0	%
Total Capital Ratio	17.9	%	16.9	%	10.0	%
Tier 1 Leverage Ratio	10.8	%	10.4	%	5.0	%