U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2020


☐	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 ◻

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 ◻

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	þ
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. ◻

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

Yes ◻ 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, 21,600,625 shares issued and 21,405,943 outstanding as of October 30, 2020.

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The First Bancshares, Inc.

Form 10-Q

Quarter Ended September 30, 2020

Index


Part I. Financial Information

Item 1.	Financial Statements	3
	Consolidated Balance Sheets—Unaudited at September 30, 2020	3
	Consolidated Statements of Income—Unaudited	4
	Consolidated Statements of Comprehensive Income—Unaudited	5
	Consolidated Statements of Changes in Shareholders’ Equity - Unaudited	6
	Consolidated Statements of Cash Flows—Unaudited	7
	Notes to Consolidated Financial Statements—Unaudited	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57
Item 4.	Controls and Procedures	59

Part II. Other Information

Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63
Signatures		64

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands)


	(Unaudited)
	September 30,		December 31,
	2020		2019
ASSETS
Cash and due from banks	$	131,898	$	89,736
Interest-bearing deposits with banks		471,838		79,128
Total cash and cash equivalents		603,736		168,864

Securities available-for-sale, at fair value		957,458		765,087
Other securities		27,461		26,690
Total securities		984,919		791,777

Loans held for sale		22,482		10,810
Loans		3,155,932		2,600,358
Allowance for loan losses		(34,256)		(13,908)
Loans, net		3,144,158		2,597,260

Interest receivable		25,822		14,802
Premises and equipment		124,875		104,980
Cash surrender value of bank-owned life insurance		73,356		59,572
Goodwill		158,572		158,572
Other real estate owned		5,202		7,299
Other assets		43,519		38,737
Total assets	$	5,164,159	$	3,941,863

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	482,236	$	723,208
Interest-bearing		3,746,978		2,353,325
Total deposits		4,229,214		3,076,533

Interest payable		2,320		2,508
Borrowed funds		115,827		214,319
Subordinated debentures		144,709		80,678
Other liabilities		33,720		24,167
Total liabilities		4,525,790		3,398,205

Shareholders’ equity:
Common stock, par value $1 per share, 40,000,000 shares authorized; 21,602,699 shares issued at September 30, 2020, and 18,996,948 shares issued at December 31, 2019, respectively		21,603		18,997
Additional paid-in capital		456,184		409,805
Retained earnings		141,474		110,460
Accumulated other comprehensive income		24,801		10,089
Treasury stock, at cost, 194,682 shares at September 30, 2020 and 194,682 shares at December 31, 2019		(5,693)		(5,693)
Total shareholders’ equity		638,369		543,658
Total liabilities and shareholders’ equity	$	5,164,159	$	3,941,863

See Notes to Consolidated Financial Statements

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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,
	2020		2019		2020		2019

Interest and dividend income:
Interest and fees on loans	$	40,999	$	32,480	$	117,597	$	93,749
Interest and dividends on securities:
Taxable interest and dividends		3,436		3,924		10,894		11,758
Tax exempt interest		1,877		828		4,985		2,375
Interest on federal funds sold and interest bearing deposits in other banks		26		9		258		203
Total interest income		46,338		37,241		133,734		108,085

Interest expense:
Interest on deposits		4,912		5,061		15,544		14,747
Interest on borrowed funds		1,453		1,721		4,973		4,976
Total interest expense		6,365		6,782		20,517		19,723

Net interest income		39,973		30,459		113,217		88,362

Provision for loan losses		6,921		974		21,628		2,888

Net interest income after provision for loan losses		33,052		29,485		91,589		85,474

Non-interest income:
Service charges on deposit accounts		1,779		1,979		5,289		5,727
Gain on sale of securities		32		57		278		131
Gain on acquisition		—		—		7,023		—
Gain on sale of premises and equipment		—		19		461		11
Other service charges and fees		6,983		5,048		17,897		13,504
Total non-interest income		8,794		7,103		30,948		19,373

Non-interest expense:
Salaries and employee benefits		15,494		11,612		44,589		33,924
Occupancy and equipment		3,826		2,632		9,943		7,606
Acquisition and integration charges		238		705		3,273		3,975
Other		7,378		5,876		20,640		18,104
Total non-interest expense		26,936		20,825		78,445		63,609

Income before income taxes		14,910		15,763		44,092		41,238

Income tax expense		2,993		3,491		6,921		9,348

Net income	$	11,917	$	12,272	$	37,171	$	31,890

Basic earnings per share	$	0.56	$	0.72	$	1.81	$	1.91
Diluted earnings per share		0.55		0.71		1.80		1.90

See Notes to Consolidated Financial Statements

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THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)


	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

Net income	$	11,917	$	12,272	$	37,171	$	31,890

Other Comprehensive Income:

Unrealized holding gains arising during the period on available-for-sale securities		368		1,369		19,983		16,509
Reclassification adjustment for gains included in net income		32		57		278		131

Unrealized holding gains arising during period on available-for-sale securities		336		1,312		19,705		16,378

Income tax expense		(85)		(378)		(4,993)		(4,209)

Other comprehensive income		251		934		14,712		12,169

Comprehensive Income	$	12,168	$	13,206	$	51,883	$	44,059

See Notes to Consolidated Financial Statements

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THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

($ in thousands except per share data, unaudited)


								Accumulated
	Common			Additional				Other
	Stock			Paid-in		Retained		Comprehensive		Treasury Stock
	Shares	Amount		Capital		Earnings		Income (Loss)		Shares	Amount		Total
Balance, June 30, 2019	17,299,975	$	17,300	$	355,217	$	89,231	$	9,439	(170,060)	$	(4,906)	$	466,281
Net income	—		—		—		12,272		—	—		—		12,272
Common stock repurchased	—		—		—		—		—	(13,873)		(435)		(435)
Other comprehensive income	—		—		—		—		934	—		—		934
Dividends on common stock, $0.08 per share	—		—		—		(1,396)		—	—		—		(1,396)
Issuance of restricted stock grants	8,333		9		(9)		—		—	—		—		—
Restricted stock grant forfeited	(750)		(1)		1		—		—	—		—		—
Compensation expense	—		—		432		—		—	—		—		432
Balance, September 30, 2019	17,307,558	$	17,308	$	355,641	$	100,107	$	10,373	(183,933)	$	(5,341)	$	478,088

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 grant 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


								Accumulated
	Common			Additional				Other
	Stock			Paid-in		Retained		Comprehensive		Treasury Stock
	Shares	Amount		Capital		Earnings		Income (Loss)		Shares	Amount		Total
Balance, January 1, 2019	14,857,092	$	14,857	$	278,659	$	71,998	$	(1,796)	(26,494)	$	(464)	$	363,254
Net income	—		—		—		31,890		—	—		—		31,890
Common stock repurchased	—		—		—		—		—	(157,439)		(4,877)		(4,877)
Other comprehensive income	—		—		—		—		12,169	—		—		12,169
Dividends on common stock, $0.23 per share	—		—		—		(3,781)		—	—		—		(3,781)
Issuance of common shares for FPB acquisition	2,377,501		2,378		75,842		—		—	—		—		78,220
Issuance restricted stock grants	75,215		75		(75)		—		—	—		—		—
Restricted stock grant forfeited	(2,250)		(2)		2		—		—	—		—		—
Compensation expense	—		—		1,213		—		—	—		—		1,213
Balance, September 30, 2019	17,307,558	$	17,308	$	355,641	$	100,107	$	10,373	(183,933)	$	(5,341)	$	478,088

Balance, January 1, 2020	18,996,948	$	18,997	$	409,805	$	110,460	$	10,089	(194,682)	$	(5,693)	$	543,658
Net income	—		—		—		37,171		—	—		—		37,171
Other comprehensive income	—		—		—		—		14,712	—		—		14,712
Dividends on common stock, $0.30 per share	—		—		—		(6,157)		—	—		—		(6,157)
Issuance of common shares for SWG acquisition	2,546,967		2,547		45,311		—		—	—		—		47,858
Issuance of restricted stock grant	77,689		78		(78)		—		—	—		—		—
Repurchase of restricted stock for payment of taxes	(13,643)		(14)		(423)		—		—	—		—		(437)
Restricted stock grant forfeited	(5,262)		(5)		5		—		—	—		—		—
Compensation expense	—		—		1,564		—		—	—		—		1,564
Balance, September 30, 2020	21,602,699	$	21,603	$	456,184	$	141,474	$	24,801	(194,682)	$	(5,693)	$	638,369

See Notes to Consolidated Financial Statements

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THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)


	(Unaudited)
	Nine months ended
	September 30,
	2020		2019

Cash flows from operating activities:
Net income	$	37,171	$	31,890
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		6,393		2,333
Provision for loan losses		21,628		2,888
Loss on sale/writedown of ORE		1,150		332
Securities gain		(278)		(131)
Acquisition gain		(7,023)		—
Gain on sale/writedown of premises and equipment		(461)		(11)
Restricted stock expense		1,564		1,213
Increase in cash value of life insurance		(1,139)		(1,146)
Federal Home Loan Bank stock dividends		(118)		(130)
Residential loans originated and held for sale		(232,191)		(134,749)
Proceeds from sale of residential loans held for sale		220,665		128,558
Changes in:
Interest receivable		(8,663)		(278)
Interest payable		(188)		642
Other, net		(2,326)		(162)
Net cash from operating activities		36,184		31,249

Cash flows from investing activities:
Maturities, calls and paydowns of available-for-sale and held-to-maturity securities		152,873		74,871
Proceeds from sales of securities available-for-sale		579		20,290
Purchases of available-for-sale securities		(241,057)		(107,557)
Redemptions (purchases) of other securities		351		(4,377)
Net increase in loans		(161,535)		(42,473)
Purchase of premises and equipment		(6,034)		(6,594)
Proceeds from sale of other real estate owned		3,024		2,694
Proceeds from the sale of land		1,416		—
Proceeds from the sale of premises and equipment		—		1,689
Proceeds from the sale of other assets		—		65
Net proceeds from (payments for) of bank-owned life insurance		(5,682)		—
Cash received in excess of cash paid for acquisitions		29,245		14,743
Net cash provided by (used) in investing activities		(226,820)		(46,649)

Cash flows from financing activities:
Increase/(decrease) in deposits		676,223		(8,628)
Net (decrease)/increase in borrowed funds		(107,992)		33,500
Principal payments on finance lease liabilities		(137)		—
Dividends paid on common stock		(6,063)		(3,712)
Cash paid to repurchase common stock		—		(4,877)
Issuance of subordinated debt, net		63,914		—
Repurchase of restricted stock for payment of taxes		(437)		—
Net cash provided by financing activities		625,508		16,283

Net change in cash and cash equivalents		434,872		883
Beginning cash and cash equivalents		168,864		159,107
Ending cash and cash equivalents	$	603,736	$	159,990

Supplemental disclosures:
Cash payments for interest		3,260		4,918
Loans transferred to other real estate		1,752		1,616
Issuance of restricted stock grants		78		75
Stock issued in connection with FPB acquisition		—		78,220
Stock issued in connection with SWG acquisition		47,858		—
Dividends on restricted stock grants		94		69
Lease liabilities arising from obtaining right-of-use assets		3,162		4,393

See Notes to Consolidated Financial Statements

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THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2020

NOTE 1 – 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, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019.

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 (the “Bank” or “The First”).

At September 30, 2020, the Company had approximately $5.164 billion in assets, $3.144 billion in net loans, $4.229 billion in deposits, and $638.4 million in shareholders’ equity. For the nine months ended September 30, 2020, the Company reported net income of $37.2 million. After-tax merger-related costs of $2.5 million were expensed during the nine months ended September 30, 2020.

On August 24, 2020, the Company paid a cash dividend in the amount of $0.10 per share to shareholders of record as of the close of business on August 10, 2020.

On May 26, 2020, the Company paid a cash dividend in the amount of $0.10 per share to shareholders of record as of the close of business on Thursday, May 11, 2020.

On February 21, 2020, the Company paid a cash dividend in the amount of $0.10 per share to shareholders of record as of the close of business on Friday, February 7, 2020.

NOTE 3 – ACCOUNTING STANDARDS

During the nine months ended September 30, 2020, there were no significant accounting pronouncements applicable to the Company that became effective.

New Accounting Standards That Have Not Yet Been Adopted

In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 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 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 March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments." This ASU makes narrow-scope improvements to various aspects of the financial instruments guidance, including the current expected credit losses (CECL) standard issued in 2016. ASU 2016-13 and subsequent ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This amendment is required to be adopted using a modified retrospective approach

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with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes.” ASU 2019-12 removes specific exceptions to the general principles in Topic 740. This update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The ASU also improves financial statement preparers’ application for income tax-related guidance, simplifies GAAP for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will be effective on January 1, 2021 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The FASB issued new guidance (Topic 326) to replace the incurred loss model for loans and other financial assets with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases recognized by a lessor. In addition, the amendments in Topic 326 require credit losses on available-for-sale debt securities to be presented as a valuation allowance rather than as a direct write-down. The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years. For calendar year-end SEC filers, it is effective for March 31, 2020 interim financial statements. For debt securities with other-than-temporary impairment (“OTTI”), the guidance will be applied prospectively. Existing purchased credit impaired (“PCI”) assets will be grandfathered and classified as purchased credit deteriorated (“PCD”) assets at the date of adoption. The assets will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The Company’s Allowance for Credit Loss Committee (“ACL Committee”), made up of executive and senior management from corporate administration, accounting, risk management, and credit and portfolio administration, have reviewed and approved the methodology and initial setup of the CECL Model. All historical data used in the model’s calculation, the mathematical accuracy of that calculation, and any inputs provided externally that affect the calculation have been independently validated. Internal controls necessary in maintaining accuracy to estimate an adequate reserve have been designed but not tested for operating effectiveness. The Company had finalized the formal review and approval process and the results of its CECL estimate as of year-end but has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (“CARES Act”), until the date on which the national emergency related to the novel coronavirus (“COVID-19”) outbreak is terminated or December 31, 2020 whichever occurs first. The delayed adoption will allow extra time to document and test controls over this standard and will allow us time to provide consistent, high-quality financial information to our investors and other stakeholders. Upon adoption of ASU 2016-13, the Company has determined that the impact to the allowance for credit losses will be an increase under the new standard due to the life of loan loss estimation methodology, as well as the requirement to record an allowance on acquired loans previously recorded at fair value. As disclosed previously, it can be reasonably expected that a probable range in the reserve as a percentage of total loans after adoption of this guidance to be between 0.68% and 1.39% as of January 1, 2020.

Upon adopting ASU 2016-13, the Company will not record an allowance as of January 1, 2020 with respect to its available-for-sale debt securities as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). The Company has elected to delay its adoption of ASU 2016-13, as provided by the CARES Act, until the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020 whichever occurs first. The Company has elected to utilize the five-year CECL transition. The adoption of ASU 2016-13 is not expected to have a significant impact on the Company’s regulatory capital ratios.

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NOTE 4 – BUSINESS COMBINATIONS

Acquisitions

Southwest Financial Corporation

On April 3, 2020, the Company completed its acquisition of Southwest Financial Corporation (“SWG”), and immediately thereafter merged its wholly-owned subsidiary, Southwest Georgia Bank with and into The First. The Company paid a total consideration of $47.9 million to the SWG shareholders as consideration in the merger, which included 2,546,967 shares of Company common stock and approximately $2 thousand in cash.

In connection with the acquisition, the Company recorded a $7.0 million bargain purchase gain and $4.6 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, which is reflected as an adjustment to retained earnings. 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 acquired the $394.6 million loan portfolio at an estimated fair value discount of $2.3 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the SWG acquisition were $201 thousand and $2.5 million for the three months and nine months period ended September 30, 2020, respectively. These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

The assets acquired and liabilities assumed and consideration paid in the acquisition of SWG 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 runs through April 3, 2021 in respect of SWG, 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.

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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 and stock	$	47,858
Total purchase price		47,858

Identifiable assets:
Cash and due from banks	$	29,247
Investments		89,737
Loans		392,292
Core deposit intangible		4,556
Personal and real property		18,558
Bank owned life insurance		6,963
Other assets		2,588
Total assets		543,941

Liabilities and equity:
Deposits		476,099
Borrowed funds		9,500
Other liabilities		3,461
Total liabilities		489,060
Net assets acquired		54,881
Bargain purchase gain	$	(7,023)

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of acquisition and at September 30, 2020, are as follows ($ in thousands):


	April 3, 2020		September 30, 2020
Outstanding principal balance	$	394,621	$	325,865
Carrying amount		392,292		323,918

PCI loans are discussed more fully in Note 10 – “Loans” of this report.

First Florida Bancorp, Inc.

On November 1, 2019, the Company completed its acquisition of First Florida Bancorp, Inc. (“FFB”), and immediately thereafter merged its wholly-owned subsidiary, First Florida Bank with and into The First. The Company paid a total consideration of $89.5 million to the FFB shareholders as consideration in the merger, which included 1,682,889 shares of Company common stock and approximately $34.1 million in cash.

In connection with the acquisition, the Company recorded approximately $40.0 million of goodwill and $3.7 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

The Company acquired the $248.9 million loan portfolio at an estimated fair value discount of $1.7 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the FFB acquisition were $65 thousand and $643 thousand for the three months and nine months period ended September 30, 2020, respectively. These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

The assets acquired and liabilities assumed and consideration paid in the acquisition of FFB 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

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estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through November 1, 2020 in respect of FFB, 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	$	89,520
Total purchase price		89,520

Identifiable assets:
Cash and due from banks		50,169
Investments		122,084
Loans		247,263
Core deposit intangible		3,745
Personal and real property		4,991
Other assets		2,283
Total assets		430,535

Liabilities and equity:
Deposits		373,908
Borrowed funds		5,527
Other liabilities		1,619
Total liabilities		381,054
Net assets acquired		49,481
Goodwill resulting from acquisition	$	40,039


	November 1,2019		September 30,2020
Outstanding principal balance	$	248,916	$	186,939
Carrying amount		247,263		185,892

PCI loans are discussed more fully in Note 10 – “Loans” of this report.

FPB Financial Corp.

On March 2, 2019, the Company completed its acquisition of FPB Financial Corp., (“FPB”), and immediately thereafter merged its wholly-owned subsidiary, Florida Parishes Bank with and into The First. The Company paid a total consideration of $78.2 million to the FPB shareholders, which included 2,377,501 shares of Company common stock and $5 thousand in cash.

In connection with the acquisition, the Company recorded $28.8 million of goodwill and $6.6 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

The Company acquired the $247.8 million loan portfolio at an estimated fair value discount of $3.1 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

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Expenses associated with the FPB acquisition were $0 and $63 thousands for the three months and nine months period ended September 30, 2020. These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred. All purchase accounting adjustments related to the acquisition are final.


		March 2,2019		September 30, 2020
Outstanding principal balance	$	247,774	$	149,979
Carrying amount		244,665		148,438

PCI loans are discussed more fully in Note 10 – “Loans” of this report.

Supplemental Pro-Forma Financial Information

The following unaudited pro-forma financial data for the nine months ended September 30, 2020 and 2019 presents supplemental information as if the SWG, FPB and FFB acquisitions had occurred on January 1, 2019. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.


	Pro-Forma		Pro-Forma
	Nine months		Nine months
	ended		ended
	September 30,		September 30,
	2020		2019
($ in thousands)	(unaudited)		(unaudited)
Net interest income	$	118,774	$	117,595
Non-interest income		32,149		26,332
Total revenue	$	150,923	$	143,927
Income before income taxes	$	47,265	$	57,036

Supplemental pro-forma earnings were adjusted to exclude acquisition costs incurred.

Non-credit impaired loans acquired in the acquisitions were accounted for in accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs. PCI loans acquired in the FPB, FFB and SWG acquisitions were accounted for in accordance with ASC 310-30 Accounting for Purchased Loans with Deteriorated Credit Quality.

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.

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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
	September 30, 2020
	Net Income		Shares		Per
	(Numerator)		(Denominator)		Share Data
Basic earnings per share	$	11,917		21,405,309	$	0.56

Effect of dilutive shares:
Restricted stock grants				108,400

Diluted earnings per share	$	11,917		21,513,709	$	0.55


	For the Nine Months ended
	September 30, 2020
	Net Income		Shares		Per
	(Numerator)		(Denominator)		Share Data
Basic earnings per share	$	37,171		20,521,779	$	1.81

Effect of dilutive shares:
Restricted stock grants				125,466

Diluted earnings per share	$	37,171		20,647,245	$	1.80


	For the Three Months Ended
	September 30, 2019
	Net Income		Shares		Per
	(Numerator)		(Denominator)		Share Data
Basic earnings per share	$	12,272		17,130,610	$	0.72

Effect of dilutive shares:
Restricted stock grants				150,713

Diluted earnings per share	$	12,272		17,281,323	$	0.71


	For the Nine Months ended
	September 30, 2019
	Net Income		Shares		Per
	(Numerator)		(Denominator)		Share Data
Basic earnings per share	$	31,890		16,653,045	$	1.91

Effect of dilutive shares:
Restricted stock grants				136,873

Diluted earnings per share	$	31,890		16,789,918	$	1.90

The Company granted 60,680 shares of restricted stock in the first quarter of 2020 and 66,132 shares of restricted stock in the first quarter of 2019. The Company granted 3,750 shares of restricted stock in the second quarter of 2020 and 750 shares of restricted stock during the second quarter of 2019. The Company granted 13,259 shares of restricted stock in the third quarter of 2020 and 8,333 shares of restricted stock during the third quarter of 2019.

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NOTE 6 – COMPREHENSIVE INCOME

As presented in the Consolidated Statements of Comprehensive Income, 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.

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, 2020, and December 31, 2019, these financial instruments consisted of the following:


	September 30,2020				December 31, 2019
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	77,607	$	7,370	$	42,774	$	5,676
Unused lines of credit		167,239		193,171		137,966		208,728
Standby letters of credit		5,279		11,948		3,648		8,475

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% to 18% and maturities ranging from approximately 1 year to 30 years.

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.

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, 2020 and December 31, 2019:

●

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.

●

Impaired Loans: Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. If the impaired loan is identified as collateral dependent, then the fair value

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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 loan 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.

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

As of September 30, 2020


					Fair Value Measurements
							Significant
							Other		Significant
							Observable		Unobservable
	Carrying		Estimated		Quoted Prices		Inputs		Inputs
($ in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)

Financial Instruments:
Assets:
Cash and cash equivalents	$	603,736	$	603,736	$	603,736	$	—	$	—
Securities available-for- sale:
U.S. Treasury		9,450		9,450		9,450		—		—
Obligations of U.S. government agencies and sponsored entities		100,603		100,603		—		100,603		—
Municipal securities		416,567		416,567		—		401,310		15,257
Mortgage- backed securities		402,458		402,458		—		402,458		—
Corporate obligations		28,380		28,380		—		28,139		241
Loans, net		3,144,158		3,115,390		—		—		3,115,390
Accrued interest receivable		25,822		25,822		—		5,291		20,531
Liabilities:
Noninterest-bearing deposits	$	482,236	$	482,236	$	—	$	482,236	$	—
Interest-bearing deposits		3,746,978		3,757,864		—		3,757,864		—
Subordinated debentures		144,709		140,905		—		—		140,905
FHLB and other borrowings		115,827		115,827		—		115,827		—
Accrued interest payable		2,320		2,320		—		2,320		—

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As of December 31, 2019


			Fair Value Measurements
							Significant
							Other		Significant
					Quoted		Observable		Unobservable
	Carrying		Estimated		Prices		Inputs		Inputs
($ in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)

Financial Instruments:
Assets:
Cash and cash equivalents	$	168,864	$	168,864	$	168,864	$	—	$	—
Securities available-for-sale:
U.S. Treasury		4,894		4,894		4,894		—		—
Obligations of U.S. government agencies and sponsored entities		77,950		77,950		—		77,950		—
Municipal securities		258,982		258,982		—		248,637		10,345
Mortgage-backed securities		395,315		395,315		—		395,315		—
Corporate obligations		27,946		27,946		—		27,538		408
Loans, net		2,597,260		2,560,668		—		—		2,560,668
Accrued interest receivable		14,802		14,802		—		4,246		10,556
Liabilities:
Non-interest-bearing deposits	$	723,208	$	723,208	$	—	$	723,208	$	—
Interest-bearing deposits		2,353,325		2,339,537		—		2,339,537		—
Subordinated debentures		80,678		80,330		—		—		80,330
FHLB and other borrowings		214,319		214,319		—		214,319		—
Accrued interest payable		2,508		2,508		—		2,508		—

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

September 30, 2020


			Fair Value Measurements Using
			Quoted Prices
			in
			Active
			Markets		Significant
			For		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
($ in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Available-for-sale
U.S. Treasury	$	9,450	$	9,450	$	—	$	—
Obligations of U.S. Government agencies and sponsored entities		100,603		—		100,603		—
Municipal securities		416,567		—		401,310		15,257
Mortgage-backed securities		402,458		—		402,458		—
Corporate obligations		28,380		—		28,139		241
Total available-for-sale	$	957,458	$	9,450	$	932,510	$	15,498

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December 31, 2019


			Fair Value Measurements Using
			Quoted Prices
			in
			Active
			Markets		Significant
			For		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
($ in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Available-for-sale
U.S. Treasury	$	4,894	$	4,894	$	—	$	—
Obligations of U.S. Government agencies and sponsored entities		77,950		—		77,950		—
Municipal securities		258,982		—		248,637		10,345
Mortgage-backed securities		395,315		—		395,315		—
Corporate obligations		27,946		—		27,538		408
Total available-for-sale	$	765,087	$	4,894	$	749,440	$	10,753

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)	2020		2019
Balance, January 1	$	408	$	874
Paydowns		(273)		—
Unrealized gain/(loss) included in comprehensive income		106		(466)
Balance at September 30,2020 and December 31,2019	$	241	$	408


	Municipal Securities
($ in thousands)	2020		2019
Balance, January 1	$	10,345	$	7,574
Unrealized gain included in comprehensive income		4,912		2,771
Balance at September 30,2020 and December 31,2019	$	15,257	$	10,345

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, 2020 and December 31, 2019. The following tables present quantitative information about recurring Level 3 fair value measurements ($ in thousands):


				Significant
	Fair		Valuation	Unobservable	Range of
Trust Preferred Securities	Value		Technique	Inputs	Inputs
September 30,2020	$	241	Discounted cash flow	Probability of default	1.11% - 2.50%
December 31, 2019	$	408	Discounted cash flow	Probability of default	2.73% - 4.15%


				Significant
	Fair		Valuation	Unobservable	Range of
Municipal Securities	Value		Technique	Inputs	Inputs
September 30,2020	$	15,257	Discounted cash flow	Discount Rate	0.60% - 2.50%
December 31, 2019	$	10,345	Discounted cash flow	Discount Rate	1.50% - 4.40%

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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, 2020 and December 31, 2019.

September 30, 2020

Fair Value Measurements Using

Quoted

Prices in

Active

Markets

Significant

For

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

($ in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

9,720

—

9,720

Other real estate owned

5,202

—

5,202

December 31, 2019

Fair Value Measurements Using

Quoted

Prices in

Active

Markets

Significant

For

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

($ in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

11,337

—

11,337

Other real estate owned

7,299

—

7,299

NOTE 9 - SECURITIES

The following disclosure of the estimated fair value of financial instruments is made in accordance with authoritative guidance. The estimated fair value amounts have been determined using available market information and valuation methodologies that management believes are appropriate. However, considerable judgment is required to interpret market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

A summary of the amortized cost, fair value of available-for-sale securities at September 30, 2020 and December 31, 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):


	September 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
($ in thousands)	Cost		Gains		Losses		Value
Available-for-sale securities:
U.S. Treasury	$	9,080	$	370	$	—	$	9,450
Obligations of U.S. government agencies and sponsored entities		97,463		3,168		28		100,603
Tax-exempt and taxable obligations of states and municipal subdivisions		403,518		13,642		593		416,567
Mortgage-backed securities - residential		238,920		9,263		16		248,167
Mortgage-backed securities - commercial		147,766		6,563		38		154,291
Corporate obligations		27,510		912		42		28,380
Total	$	924,257	$	33,918	$	717	$	957,458

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	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
($ in thousands)	Cost		Gains		Losses		Value
Available-for-sale securities:
U.S. Treasury	$	4,967	$	—	$	73	$	4,894
Obligations of U.S. government agencies sponsored entities		76,699		1,475		224		77,950
Tax-exempt and taxable obligations of states and municipal subdivisions		253,527		5,602		147		258,982
Mortgage-backed securities - residential		263,229		4,726		107		267,848
Mortgage-backed securities - commercial		125,292		2,398		223		127,467
Corporate obligations		27,877		218		149		27,946
Total	$	751,591	$	14,419	$	923	$	765,087

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	September 30,2020				December 31, 2019
	Available-for-Sale				Available-for-Sale
	Amortized		Fair		Amortized		Fair
($ in thousands)	Cost		Value		Cost		Value

Due less than one year	$	30,084	$	30,284	$	30,141	$	30,303
Due after one year through five years		123,842		127,542		80,119		81,372
Due after five years through ten years		185,005		192,052		143,811		148,085
Due greater than ten years		198,640		205,122		108,999		110,012
Mortgage-backed securities - residential		238,920		248,167		263,229		267,848
Mortgage-backed securities - commercial		147,766		154,291		125,292		127,467
Total	$	924,257	$	957,458	$	751,591	$	765,087

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $586.3 million and $436.0 million at September 30, 2020 and December 31, 2019, respectively.

The following table summarizes available-for-sale securities with unrealized and unrecognized losses at September 30, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized or unrecognized loss position:


	September 30,2020
	Losses < 12 Months				Losses 12 Months or >				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
($ in thousands)	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S government agencies and sponsored entities		7,695		26		366		2		8,061		28
Tax-exempt and taxable obligations of state and municipal subdivisions		35,175		593		—		—		35,175		593
Mortgage-backed securities - residential		3,345		16		11		—		3,356		16
Mortgage-backed securities - commercial		28,549		5		5,690		33		34,239		38
Corporate obligations		4,606		33		39		9		4,645		42
Total	$	79,370	$	673	$	6,106	$	44	$	85,476	$	717

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	December 31, 2019
	Losses < 12 Months				Losses 12 Months or >				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
($ in thousands)	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury	$	4,894	$	73	$	—	$	—	$	4,894	$	73
Obligations of U.S government agencies and sponsored entities		22,987		224		—		—		22,987		224
Tax-exempt and taxable obligations of state and municipal subdivisions		27,913		146		322		1		28,235		147
Mortgage-backed securities - residential		22,328		55		7,602		52		29,930		107
Mortgage-backed securities - commercial		10,787		166		17,649		57		28,436		223
Corporate obligations		10,636		49		436		100		11,072		149
Total	$	99,545	$	713	$	26,009	$	210	$	125,554	$	923

At September 30, 2020 and December 31, 2019, the Company’s securities portfolio consisted of 97 and 156 securities, respectively, which were in an unrealized loss position. The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”), with attention given to securities in a continuous loss position of at least ten percent for over twelve months. Management believes that none of the losses on available-for-sale securities noted above constitutes an OTTI. The noted losses are considered temporary due to market fluctuations in available interest rates. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. No OTTI losses were recognized during the nine months ended September 30, 2020 or the year ended December 31, 2019.

NOTE 10 – LOANS

The Company uses four different categories to classify loans in its portfolio based on the underlying collateral securing each loan. The loans grouped together in each category have been determined to share similar risk characteristics with respect to credit quality. Those four categories are commercial, financial and agriculture, commercial real estate, consumer real estate, installment and other;

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.

Installment and other – 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.

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.

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The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as nonaccrual including PCI loans.


	September 30, 2020
	Past Due		Past Due 90						Total
	30 to 89		Days or More						Past Due,
	Days and		and						Non accrual		Total
($ in thousands)	Accruing		Still Accruing		Non accrual		PCI		and PCI		Loans
Commercial, financial and agriculture(1)	$	815	$	—	$	2,737	$	235	$	3,787	$	576,812
Commercial real estate		11,123		1,081		21,445		3,486		37,135		1,646,325
Consumer real estate		2,848		1,306		2,660		6,697		13,511		874,640
Consumer installment		229		9		36		4		278		42,332
Lease financing receivable		—		—		—		—		—		2,478
Obligations of states and subdivisions		—		—		—		—		—		13,345
Total	$	15,015	$	2,396	$	26,878	$	10,422	$	54,711	$	3,155,932

(1)	Total loan balance as of September 30, 2020 includes $260.2 million in PPP loans.


	December 31,2019
			Past Due 90						Total
	Past Due		Days or						Past Due,
	30 to 89		More and Still						Non accrual		Total
($ in thousands)	Days		Accruing		Non accrual		PCI		and PCI		Loans
Commercial, financial and agriculture	$	515	$	61	$	2,137	$	97	$	2,810	$	332,600
Commercial real estate		2,447		1,046		22,441		3,844		29,778		1,387,207
Consumer real estate		4,569		1,608		1,902		8,148		16,227		814,282
Consumer installment		226		—		260		6		492		42,458
Lease financing receivable		—		—		—		—		—		3,095
Obligations of states and subdivisions		—		—		—		—		—		20,716
Total	$	7,757	$	2,715	$	26,740	$	12,095	$	49,307	$	2,600,358

We acquired loans with deteriorated credit quality in 2014, 2017, 2018, 2019 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.

The following presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of PCI loans acquired in the acquisitions from 2019 and 2020.


($ in thousands)	FPB		FFB		SWG		Total
Contractually required payments at acquisition	$	4,715	$	947	$	882	$	6,544
Cash flows expected to be collected at acquisition		4,295		955		570		5,820
Fair value of loans at acquisition		3,916		809		526		5,251

Total outstanding PCI loans were $11.9 million and the related purchase accounting discount was $3.5 million as of September 30, 2020, and $14.6 million and $3.3 million as of December 31, 2019, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.

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Changes in the carrying amount and accretable yield for purchased credit impaired loans were as follows at September 30, 2020 and 2019 ($ in thousands):


	September 30, 2020		September 30, 2019
	Accretable		Accretable
	Yield		Yield
Balance at beginning of period, January 1	$	3,714	$	3,835
Additions, including transfers from non-accretable		569		452
Accretion		(738)		(845)
Balance at end of period, September 30	$	3,545	$	3,442

The following tables provide detail of impaired loans broken out according to class as of September 30, 2020 and December 31, 2019. The following tables do 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.

September 30, 2020


							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
($ in thousands)	Investment		Balance		Allowance		YTD		YTD
Impaired loans with no related allowance:
Commercial, financial and agriculture	$	259	$	261	$	—	$	264	$	2
Commercial real estate		12,634		12,830		—		13,283		10
Consumer real estate		830		875		—		816		5
Consumer installment		25		26		—		15		1
Total	$	13,748	$	13,992	$	—	$	14,378	$	18

Impaired loans with a related allowance:
Commercial, financial and agriculture	$	2,528	$	2,539	$	1,285	$	2,168	$	44
Commercial real estate		12,514		12,896		4,804		12,258		99
Consumer real estate		944		1,000		189		801		19
Consumer installment		28		29		16		106		—
Total	$	16,014	$	16,464	$	6,294	$	15,333	$	162

Total impaired loans:
Commercial, financial and agriculture	$	2,787	$	2,800	$	1,285	$	2,432	$	46
Commercial real estate		25,148		25,726		4,804		25,541		109
Consumer real estate		1,774		1,875		189		1,617		24
Consumer installment		53		55		16		121		1
Total Impaired Loans	$	29,762	$	30,456	$	6,294	$	29,711	$	180

As of September 30, 2020, the Company had $1.1 million of foreclosed residential real estate property obtained by physical possession and $1.2 million of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

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December 31, 2019


							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
($ in thousands)	Investment		Balance		Allowance		YTD		YTD
Impaired loans with no related allowance:
Commercial, financial and agriculture	$	59	$	62	$	—	$	294	$	7
Commercial real estate		13,556		13,671		—		10,473		591
Consumer real estate		542		594		—		2,173		—
Consumer installment		21		21		—		23		—
Total	$	14,178	$	14,348	$	—	$	12,963	$	598

Impaired loans with a related allowance:
Commercial, financial and agriculture	$	2,434	$	2,434	$	1,182	$	2,039	$	13
Commercial real estate		12,428		12,563		3,021		10,026		49
Consumer real estate		639		657		141		560		3
Consumer installment		260		260		80		164		2
Total	$	15,761	$	15,914	$	4,424	$	12,789	$	67

Total impaired loans:
Commercial, financial and agriculture	$	2,493	$	2,496	$	1,182	$	2,333	$	20
Commercial real estate		25,984		26,234		3,021		20,499		640
Consumer real estate		1,181		1,251		141		2,733		3
Consumer installment		281		281		80		187		2
Total Impaired Loans	$	29,939	$	30,262	$	4,424	$	25,752	$	665

The cash basis interest earned in the charts above is materially the same as the interest recognized during impairment for period ended September 30, 2020 and December 31, 2019.

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 three months and nine months ended September 30, 2020, was $391 thousand and $1.1 million, respectively. The Company had no loan commitments to borrowers in nonaccrual status at September 30, 2020 and December 31, 2019.

Troubled Debt Restructuring

If the Company grants a concession to a borrower in financial difficulty, the loan is classified as a troubled debt restructuring (“TDR”).

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The following table presents loans by class modified as troubled debt restructurings (TDRs) that occurred during the three months and nine months ended September 30, 2020 and 2019 ($ in thousands, except for number of loans).


	Three Months Ended September 30,
		Outstanding		Outstanding
		Recorded		Recorded
	Number of	Investment		Investment
2020	Loans	Pre-Modification		Post-Modification
Commercial real estate	2	$	573	$	602
Total	2	$	573	$	602

2019
Commercial, financial and agriculture	3	$	315	$	313
Commercial real estate	5		14,154		14,154
Consumer real estate	1		46		41
Consumer installment	1		6		6
Total	10	$	14,521	$	14,514

The TDRs presented above increased the allowance for loan losses $29 thousand and $2.3 million and resulted in no charge-offs for the three months period ended September 30, 2020 and 2019, respectively.


($ in thousands, except for number of loans)	Nine Months Ended September 30,
		Outstanding		Outstanding
		Recorded		Recorded
	Number of	Investment		Investment
2020	Loans	Pre-Modification		Post-Modification
Commercial, financial and agriculture	2	$	47	$	46
Commercial real estate	5		1,506		1,530
Total	7	$	1,553	$	1,576

2019
Commercial, financial and agriculture	5	$	970	$	958
Commercial real estate	7		14,244		14,240
Consumer real estate	1		46		41
Consumer installment	1		6		6
Total	14	$	15,266	$	15,245

The TDRs presented above increased the allowance for loan losses $76 thousand and $2.6 million and resulted in no charge-offs for the nine months period ended September 30, 2020 and 2019, respectively.

The balance of TDRs decreased $1.8 million to $30.2 million at September 30, 2020 compared to $32.0 million at December 31, 2019. As of September 30, 2020, the Company had no additional amount committed on any loan classified as TDR.

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The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification ($ in thousands, except for number of loans).


	Nine months ended			Nine months ended
	September 30, 2020			September 30, 2019
Troubled Debt Restructurings	Number of	Recorded		Number of	Recorded
That Subsequently Defaulted:	Loans	Investment		Loans	Investment
Commercial, financial and agriculture	—	$	—	3	$	427
Commercial real estate	4		2,291	11		17,267
Consumer real estate	—		—	2		158
Consumer installment	1		3	—		—
Total	5	$	2,294	16	$	17,852

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. The TDRs presented above increased the allowance for loan losses $54 thousand and $2.0 million and resulted in no charge-offs for the nine months period ended September 30, 2020 and 2019, respectively.

The following tables represents the Company’s TDRs at September 30, 2020 and December 31, 2019:


					Past Due 90
September 30, 2020	Current		Past Due		days and still
($ in thousands)	Loans		30‑89		accruing		Nonaccrual		Total
Commercial, financial and agriculture	$	30	$	37	$	—	$	1,495	$	1,562
Commercial real estate		4,641		29		—		19,439		24,109
Consumer real estate		1,849		—		—		2,695		4,544
Consumer installment		24		3		—		—		27
Total	$	6,544	$	69	$	—	$	23,629	$	30,242
Allowance for loan losses	$	137	$	29	$	—	$	3,780	$	3,946


					Past Due 90
December 31, 2019	Current		Past Due		days and still
($ in thousands)	Loans		30‑89		accruing		Nonaccrual		Total
Commercial, financial and agriculture	$	583	$	64	$	—	$	1,062	$	1,709
Commercial real estate		4,299		809		109		19,991		25,208
Consumer real estate		1,905		112		58		2,940		5,015
Consumer installment		37		—		—		—		37
Total	$	6,824	$	985	$	167	$	23,993	$	31,969
Allowance for loan losses	$	128	$	—	$	—	$	1,997	$	2,125

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 uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:

Pass: Loan classified as pass are deemed to possess average to superior credit quality, requiring no more than normal attention.

Special 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.

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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: 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.

As of September 30, 2020 and December 31, 2019, 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,
September 30, 2020	Financial and		Commercial		Consumer		Consumer
($ in thousands)	Agriculture		Real Estate		Real Estate		Installment		Total
Pass	$	575,621	$	1,872,964	$	541,829	$	46,214	$	3,036,628
Special Mention		1,819		37,284		1,573		24		40,700
Substandard		10,585		61,441		14,105		161		86,292
Doubtful		1,963		23		—		—		1,986
Subtotal	$	589,988	$	1,971,712	$	557,507	$	46,399	$	3,165,606
Less:
Unearned Discount		—		9,674		—		—		9,674

Loans, net of unearned discount	$	589,988	$	1,962,038	$	557,507	$	46,399	$	3,155,932


	Commercial,
December 31, 2019	Financial and		Commercial		Consumer		Consumer
($ in thousands)	Agriculture		Real Estate		Real Estate		Installment		Total
Pass	$	327,205	$	1,645,496	$	499,426	$	41,008	$	2,513,135
Special Mention		3,493		8,876		1,194		21		13,584
Substandard		10,972		50,554		13,244		397		75,167
Doubtful		16		77		—		—		93
Subtotal	$	341,686	$	1,705,003	$	513,864	$	41,426	$	2,601,979
Less:
Unearned Discount		—		1,621		—		—		1,621

Loans, net of unearned discount	$	341,686	$	1,703,382	$	513,864	$	41,426	$	2,600,358

Allowance for Loan Losses

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months period ended September 30, 2020 and 2019:


	Three months ended September 30,2020
	Commercial,								Paycheck
	Financial and		Commercial		Consumer		Installment		Protection
($ in thousands)	Agriculture		Real Estate		Real Estate		and Other		Program		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	5,208	$	18,526	$	3,741	$	459	$	130	$	—	$	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

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	Nine months ended September 30,2020
	Commercial,		Commercial		Consumer		Installment		Paycheck
	Financial and		Real		Real		and		Protection
($ in thousands)	Agriculture		Estate		Estate		Other		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


	Three months ended September 30,2019
	Commercial,
	Financial and		Commercial		Consumer		Installment
($ in thousands)	Agriculture		Real Estate		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	2,432	$	7,872	$	1,489	$	250	$	48	$	12,091
Provision for loan losses		(82)		787		294		18		(43)		974
Loans charged-off		(17)		66		(174)		(76)		—		(201)
Recoveries		24		9		64		82		—		179
Total ending allowance balance	$	2,357	$	8,734	$	1,673	$	274	$	5	$	13,043


	Nine months ended September 30,2019
	Commercial,		Commercial		Consumer		Installment
	Financial and		Real		Real		and
($ in thousands)	Agriculture		Estate		Estate		Other		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	2,060	$	6,258	$	1,743	$	201	$	(197)	$	10,065
Provision for loan losses		269		2,454		(19)		(18)		202		2,888
Loans charged-off		(23)		—		(216)		(143)		—		(382)
Recoveries		51		22		165		234		—		472
Total ending allowance balance	$	2,357	$	8,734	$	1,673	$	274	$	5	$	13,043

The following tables provide the ending balances in the Company’s loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of September 30, 2020 and December 31, 2019. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company’s systematic methodology for estimating its Allowance for Loan Losses.


	Commercial,						Installment
September 30, 2020	Financial and		Commercial		Consumer		and
($ in thousands)	Agriculture		Real Estate		Real Estate		Other		Unallocated		Total
Loans
Individually evaluated	$	2,787	$	25,148	$	1,774	$	53	$	—	$	29,762
Collectively evaluated		586,939		1,977,139		500,317		46,322		—		3,110,717
PCI Loans		262		9,390		5,777		24		—		15,453
Total	$	589,988	$	2,011,677	$	507,868	$	46,399	$	—	$	3,155,932

Allowance for Loan Losses
Individually evaluated	$	1,285	$	4,804	$	189	$	16	$	—	$	6,294
Collectively evaluated		4,489		18,342		4,591		540		—		27,962
Total	$	5,774	$	23,146	$	4,780	$	556	$	—	$	34,256

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	Commercial,						Installment
December 31, 2019	Financial and		Commercial		Consumer		and
($ in thousands)	Agriculture		Real Estate		Real Estate		Other		Unallocated		Total
Loans
Individually evaluated	$	2,493	$	25,984	$	1,181	$	281	$	—	$	29,939
Collectively evaluated		339,003		1,773,934		398,471		41,112		—		2,552,520
PCI Loans		191		10,471		7,204		33		—		17,899
Total	$	341,687	$	1,810,389	$	406,856	$	41,426	$	—	$	2,600,358

Allowance for Loan Losses
Individually evaluated	$	1,182	$	3,021	$	141	$	80	$	—	$	4,424
Collectively evaluated		1,861		5,815		1,553		216		39		9,484
Total	$	3,043	$	8,836	$	1,694	$	296	$	39	$	13,908

NOTE 11 – REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within non-interest income. The guidance does not apply to revenue associated with financial instruments, including loans and investment securities that are accounted for under other GAAP, which comprise a significant portion of our revenue stream. A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in time that the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income: The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided by the cardholder.

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction prices is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

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All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following table presents the Company’s sources of non-interest income revenue, by operating segments, for the three months and nine months period ended September 30, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.


	Three Months Ended September 30,2020								Nine Months Ended September 30,2020
	Commercial/		Mortgage						Commercial/		Mortgage
	Retail		Banking		Holding				Retail		Banking		Holding
($in thousands)	Bank		Division		Company		Total		Bank		Division		Company		Total
Non-interest income
Service charges on deposits
Overdraft fees	$	750	$	—	$	—	$	750	$	2,330	$	—	$	—	$	2,330
Other		1,029		—		—		1,029		2,958		1		—		2,959
Interchange income		2,491		—		—		2,491		6,871		—		—		6,871
Investment brokerage fees		277		—		—		277		659		—		—		659
Net gains (losses) on OREO		(55)		—		—		(55)		(396)		—		—		(396)
Net gains (losses) on sales of securities (a)		32		—		—		32		278		—		—		278
Gain on acquisition		—		—		—		—		7,023		—		—		7,023
Gain on premises and equipment		—		—		—		—		461		—		—		461
Other		1,313		2,961		(4)		4,270		3,581		7,173		9		10,763
Total non-interest income	$	5,837	$	2,961	$	(4)	$	8,794	$	23,765	$	7,174	$	9	$	30,948


	Three Months Ended September 30,2019								Nine Months Ended September 30,2019
	Commercial/		Mortgage						Commercial/		Mortgage
	Retail		Banking		Holding				Retail		Banking		Holding
($in thousands)	Bank		Division		Company		Total		Bank		Division		Company		Total
Non-interest income
Service charges on deposits
Overdraft fees	$	1,117	$	—	$	—	$	1,117	$	3,129	$	1	$	—	$	3,130
Other		861		1		—		862		2,596		2		—		2,598
Interchange income		2,252		—		—		2,252		5,949		—		—		5,949
Investment brokerage fees		24		—		—		24		58		—		—		58
Net gains (losses) on OREO		51		—		—		51		23		—		—		23
Net gains (losses) on sales of securities (a)		57		—		—		57		131		—		—		131
Gain on premises and equipment		19		—		—		19		11		—		—		11
Other		913		1,799		9		2,721		2,860		4,265		348		7,473
Total non-interest income	$	5,294	$	1,800	$	9	$	7,103	$	14,757	$	4,268	$	348	$	19,373

(a)	Not within scope of ASC 606

NOTE 12 – LEASES

The Company enters into leases in the normal course of business primarily for financial centers, back office operations locations and business development offices. The Company’s leases have remaining terms ranging from 1 to 11 years.

The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.

Leases are classified as operating or finance leases at the lease commencement date. Leases in which we are the lessee are recorded as a right-of-use assets and lease liabilities, which are included in premises and equipment and other liabilities, respectively, on our consolidated balance sheets. Lease expense for leases and short-term leases is recognized on a straight-line basis over the lease term, and is recorded in net occupancy and equipment expense in the consolidated statements of income and other comprehensive income. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation

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to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date and based on the estimated present value of lease payments over the lease term.

The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company’s incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors.

The following table details balance sheet information, as well as weighted-average lease terms and discount rates, related to leases at September 30, 2020 and December 31, 2019 ($ in thousands).


	September 30, 2020			December 31, 2019
Right-of-use assets:
Operating leases	$	6,427		$	6,518
Finance leases, net of accumulated depreciation		2,719			—
Total right-of-use assets	$	9,146		$	6,518
Lease liabilities:
Operating lease	$	6,427		$	6,518
Finance lease		2,327			—
Total lease liabilities	$	8,754		$	6,518
Weighted average remaining lease term
Operating leases		4.6	years		6.2	years
Finance leases		11.2	years		—
Weighted average discount rate
Operating leases		2.3	%		3.1	%
Finance leases		2.3	%		—

The table below summarizes our net lease costs ($ in thousands):


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Operating lease cost	$	431	$	231	$	1,252	$	581
Finance lease cost:
Interest on lease liabilities		2		—		6		—
Amortization of right-of-use		61		—		122		—
Net lease cost	$	494	$	231	$	1,380	$	581

The table below summarizes the maturity of remaining lease liabilities at September 30, 2020 and December 31, 2019 ($ in thousands):


	September 30, 2020
	Operating Leases		Finance Leases
Remaining 2020	$	434	$	48
2021		1,741		193
2022		1,574		220
2023		1,058		220
2024		846		220
Thereafter		1,143		1,680
Total lease payments	$	6,796	$	2,581
Less: Interest		(369)		(254)
Present value of lease liabilities	$	6,427	$	2,327

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	December 31, 2019
	Operating Leases		Finance Leases
2020	$	1,643	—
2021		1,527	—
2022		1,359	—
2023		844	—
2024		631	—
Thereafter		981	—
Total lease payments	$	6,985	—
Less: Interest		(467)	—
Present value of lease liabilities	$	6,518	—

NOTE 13 – 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 financial condition and results of operations including but not limited to additional credit loss reserves, additional collateral and/or modifications to debt obligations, liquidity, limited dividend payouts or potential shortages of personnel. Management continues to take appropriate actions to mitigate the negative impact the virus has on the Company, including restricting employee travel, directing employees to work remotely, cancelling in-person meetings and implementing our business continuity plans and protocols to the extent necessary.

Despite recent improvements in certain economic indicators, significant constraints to commerce remain in place, and significant uncertainty remains over the timing of an effective and widely available coronavirus vaccine, the timing and scope of additional government stimulus packages, and the economic impact resulting from the outcome of the November 2020 elections. 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 result of these conditions, including the determination of the allowance for loan losses, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes.

NOTE 14 – RECLASSIFICATION

Certain amounts in the 2019 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

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

All statements other than statements of historical fact are forward-looking statements. You can identify these forward-looking statements through the Company’s use of words such as “believes,” “anticipates,” “expects,” “may,” “will,” “assumes,” “predicts,” “could,” “should,” “would,” “intends,” “targets,” “estimates,” “projects,” “plans,” “potential” and other similar words and expressions of the future or otherwise regarding the outlook for the Company’s future business and financial performance and/or the performance of the financial services industry and economy in general. Forward-looking statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this document. Many of these factors are beyond the Company’s ability to control or predict. The most recent factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the negative impact of COVID-19 pandemic on our financial statements, including our ability to continue our business activities in certain communities we serve, the duration of the pandemic and its continued effects on financial markets, a reduction in financial transaction and business activities resulting in decreased deposits and reduced loan originations, increases in unemployment rates impacting our borrowers’ ability to repay their loans, our ability to manage liquidity in a rapidly changing and unpredictable market, additional interest rate changes by 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;

●

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, uncertainty relating to calculation of LIBOR and other regulatory responses to economic conditions;

●

changes in political conditions or the legislative or regulatory environment;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

changes in the securities markets;

●

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

●

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

●

changes occurring in business conditions and inflation;

●

changes in technology or risks to cybersecurity;

●

changes in deposit flows;

●

changes in accounting principles, policies, or guidelines, including the impact of the new CECL standard;

●

our ability to maintain adequate internal control over financial reporting;

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●

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

●

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

We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in and the assumptions underlying our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved or the assumptions will be accurate. The Company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional information concerning these risks and uncertainties is contained in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, in this Quarterly Report on Form 10Q, and in our other filings with the Securities and Exchange Commission, available at the SEC’s website, http://www.sec.gov.

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.

Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the Company’s critical accounting policies deal with the following areas: the establishment of the allowance for loan and lease losses (referred to as the “allowance for loan losses” or the “ALLL”), as explained in detail in Note 10 - Loans to the Consolidated Financial Statements and in the “Allowance for Loan and Lease Losses” sections of this Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations; the valuation of impaired loans and foreclosed assets, as discussed in Note 10 - Loans to the Consolidated Financial Statements; income taxes and deferred tax assets and liabilities, especially with regard to the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and goodwill and other intangible assets, which are evaluated annually for impairment, as discussed in the “Other Assets” section of this Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations. Critical accounting policies are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations with regard to those areas.

As a result of the Company’s immediate response to COVID-19, including loan modifications/payment deferral programs and the Paycheck Protection Program, as well as acquisition and integration of SWG, and increased uncertainty related to certain judgments and estimates, the Company has elected to temporarily defer or suspend the application of two provisions of U.S. Generally Accepted Accounting Principles (GAAP), as allowed by the CARES Act, which was signed into law by the President on March 27, 2020. Sections 4013 and 4014 of the CARES Act provide the Company with temporary relief from troubled debt restructurings and from CECL, which the Company believes prudent to elect in these challenging times to allow us time to provide consistent, high-quality financial information to our investors and other stakeholders.

CORONAVIRUS (COVID-19) IMPACT

In March 2020, the World Health Organization recognized the novel Coronavirus Disease 2019 (“COVID-19”) as a pandemic. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. These disruptions may result in a decline in demand for banking products or services, including loans and deposits, which could impact our future financial condition, result of operations and liquidity. The impacts of the COVID-19 pandemic on the economy and the banking industry are rapidly evolving and the future effects are

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unknown at this time. The Company is working to adapt to the changing environment and proactively plan for contingencies. To that end, the Company has and is taking steps to protect the health of our employees and to work with our customers experiencing difficulties as a result of this virus. The Company has many non-branch personnel working remotely. All of our branches are open, and we are servicing our clients with limited lobby access by appointment only. We have also been working through loan modifications and payment deferral programs to assist affected customers, and have increased our allowance for loan and lease losses.

The pandemic is having an adverse impact on certain industries the Company serves, including hotels, restaurants, retail, convenience stores, healthcare, and direct energy. As of September 30, 2020, the Company’s aggregate outstanding exposure in these segments was $452.5 million, or 14.3% of total loans. While it is not yet possible to know the full effect that the pandemic will have on the economy, or to what extent this crisis will impact the Company, all available current industry statistics and internal monitoring of loan repayment ability and payment forgiveness across the portfolio has been analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration. This analysis of the possibility of increasing credit losses resulted in the need for a higher than normal provision expense to provide the required allowance reserve for this situation. Based on management’s current assessment of the increased inherent risk in the loan portfolio, the provision for loan and leases losses as of September 30, 2020 totaled $21.6 million of which $18.0 million was related to the anticipated economic effects of COVID-19. If economic conditions continue to worsen, further funding to the allowance may be required in future periods.

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

Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDR for a limited period of time to account for the effects of COVID-19. To qualify for Section 4013 of the CARES Act, borrowers must have been current at December 31, 2019. All modifications are eligible as long as they are executed between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) the 60th day after the end of the COVID-19 national emergency declared by the President of the U.S. Loans that were current as of December 31, 2019 are not TDRs. In addition, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. We began receiving requests from our borrowers for loan and lease deferrals in March. Payment modifications include the deferral of principal payments or the deferral of principal and interest payments for terms generally 90-180 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower. As of September 30, 2020, we have modified approximately 1,610 loans for $709.6 million, of which 1,386 loans for $564.0 million were modified to defer monthly principal and interest payments and 224 loans for $145.6 were modified from monthly principal and interest payments to interest only. As of September 30, 2020 we have approximately 3,230 loans approved through the SBA for $260.2 million.

The Company had finalized the formal review and approval process and the results of its CECL estimate as of year-end but has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (“CARES Act”), until the date on which the national emergency related to the novel coronavirus (“COVID-19”) outbreak is terminated or December 31, 2020 whichever occurs first. Upon adoption of ASU 2016-13, the Company has determined that the impact to the allowance for credit losses will be an increase under the new standard due to the life of loan loss estimation methodology, as well as the requirement to record an allowance on acquired loans previously recorded at fair value. As disclosed previously, it can be reasonably expected that a

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probable range in the reserve as a percentage of total loans after adoption of this guidance to be between 0.68% and 1.39% as of January 1, 2020.

OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

Third quarter 2020 compared to third quarter 2019

The Company reported net income available to common shareholders of $11.9 million for the three months ended September 30, 2020, compared with net income available to common shareholders of $12.3 million for the same period last year, a decrease of $355 thousand or 2.9%. In comparing the quarters, an increased provision for loan losses in the amount of $5.9 million was expensed during the third quarter of 2020 as compared to the third quarter 2019. For the third quarter of 2020, fully diluted earnings per share were $0.55, compared to $0.71 for the third quarter of 2019. The additional provision for loan losses expense of $5.9 million, which is primarily attributable to the COVID-19 pandemic, accounted for a decrease of $0.21 in fully diluted earnings per share.

Operating net earnings, a non-GAAP financial measure, for the third quarter of 2020 totaled $12.1 million compared to $12.8 million for the third quarter of 2019, a decrease of $731 thousand or 5.69%. Operating net earnings for the third quarter of 2020 excludes merger-related costs of $177 thousand, net of tax. Operating net earnings for the third quarter of 2019 excludes merger-related costs of $553 thousand, net of tax. Operating earnings per share were $0.56 on a fully diluted basis for the third quarter 2020, compared to $0.74 for the same period in 2019, excluding the merger-related costs and income described above. See reconciliation of non-GAAP financial measures provided below.

Net interest income increased to $40.0 million, or 31.2%, for the three months ended September 30, 2020, compared to $30.5 million for the same period in 2019. The increase was due to interest income earned on a higher volume of loans. Fully tax equivalent (“FTE”) net interest income, which is a non-GAAP measure, totaled $40.6 million and $30.7 million for the third quarter of 2020 and 2019, respectively. FTE net interest income increased $9.9 million in the prior year quarterly comparison due to increased loan volume. Purchase accounting adjustments accounted for $557 thousand of the difference in net interest income for the third quarter comparisons. Third quarter 2020 FTE net interest margin, which is a non-GAPP measure, of 3.58% included 17 basis points related to purchase accounting adjustments compared to 4.05% for the same quarter in 2019, which included 19 basis points related to purchase accounting adjustments. Excluding the purchase accounting adjustments, the net interest margin decreased 45 basis points in prior year quarterly comparison.

Non-interest income for the three months ended September 30, 2020, was $8.8 million compared to $7.1 million for the same period in 2019, reflecting an increase of $1.7 million or 23.8%. Mortgage income increased $1.2 million in prior year quarterly comparison primarily due to an increase in mortgage loan volume.

Pre-tax, pre-provision operating earnings, a non-GAAP measure, excludes acquisition charges, increased 26.5% to $22.1 million for the quarter-ended September 30, 2020 as compared to $17.4 million for the third quarter of 2019. See reconciliation of non-GAAP financial measures provided below.

Provision for loan losses totaled $6.9 million for the quarter ended September 30, 2020, an increase of $5.9 million, or 610.6% as compared to $974 thousand for the third quarter of 2019. $5.8 million of the $6.9 million provision for loan loss expense for the quarter ended September 30, 2020 was related to the economic effects of COVID-19. The allowance for loan losses of $34.3 million at September 30, 2020 or 1.09% of total loans is based on our methodology and is considered by management to be adequate to cover losses inherent in the loan portfolio. See “Allowance for Loan and Lease Losses” in Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation.

Non-interest expense was $26.9 million for the three months ended September 30, 2020, an increase of $6.1 million or 29.3%, when compared with the same period in 2019. Excluding the net decrease in acquisition charges of $467 thousand for the quarterly comparison, non-interest expense increased $6.6 million in the third quarter of 2020, of which $4.1 million was attributable to the operations of FFB and SWG, as compared to second quarter of 2019.

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Investment securities totaled $984.9 million, or 19.1% of total assets at September 30, 2020, versus $640.8 million, or 18.4% of total assets at September 30, 2019. The average balance of investment securities increased $335.8 million in prior year quarterly comparison, mostly as a result of the acquisitions of FFB and SWG. The average tax equivalent yield on investment securities decreased 76 basis points to 2.48% from 3.24% in prior year quarterly comparison. The investment portfolio had a net unrealized gain of $33.2 million at September 30, 2020 as compared to a net unrealized gain of $13.9 million at September 30, 2019.

The FTE average yield on all earning assets, a non-GAAP measure, decreased 80 basis points in prior year quarterly comparison, from 4.94% for the third quarter of 2019 to 4.14% for the third quarter of 2020. Average interest expense decreased 56 basis points from 1.17% for the third quarter of 2019 to 0.61% for the third quarter of 2020. Cost of all deposits averaged 47 basis points for the third quarter of 2020 compared to 76 basis points for the third quarter of 2019. See reconciliation of non-GAAP financial measures provided below.

First nine months 2020 compared to first nine months 2019

The Company reported net income available to common shareholders of $37.2 million for the nine months ended September 30, 2020, compared to $31.9 million for the same period last year. Operating net earnings decreased $2.6 million, or 7.4%, from $34.8 million at September 30, 2019 to $32.2 million at September 30, 2020. Provision for loan losses increased $18.7 million for the year-over-year comparison. Operating net earnings excludes merger-related costs of $2.5 million, net of tax, $7.0 million bargain purchase gain and a gain on the sale of land of $463 thousand, net of tax, for the year-to-date period ending September 30, 2020, and merger-related costs of $3.1 million, net of tax, and income of $174 thousand, net of tax, related to the Financial Assistance Award from the U.S. Department of the Treasury, for the year-to-date period ending September 30, 2019. Operating earnings per share were $1.56 on a fully diluted basis for nine-month period ending September 30, 2020, compared to $2.07 for the same period in 2019, excluding the merger-related costs and income described above. See reconciliation of non-GAAP financial measures provided below.

Net interest income increased to $113.2 million, or 28.1%, for the nine months ended September 30, 2020, compared to $88.4 million for the same period in 2019. This increase was primarily due to interest earned on a high volume of loans and securities. Average earning assets at September 30, 2020, increased $1.086 billion, or 35.5%, and average interest-bearing liabilities increased $1.446 billion, or 61.7%, when compared to December 31, 2019.

Non-interest income for the nine months ended September 30, 2020, was $30.9 million compared to $19.4 million for the same period in 2019, reflecting an increase of $11.6 million or 59.7%. Excluding the awards and gains mentioned above, non-interest income increased $4.2 million in year-over-year comparison. Mortgage income increased $2.9 million and interchange fee income increased $923 thousand in the year-over-year comparison.

The provision for loan losses was $21.6 million for the nine months ended September 30, 2020, compared with $2.9 million for the same period in 2019. The allowance for loan losses of $34.3 million at September 30, 2020 (approximately 1.09% of total loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. Total valuation accounting adjustments totaled $8.8 million on acquired loans. See “Allowance for Loan and Lease Losses” in Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation.

Non-interest expense was $78.4 million for the nine months ended September 30, 2020, an increase of $14.8 million or 23.3%, when compared with the same period in 2019. $11.7 million of the increase is related to the operations of FFB and SWG.

FINANCIAL CONDITION

The First represents the primary asset of the Company. The First reported total assets of $5.155 billion at September 30, 2020 compared to $3.935 billion at December 31, 2019, an increase of $1.220 billion. Loans increased $546.9 million to $3.144 billion, or 21.1%, during the first nine months of 2020. Deposits at September 30, 2020 totaled $4.306 billion compared to $3.082 billion at December 31, 2019.

For the nine months period ended September 30, 2020, The First reported net income of $43.0 million compared to $37.3 million for the nine months ended September 30, 2019. Merger charges, net of tax, equaled $2.1 million for the first nine months of 2020 as compared to $3.1 million for the first nine months of 2019.

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EARNINGS PERFORMANCE

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

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income increased by $9.5 million, or 31.2%, for the third quarter of 2020 relative to the third quarter of 2019. The increase was due to interest income earned on a higher volume of loans. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on nonaccrual status during the reporting period, and the recovery of interest on loans that had been on nonaccrual and were paid off, sold or returned to accrual status.

The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.

Average Balances, Tax Equivalent Interest and Yields/Rates


($ in thousands)	Three Months Ended						Three Months Ended
	September 30, 2020						September 30, 2019
			Tax						Tax
	Avg.		Equivalent		Yield/		Avg.		Equivalent		Yield/
	Balance		interest		Rate		Balance		interest		Rate
Earning Assets:
Taxable securities	$	616,168	$	3,432	2.23	%	$	494,184	$	3,926	3.18	%
Tax exempt securities		341,550		2,513	2.94	%		127,750		1,108	3.47	%
Total investment securities		957,718		5,945	2.48	%		621,934		5,034	3.24	%
Interest bearing deposits in other banks		413,786		29	0.03	%		71,165		9	0.05	%
Loans		3,165,653		40,999	5.18	%		2,343,392		32,480	5.54	%
Total earning assets		4,537,157		46,973	4.14	%		3,036,491		37,521	4.94	%
Other assets		548,183						402,711
Total assets	$	5,085,340					$	3,439,202

Interest-bearing liabilities:
Deposits	$	3,960,054	$	4,912	0.50	%	$	2,140,419	$	5,061	0.95	%
Borrowed funds		115,935		265	0.91	%		95,241		451	1.89	%
Subordinated debentures		81,470		1,188	5.83	%		80,619		1,270	6.30	%
Total interest-bearing liabilities		4,157,459		6,365	0.61	%		2,316,279		6,782	1.17	%
Other liabilities		295,354						652,899
Shareholders’ equity		632,527						470,024
Total liabilities and shareholders’ equity	$	5,085,340					$	3,439,202

Net interest income			$	39,973					$	30,459
Net interest margin					3.52	%					4.01	%
Net interest income (FTE)*			$	40,608	3.53	%			$	30,739	3.77	%
Net interest margin (FTE)*					3.58	%					4.05	%

* See reconciliation of Non-GAAP financial measures.

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($in thousands)	Nine Months Ended						Nine Months Ended
	September 30, 2020						September 30, 2019
			Tax						Tax
	Avg.		Equivalent		Yield/		Avg.		Equivalent		Yield/
	Balance		interest		Rate		Balance		interest		Rate
Earning Assets:
Taxable securities	$	594,216	$	10,815	2.43	%	$	475,967	$	11,734	3.29	%
Tax exempt securities		289,087		6,674	3.08	%		123,353		3,181	3.44	%
Total investment securities		883,303		17,489	2.64	%		599,320		14,915	3.32	%
Interest bearing deposits in other banks		288,898		337	0.16	%		85,370		227	0.34	%
Loans		2,975,535		117,597	5.27	%		2,283,468		93,748	5.47	%
Total earning assets		4,147,736		135,423	4.35	%		2,968,158		108,890	4.89	%
Other assets		516,956						392,135
Total assets	$	4,664,692					$	3,360,293

Interest-bearing liabilities:
Deposits	$	3,584,416	$	15,544	0.58	%	$	2,128,661	$	14,747	0.92	%
Borrowed funds		125,608		1,406	1.49	%		73,024		1,285	2.35	%
Subordinated debentures		80,969		3,567	5.87	%		80,579		3,691	6.11	%
Total interest-bearing liabilities		3,790,993		20,517	0.72	%		2,282,264		19,723	1.15	%
Other liabilities		277,911						639,335
Shareholders’ equity		595,788						438,694
Total liabilities and shareholders’ equity	$	4,664,692					$	3,360,293

Net interest income			$	113,217					$	88,362
Net interest margin					3.64	%					3.97	%
Net interest income (FTE)*			$	114,906	3.63	%			$	89,167	3.74	%
Net interest margin (FTE)*					3.69	%					4.01	%

*	See reconciliation of Non-GAAP financial measures.

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NON-INTEREST INCOME AND NON-INTEREST EXPENSE

The following table provides details on the Company’s non-interest income and non-interest expense for the three and nine months ended September 30, 2020 and 2019:


($ in thousands)	Three Months Ended								Nine Months Ended
EARNINGS STATEMENT	9/30/20		% of Total		9/30/19		% of Total		9/30/20		% of Total		9/30/19		% of Total
Non-interest income:
Service charges on deposit accounts		1,779	20.2	%	$	1,979	27.9	%		5,289	17.1	%	$	5,728	29.6	%
Mortgage fee income		2,961	33.7	%		1,800	25.3	%		7,174	23.2	%		4,268	22.0	%
Interchange fee income		2,491	28.3	%		2,252	31.7	%		6,871	22.2	%		5,949	30.7	%
Gain (loss) on securities , net		32	0.4	%		57	0.8	%		278	0.9	%		131	0.7	%
Financial assistance award		—	—	%		—	—	%		—	—	%		233	1.2	%
Gain on acquisition		—	—	%		—	—	%		7,023	22.7	%		—	—	%
Gain on sale of premises and equipment		—	—	%		—	—	%		461	2.0	%		—	—	%
Other charges and fees		1,531	17.4	%		1,015	14.3	%		3,852	11.9	%		3,064	15.8	%
Total non-interest income	$	8,794	100	%	$	7,103	100	%	$	30,948	100	%	$	19,373	100	%

Non-interest expense:
Salaries and employee benefits		15,494	57.5	%		11,612	55.8	%		44,589	56.8	%		33,924	53.3	%
Occupancy expense		3,826	14.2	%		2,632	12.6	%		9,943	12.7	%		7,606	12.0	%
FDIC premiums		447	1.7	%		111	0.5	%		831	1.1	%		485	0.8	%
Marketing		24	0.1	%		62	0.3	%		262	0.3	%		397	0.6	%
Amortization of core deposit intangibles		1,052	3.9	%		796	3.8	%		3,041	3.9	%		2,308	3.6	%
Other professional services		990	3.7	%		1,140	5.5	%		2,848	3.6	%		3,040	4.8	%
Other non-interest expense		4,865	18.0	%		3,767	18.1	%		13,658	17.4	%		11,874	18.7	%
Acquisition and integration charges		238	0.9	%		705	3.4	%		3,273	4.2	%		3,975	6.2	%
Total non-interest expense	$	26,936	100	%	$	20,825	100	%	$	78,445	100	%	$	63,609	100	%

PROVISION FOR INCOME TAXES

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

The Company’s provision for income taxes was $3.0 million or 20.1% of earnings before income taxes for the third quarter 2020, compared to $3.5 million or 22.1% of earnings before income taxes for the same period in 2019. The provision for the nine months ended September 30, 2020 was $6.9 million or 15.7% of earnings before income taxes compared to $9.3 million or 22.7% of earnings before income taxes for the same period in 2019. The decrease in the effective tax rate for 2020 is attributed to the $7.0 million, non-taxable, bargain purchase gain related to the SWG acquisition and the CARES Act that was signed into law on March 27, 2020. The Act includes several significant provisions for corporations including increasing the amount of deductible interest under section 163(j), allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss that corporations can use to offset income.

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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 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 $957.5 million, or 18.5% of total assets at September 30, 2020 compared to $765.1 million, or 19.4% of total assets at December 31, 2019.

There were no federal funds sold at September 30, 2020 and December 31, 2019; and interest-bearing balances at other banks increased to $471.8 million at September 30, 2020 from $79.0 million at December 31, 2019. The Company’s investment portfolio increased $193.1 million, or 24.4%, to a total fair market value of $984.9 million at September 30, 2020 compared to December 31, 2019, $89.7 million of which was due to the acquisition of SWG during April 2020, as well as an increase in the fair market value of $19.7 million. The Company’s investments are classified as “available-for-sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

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

LOAN AND LEASE PORTFOLIO

The Company’s gross loans and leases, excluding the associated allowance for loan losses and including loans held for sale, totaled $3.178 billion at September 30, 2020, an increase of $567.2 million, or 21.7%, from December 31, 2019. The acquisition of SWG accounted for approximately $392.3 million, net of fair value marks, of the increase. The Company also saw an increase in the commercial, financial, and agriculture loan portfolio of $260.2 million related to PPP loans.

As of September 30, 2020, we have modified approximately 1,610 loans for $709.6 million, of which 1,386 loans for $564.0 million were modified to defer monthly principal and interest payments and 224 loans for $145.6 were modified from monthly principal and interest payments to interest only. As of September 30, 2020 we have approximately 3,230 loans approved through the SBA for $260.2 million.

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The following table shows the composition of the loan portfolio by category ($ in thousands):


	Composition of Loan Portfolio
	September 30, 2020					December 31, 2019
			Percent					Percent
	Amount		of Total			Amount		of Total
Loans held for sale	$	22,482		0.8	%	$	10,810	0.4	%
Commercial, financial and agricultural		576,812		18.1	%		332,600	12.7	%
Real estate - commercial		1,191,513		37.5	%		1,028,012	39.4	%
Real estate - residential		999,381		31.4	%		814,282	31.2	%
Real estate -construction		330,070		10.4	%		359,195	13.8	%
Lease financing receivable		2,478		0.1	%		3,095	0.1	%
Obligations of states and subdivisions		13,345		0.4	%		20,716	0.8	%
Consumer and other		42,333		1.3	%		42,458	1.6	%
Total loans		3,178,414		100	%		2,611,168	100	%
Allowance for loan losses		(34,256)					(13,908)
Net loans	$	3,144,158				$	2,597,260

In the context of this discussion, a “real estate residential loan” is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in its market area by obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes that the risk elements of its loan portfolio have been reduced through strategies that diversify the lending mix.

Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Associated servicing rights are not retained. Commitments from investors to purchase the loans are obtained upon origination.

LOAN CONCENTRATIONS

Diversification within the loan portfolio is an important means of reducing inherent lending risk. At September 30, 2020, The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas, which include Mississippi, Louisiana, Alabama, Florida and Georgia.

NON-PERFORMING ASSETS

Non-performing assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and OREO. Loans are placed on nonaccrual status when they become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans, including PCI loans, totaled $37.3 million at September 30, 2020, an decrease of $1.5 million from December 31, 2019.

Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $5.2 million at September 30, 2020 as compared to $7.3 million at December 31, 2019.

A loan is classified as a restructured loan when the following two conditions are present: first, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower’s financial difficulty. At September 30, 2020, the Bank had $30.2 million in loans that were classified as TDRs, of which $6.5 million were performing as agreed with modified terms. At December 31, 2019, the Bank had $32.0 million in loans that were classified as TDRs of which $6.8 million were performing as agreed with modified terms. TDRs may be classified as either non-performing or performing loans depending on their accrual status. As of September 30, 2020, $23.7 million in loans categorized as TDRs were classified as non-performing as compared to $25.1 million at December 31, 2019.

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The following table, which includes PCI loans, presents comparative data for the Company’s non-performing assets and performing TDRs as of the dates noted:


($ in thousands)	9/30/20			12/31/19

Nonaccrual Loans

Real Estate:
1-4 Family residential construction	$	—		$	—
Other Construction/land		2,083			1,548
1-4 family residential revolving/open-end		795			998
1-4 family residential closed-end		8,562			8,986
Nonfarm, nonresidential, owner-occupied		19,132			20,157
Nonfarm, nonresidential, other nonfarm nonresidential		3,717			4,647
Total Real Estate		34,289			36,336
Commercial and industrial		2,971			2,234
Loans to individuals – other		40			265
Total Nonaccrual Loans		37,300			38,835

Other real-estate owned		5,202			7,299

Total Non-performing Assets	$	42,502		$	46,134
Performing TDRs	$	6,544		$	6,824
Total non-performing assets as a % of total loans & leases net of unearned income		1.35	%		1.77	%
Total nonaccrual loans as a % of total loans & leases net of unearned income		1.18	%		1.49	%

Non-performing assets totaled $42.5 million at September 30, 2020, compared to $46.1 million at December 31, 2019, a decrease of $3.6 million. The ALLL/total loans ratio was 1.09% at September 30, 2020, and 0.53% at December 31, 2019. The increase in the ALLL/total loans ratio is primarily attributable to an increase in the ALLL due to concerns with the anticipated economic effects of COVID-19, as discussed under the heading “Allowance for Loan and Lease Losses” below. Total valuation accounting adjustments total $10.5 million on acquired loans. The ratio of annualized net charge-offs (recoveries) to total loans was 0.09% for the quarter ended September 30, 2020 compared to (0.002)% at December 31, 2019.

The following table represents the Company’s impaired loans, excluding PCI loans, as of the dates noted:


($ in thousands)	September 30,		December 31,
	2020		2019
Impaired Loans:
Impaired loans without a valuation allowance	$	13,748	$	14,178
Impaired loans with a valuation allowance		16,014		15,761
Total impaired loans	$	29,762	$	29,939
Allowance for loan losses on impaired loans at period end		6,294		4,424

Total nonaccrual loans	$	26,878	$	29,939

Past due 90 days or more and still accruing		2,396		2,715
Average investment in impaired loans		29,711		26,195

ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance for credit losses is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. The level of this allowance is dependent upon a number of factors, including the total amount of past due loans, general economic conditions, and

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management’s assessment of potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions to the allowance may be necessary. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.

The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. The Company uses a loan loss history based upon the prior ten years to determine the appropriate allowance. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio. These factors require judgment on the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committees, and data and guidance received or obtained from the Company’s regulatory authorities.

The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. Impaired loans are determined based upon a review by internal loan review and senior loan officers. Impaired loans are loans for which the Bank does not expect to receive contractual interest and/or principal by the due date. A specific allowance is assigned to each loan determined to be impaired based upon the value of the loan’s underlying collateral. Appraisals are used by management to determine the value of the collateral.

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

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan by loan basis, and a specific allowance is assigned to each loan determined to be impaired. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if, in the Company’s opinion, the ultimate source of repayment will be generated from the liquidation of collateral.

The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

At September 30, 2020, the consolidated allowance for loan losses was approximately $34.3 million, or 1.09% of outstanding loans excluding loans held for sale. At December 31, 2019, the allowance for loan losses amounted to approximately $13.9 million, which was 0.53% of outstanding loans excluding loans held for sale. The provision for loan losses is a charge to earnings to maintain the allowance for loan losses at a level consistent with management’s assessment of the collectability of the loan portfolio in light of current economic conditions and market trends. During the first quarter of 2020, the World Health Organization declared the spread of

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the COVID-19 virus to be a global pandemic. That has caused significant disruptions to the U.S. economy across all industries. With the number of diagnosed cases of the virus rising during the second and third quarters, it is still impossible to foresee how long the pandemic will last and what effect it will have on the economy, or to what extent this crisis will impact the Company. All available industry statistics and trends, as well as internal tracking of loan repayment ability and payment forgiveness across the portfolio is being analyzed in an attempt to understand the correlation with asset quality and degree of possible deterioration. This ongoing analysis of the possibility of increasing credit losses resulted in the need for a provision expense similar to what was taken in the first quarter that will continue to provide an adequate allowance reserve for this situation. If economic conditions continue to worsen, further funding to the allowance may be required in future periods. The Company maintains the allowance at a level that management believes is adequate to absorb probable incurred losses inherent in the loan portfolio. Specifically, identifiable and quantifiable losses are immediately charged-off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off. The Company’s provision for loan losses was $21.6 million for the nine months ended September 30, 2020, $3.7 million for the year ended December 31, 2019 and $2.9 million for the nine months ended September 30, 2019. The overall allowance for loan losses results from consistent application of our loan loss reserve methodology as described above. At September 30, 2020, management believes the allowance is appropriate and has been derived from consistent application of our methodology. Should any of the factors considered by management in evaluating the appropriateness of the allowance for loan losses change, management’s estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for loan losses.

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The table that follows summarizes the activity in the allowance for loan and lease losses for the noted periods ($ in thousands):

Allowance for Loan and Lease Losses


	Three Months			Three Months			Nine Months			Nine Months			For the Year
	Ended			Ended			Ended			Ended			Ended
Balances:	9/30/20			9/30/19			9/30/20			9/30/19			12/31/19
Average gross loans & leases outstanding during
period:	$	3,165,653		$	2,343,392		$	2,975,535		$	2,283,468		$	2,341,202
Gross loans & leases outstanding at end of
period:		3,178,414			2,361,090			3,178,414			2,361,090			2,611,168
Allowance for Loan and Lease Losses:
Balance at beginning of period	$	28,064		$	12,091		$	13,908		$	10,065		$	10,065
Provision charged to expense		6,921			974			21,628			2,888			3,738
Charge-offs:
Real Estate-
1-4 family residential construction		—			—			—			—			—
Other construction/land		—			—			13			—			-
1-4 family revolving, open-ended		30			54			117			54			54
1-4 family closed-end		25			—			34			108			109
Nonfarm, nonresidential, owner-occupied		769			54			1,152			54			54
Total Real Estate		824			108			1,316			216			217
Commercial and industrial		78			17			342			23			141
Credit cards		—			10			-			10			33
Automobile loans		1			14			226			25			48
Loans to individuals - other		19			52			140			108			—
All other loans		12			—			279			—			225
Total		934			201			2,303			382			664
Recoveries:
Real Estate-
1-4 family residential construction		—			—			24			—			—
Other construction/land		8			8			24			22			129
1-4 family revolving, open-ended		2			7			28			17			19
1-4 family closed-end		15			54			128			139			221
Nonfarm, nonresidential, owner-occupied		10			3			355			9			13
Total Real Estate		35			72			559			187			382
Commercial and industrial		37			24			137			51			85
Credit cards		—			2			-			3			3
Automobile loans		3			11			46			33			40
Loans to individuals - other		74			28			116			58			72
All other loans		56			42			165			140			187
Total		205			179			1,023			472			769
Net loan charge offs (recoveries)		729			22			1,280			(90)			(105)
Balance at end of period	$	34,256		$	13,043		$	34,256		$	13,043		$	13,908

RATIOS

Net Charge-offs (recoveries) to average loans & leases (annualized)		0.09	%		0.004	%		0.05	%		(0.005)	%		(0.004)	%

Allowance for loan losses to gross loans & leases at end of period		1.09	%		0.56	%		1.09	%		0.56	%		0.53	%

Net Loan Charge-offs (recoveries) to provision for loan losses		10.53	%		2.26	%		5.92	%		(3.12)	%		(2.81)	%

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The following tables represent how the allowance for loan losses is allocated to a particular loan type, as well as the percentage of the category to total loans at September 30, 2020 and December 31, 2019.

Allocation of the Allowance for Loan Losses


($ in thousands)	September 30, 2020
			% of loans
			in each
			category
	Amount		to total loans
Commercial, financial and agriculture	$	5,774	18.6	%
Commercial real estate		23,146	62.3	%
Consumer real estate		4,780	17.6	%
Installment and other		556	1.5	%
Unallocated		—	—
Total	$	34,256	100	%


($ in thousands)	December 31, 2019
			% of loans
			in each
			category
	Amount		to total loans
Commercial, financial and agriculture	$	3,043	13.1	%
Commercial real estate		8,836	65.5	%
Consumer real estate		1,694	19.8	%
Installment and other		296	1.6	%
Unallocated		39	—
Total	$	13,908	100	%

OTHER ASSETS

The Company’s balance of non-interest earning cash and due from banks was $131.9 million at September 30, 2020 and $89.7 million at December 31, 2019. The balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the level of cash maintained on hand at our branches, and our reserve requirement among other things, and is subject to significant fluctuation in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to and borrowings from correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank (“ FHLB”). Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, the Company will let brokered deposits or other wholesale borrowings roll off as they mature, or might invest excess liquidity in higher-yielding, longer-term bonds.

Total other securities increased $771 thousand due to an increase in Federal Reserve stock. The Company’s net premises and equipment at September 30, 2020 was $124.9 million and $105.0 million at December 31, 2019; an increase of $19.9 million, or 19.0% for the first nine months of 2020. The increase is attributed to the recording of $4.2 million in right-of-use assets and $18.6 million of acquired premises and equipment related to the SWG acquisition. Bank-owned life insurance at September 30, 2020 totaled $73.4 million compared to $59.6 million at December 31, 2019, an increase of $13.8 million. The increase was due to the purchase of $5.8 million in BOLI contracts in the second quarter of 2020 and $7.0 million in BOLI contracts acquired in the SWG acquisition. Goodwill at September 30, 2020 remained unchanged at $158.6 million when compared to December 31, 2019. Other intangible assets, consisting primarily of the Company’s core deposit intangible (“CDI”), increased by $1.5 million as of September 30, 2020, as compared to December 31, 2019. The Company recorded $4.6 million in CDI related to the SWG acquisition and recognized CDI amortization expense of $3.1 million during the nine months ended September 30, 2020.

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually, and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. During the first quarter of 2020, management determined that the deterioration in the general economic conditions as a result of the COVID-19 pandemic represented a triggering

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event prompting an evaluation of goodwill impairment. Based on the analyses performed in the first quarter of 2020, we determined that goodwill was not impaired. Due to the ongoing economic uncertainty present at the end of the second quarter, the Company prepared a Step 1 goodwill impairment analysis as of June 30, 2020. In testing goodwill for impairment, the Company compared the estimated fair value of its reporting unit to its carrying amount, including goodwill. The estimated fair value of the reporting unit exceeded its book value. At this time, we do not believe there exists any impairment to goodwill and intangible assets, long-lived assets, or available-for-sale securities due to the COVID-19 pandemic. In addition, in future periods the Company will be required to evaluate the impact of COVID-19 on the carrying value of certain of its assets, including goodwill, and to conduct impairments tests on those assets, which may result in impairment charges on these assets in future periods that could be material.

Other real estate owned decreased by $2.1 million, or 28.7%, to $5.2 million at September 30, 2020 as compared to December 31, 2019.

OFF-BALANCE SHEET ARRANGEMENTS

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. Unused commitments to extend credit totaled $442.3 million at September 30, 2020 and $410.3 million at December 31, 2019, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 13.9% of gross loans at September 30, 2020 and 15.8% at December 31, 2019. The Company also had undrawn similar standby letters of credit to customers totaling $17.2 million at September 30, 2020 and $12.1 million at December 31, 2019. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments. For more information regarding the Company’s off-balance sheet arrangements, see Note 7 – Financial Instruments with Off-Balance Risk to the Consolidated Financial Statements.

In addition to unused commitments to provide credit, the Company is utilizing a $5.0 million letter of credit issued by the FHLB on the Company’s behalf as of September 30, 2020. That letter of credit is backed by loans which are pledged to the FHLB by the Company.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by management on a monthly basis, with various scenarios applied to assess its ability to meet liquidity needs under adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored and we are focused on maintaining adequate liquidity resources to draw upon should unexpected needs arise.

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances through FHLB lines of credit, or solicit brokered deposits if deposits are not immediately obtainable from local sources. The net availability on lines of credit from the FHLB totaled $1.175 billion at September 30, 2020. Furthermore, funds can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cash for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As of September 30, 2020, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $404.3 million of the Company’s investment balances, compared to $348.3 million at December 31, 2019. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding federal funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since it utilizes a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans that are pledged to the FHLB by the Company, totaled $100.0 million at September 30, 2020.

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The Company’s liquidity ratio as of September 30, 2020 was 24.9%, as compared to internal liquidity policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines:


			Policy		Policy
	September 30, 2020		Maximum		Compliance
Loans to Deposits (including FHLB advances)	71.3	%	90.0	%	In Policy
Net Non-core Funding Dependency Ratio	(5.0)	%	20.0	%	In Policy
Fed Funds Purchased / Total Assets	0.0	%	10.0	%	In Policy
FHLB Advances / Total Assets	2.2	%	20.0	%	In Policy
FRB Advances / Total Assets	0.0	%	10.0	%	In Policy
Pledged Securities to Total Securities	62.2	%	90.0	%	In Policy

Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.

As of September 30, 2020, cash and cash equivalents were $603.7 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately $649.4 million at September 30, 2020. Approximately $442.3 million in loan commitments could fund within the next three months and other commitments, primarily commercial and similar letters of credit, totaled $17.2 million at September 30, 2020.

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. A prolonged outbreak of the COVID-19 pandemic could cause a widespread liquidity crisis, and the availability of these funds or the options to sell securities currently held could be hindered. The full impact and duration of COVID-19 on our business is unknown but if it continues to curtail economic activity, it could impact our ability to obtain funding and result in the reduction of or the cessation of dividends.

The Company’s primary uses of funds are ordinary operating expenses and shareholder dividends, and its primary source of funds is dividends from the Bank since the Company does not conduct regular banking operations. Both the Company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 1. Business – Supervision and Regulation in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

DEPOSITS

Deposits are another key balance sheet component impacting the Company’s net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates for the three-month periods ended September 30, 2020 and 2019 is included in the Average Balances, Tax Equivalent Interest and Yield/Rates tables appearing above, under the heading “Net Interest Income and Net Interest Margin.” The Company implemented Deposit Reclassification at the beginning of 2020. This program reclassifies non-interest bearing deposits and NOW deposit balances to money market accounts. This program reduces our reserve balance required at the Federal Reserve Bank of Atlanta and provides additional funds for liquidity or lending. At quarter-end September 30, 2020, $712.8 million in non-interest deposit balances and $677.3 million in NOW deposit

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accounts were reclassified as money market accounts. A distribution of the Company’s deposits without reclassification showing the balance and percentage of total deposits by type is presented for the noted periods in the following table.


Deposit Distribution	September 30, 2020				December 31, 2019
			Percent of				Percent of
($ in thousands)	Amount		Total		Amount		Total
Non-interest bearing demand deposits	$	1,195,042	28.3	%	$	723,208	23.5	%
NOW accounts and Other		1,335,798	31.6	%		941,598	30.7	%
Money Market accounts		687,292	16.3	%		462,810	15.0	%
Savings accounts		379,061	8.9	%		287,200	9.3	%
Time Deposits of less than $250,000		473,265	11.2	%		479,386	15.6	%
Time Deposits of $250,000 or more		158,756	3.7			182,331	5.9	%
Total deposits	$	4,229,214	100	%	$	3,076,533	100	%

As of September 30, 2020, deposits increased by $1.153 billion, or 37.5% to $4.229 billion from $3.077 billion at December 31, 2019. The acquisition of SWG accounted for approximately $476.1 million, including fair value marks, or 41.3% of the increase. Transaction account balances were above normal as of September 30, 2020 due to PPP loan proceeds.

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include federal funds purchased from correspondent banks, borrowings from the FHLB, advances from 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 liabilities decreased by $34.5 million, or 11.7%, in the first nine months of 2020, due in part to a decrease in notes payable to the FHLB. As of September 30, 2020, junior subordinated debentures increased $64.0 million, net of issuance costs, or 79.4% to $144.7 million from $80.7 million at December 31, 2019. The Company issued $65.0 million in aggregate principal amount of subordinated debt on September 25, 2020. Subordinated debt is discussed more fully in the below Capital section of this report.

OTHER LIABILITIES

Other liabilities are principally comprised of accrued interest payable, lease liabilities and other accrued but unpaid expenses. Other liabilities increased by $9.4 million, or 35.1%, during the first nine months of 2020. The increase in other liabilities is primarily due to $3.8 million in leases added during 2020 and $5.0 million increase in deferred taxes. For more information regarding the Company’s leases, see Note 12 – Leases to the Consolidated Financial Statements.

CAPITAL

At September 30, 2020, the Company had total shareholders’ equity of $638.4 million, comprised of $21.6 million in common stock, $5.7 million in treasury stock, $456.2 million in surplus, $141.5 million in undivided profits and $24.8 million in accumulated comprehensive income on available-for-sale securities. Total shareholders’ equity at the end of 2019 was $543.7 million. The increase of $94.7 million, or 17.4%, in shareholders’ equity during the first nine months of 2020 is comprised of capital added through net earnings of $37.2 million, a $14.7 million increase in accumulated comprehensive income for available-for-sale securities and 2.5 million shares of common stock issued for the purchase of SWG, offset by $6.2 million in cash dividends paid.

On May 7, 2020, the Company announced the renewal of its share repurchase program that previously expired on December 31, 2019. Under the program, the Company may, but is not required to, from time to time repurchase up to $15 million of shares of its common stock in any manner determined appropriate by the Company’s management. The actual timing and method of any purchases, the target number of shares and the maximum price (or range of prices) under the program, will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and

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economic conditions, and applicable legal and regulatory requirements. The renewed share repurchase program has an expiration date of December 31, 2020, and has been approved by the Company’s regulators.

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	2020		2019		Well Capitalized
Common Equity Tier 1 Capital Ratio	15.5	%	15.1	%	6.5	%
Tier 1 Capital Ratio	15.5	%	15.1	%	8.0	%
Total Capital Ratio	16.5	%	15.6	%	10.0	%
Tier 1 Leverage Ratio	10.2	%	11.8	%	5.0	%


					Minimum
	September 30,		December 31,		Required to be
Regulatory Capital Ratios The First Bancshares, Inc.	2020		2019		Well Capitalized
Common Equity Tier 1 Capital Ratio*	13.4	%	12.5	%	N/A
Tier 1 Capital Ratio**	13.9	%	13.0	%	N/A
Total Capital Ratio	19.0	%	15.8	%	N/A
Tier 1 Leverage Ratio	9.1	%	10.3	%	N/A

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

** The numerator includes Trust Preferred.

Our capital ratios remain very strong relative to the median for peer financial institutions, and at September 30, 2020 were well above the threshold for the Company and the Bank to be classified as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. Basel III rules require a “capital conservation buffer” for both the Company and the Bank. The capital conservation buffer is subject to a three year phase-in period that 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.

The Company has elected to delay its adoption of ASU 2016-13, as provided by the CARES Act, until the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020 whichever occurs first. In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). The Company has elected to utilize the five-year CECL transition.

As of September 30, 2020, management believes that each of the Bank and the Company met all capital adequacy requirements to which they are subject. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.

Total consolidated equity capital at September 30, 2020 was $638.4 million, or approximately 12.4% of total assets. The Company currently has adequate capital to meet the minimum capital requirements for all regulatory agencies.

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On June 30, 2006, The Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 (“Trust 2”) in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. Trust 2 issued $4,000,000 of Trust Preferred Securities (“TPSs”) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of Trust 2’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.

On July 27, 2007, The Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 (“Trust 3”) in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of TPSs to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 3’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.

In 2018, the Company 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 $6,000,000 of TPSs to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust 1’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2033. Interest on the preferred securities is the three month LIBOR plus 2.85% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.

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

Subordinated Notes

On April 30, 2018, 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. 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.

Reconciliation of Non-GAAP Financial Measures

Our accounting and reporting policies conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. This Quarterly Report on Form 10-Q includes operating net earnings; diluted operating earnings per share;net interest income, FTE; pre-tax, pre-provision operating earnings; total interest income, FTE; interest income investment

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securities, FTE and certain rations derived from these non-GAAP financial measures. The Company believes that the non-GAAP financial measures included in this Quarterly Report on Form 10-Q allow management and investors to understand and compare results in a more consistent manner for the periods presented herein. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 25.3% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and believes it enhances the comparability of income and expenses arising from taxable and nontaxable sources. Pre-tax, pre-provision operating earnings excludes acquisition charges, treasury awards, bargain purchase gains and sale of land. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented, and other bank holding companies may define or calculate these measures differently. These non-GAAP financial measures should not be considered in isolation and do not purport to be an alternative to the efficiency ratio, net income, earnings per share, net interest income, net interest margin, average yield on investment securities, average yield on all earning assets, common equity, book value per common share or other GAAP financial measures as a measure of operating performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided below.

Operating Net Earnings


($ in thousands)	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Net income available to common shareholders	$	11,917	$	12,272	$	37,171	$	31,890
Effect of acquisition charges		238		705		3,273		3,975
Tax on acquisition charges		(61)		(152)		(743)		(887)
Gain on acquisition and sale of land		—		—		(7,643)		—
Tax on gain from the sale of land		—		—		157		—
Treasury awards		—		—		—		(233)
Tax on Treasury awards		—		—		—		59
Net earnings available to common shareholders, operating	$	12,094	$	12,825	$	32,215	$	34,804

Diluted Operating Earnings per Share


($ in thousands)	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Diluted earnings per share		0.55		0.71		1.80		1.90
Effect of acquisition charges		0.01		0.04		0.16		0.24
Tax on acquisition charges		—		(0.01)		(0.03)		(0.06)
Effect of gain on acquisition and gain on land		—		—		(0.38)		—
Tax on gain from the sale of land		—		—		0.01		—
Effect of Treasury Awards		—		—		—		(0.01)
Tax on Treasury Awards		—		—		—		—
Diluted earnings per share, operating	$	0.56	$	0.74	$	1.56	$	2.07

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Net Interest Income, Fully Tax Equivalent


($ in thousands)	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019
Net interest income	$	39,973		$	30,459		$	113,217		$	88,362
Tax exempt investment income		(1,877)			(828)			(4,985)			(2,376)
Taxable investment income		2,513			1,108			6,674			3,181
Net interest income, FTE	$	40,609		$	30,739		$	114,906		$	89,167

Average earning assets	$	4,537,157		$	3,036,491		$	4,147,736		$	2,968,158
Net interest margin, FTE		3.58	%		4.05	%		3.69	%		4.01	%

Pre-Tax Pre-Provision Operating Earnings


($ in thousands)	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019

Earnings before income taxes	$	14,910	$	15,763	$	44,092	$	41,238
Acquisition charges		238		705		3,273		3,975
Provision for loan losses		6,921		974		21,628		2,888
Treasury Awards and gains		—		—		(7,643)		(233)
Pre-Tax, Pre-Provision Operating Earnings	$	22,069	$	17,442	$	61,350	$	47,868

Total Interest Income, Fully Tax Equivalent


($ in thousands)	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019

Total interest income	$	46,337		$	37,241		$	133,734		$	108,086
Tax-exempt investment income		(1,877)			(828)			(4,985)			(2,375)
Taxable investment income		2,513			1,108			6,674			3,179
Total interest income, FTE	$	46,973		$	37,521		$	135,423		$	108,890

Yield on average earnings assets, FTE		4.14	%		4.94	%		4.35	%		4.89	%

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Interest Income Investment Securities, Fully Tax Equivalent


($ in thousands)	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2020			2019			2020			2019

Interest income investment securities	$	5,309		$	4,752		$	15,800		$	14,111
Tax-exempt investment income		(1,877)			(828)			(4,985)			(2,375)
Taxable investment income		2,513			1,108			6,674			3,179
Interest income investment securities, FTE	$	5,945		$	5,034		$	17,489		$	14,915

Average investment securities	$	957,718		$	621,934		$	883,303		$	599,320

Yield on investment securities, FTE		2.48	%		3.24	%		2.64	%		3.32	%

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).

The following table shows the estimated changes in net interest income at risk and market value of equity along with policy limits:


	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	16.6	%	(20.0)	%	45.1	%	(40.0)	%
Up 300 bps	13.7	%	(15.0)	%	39.4	%	(30.0)	%
Up 200 bps	10.0	%	(10.0)	%	30.3	%	(20.0)	%
Up 100 bps	5.4	%	(5.0)	%	17.4	%	(10.0)	%
Down 100 bps	(2.3)	%	(5.0)	%	(23.1)	%	(10.0)	%
Down 200 bps	(3.4)	%	(10.0)	%	(27.3)	%	(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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2020, 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, 2020	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	130,868		132,334		135,493	142,805		148,976		154,083		158,014
Dollar Change	(4,625)		(3,159)			7,312		13,483		18,590		22,521
NII @ Risk - Sensitivity Y1	(3.4)	%	(2.3)	%		5.4	%	10.0	%	13.7	%	16.6	%
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 $4.6 million lower than in a stable interest rate scenario, for a negative variance of 3.4%. 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 $13.5 million, or 10.0%, 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 214.0%, 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 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, 2020, under different interest rate scenarios relative to a base case of current interest rates:


	Balance Sheet Shock
						STATIC
($in thousands)		-200 bp		-100 bp		(Base)	+100 bp		+200 bp		+300 bp		+400 bp
Market Value of Equity		632,734		669,147		869,785	1,021,312		1,133,396		1,212,482		1,262,374
Change in EVE from base		(237,051)		(200,638)			151,527		263,611		342,697		392,589
% Change		(27.3)	%	(23.1)	%		17.4	%	30.3	%	39.4	%	45.1	%
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, 2020, (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 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

There have been no changes in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended September 30, 2020 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. 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

The following represents a material change in our risk factors from those disclosed in Part I - “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

The novel coronavirus, COVID-19, may adversely affect our business, financial condition, results of operations and our liquidity in the short term and for the foreseeable future.

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The Company has taken a number of steps to assess the effects, and mitigate the adverse consequences to its businesses, of the outbreak; though the magnitude of the impact remains to be seen, the Company’s business will likely be adversely impacted by the outbreak of COVID-19.

As previously disclosed in Part I - Item IA - Risk Factors” of the Company’s 2019 Form 10-K, the Company’s operations and profitability are impacted by business and economic conditions generally, as well as those in the primary banking markets in which it operates. The COVID-19 pandemic has resulted in historic job losses and decreases in economic activity. While the duration and full extent of job losses and magnitude of economic dislocation are not yet known, it is clear that they may impact the ability of individuals and businesses to make payments, adversely affect the value of underlying collateral and the ability of guarantors to make payments in the case of default, which may decrease demand for the Company’s products and services and otherwise adversely impact the Company’s financial condition, results of operations and business.

The United States and various state and local governments have implemented various programs designed to aid individuals and businesses, but the impact of, and extent to which, these efforts will be successful cannot be determined at this time. We have participated in some of these programs, including PPP, and likely will continue to participate in and facilitate such programs. Such programs have been developed and implemented rapidly, often with little immediate guidance from regulatory authorities, creating uncertainty regarding the rules for participating in and facilitating these programs in a compliant manner. Since the opening of the PPP, many banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. We may experience losses as a result of our participation in and facilitation of PPP and similar government stimulus and relief programs, including losses arising from fraud, litigation or regulatory action.

Federal, state and local governments have mandated or encouraged financial services companies to make accommodations to borrowers and other customers affected by the COVID-19 pandemic. Legal and regulatory responses to concerns about the COVID-19 pandemic could result in additional regulation or restrictions affecting the conduct of our business in the future. In addition to the potential affects from negative economic conditions noted above, the Company instituted a program to help COVID-19 impacted customers. This program includes waiving NSF fees, offering payment deferment and other loan relief, as appropriate, for customers impacted by COVID-19. The Company’s liquidity could be negatively impacted if a significant number of customers apply and are approved for the deferral of payments. In addition, if these deferrals are not effective in mitigating the effect of COVID-19 on the Company’s customers, it may adversely affect its business and results of operations more substantially over a longer period of time.

COVID-19 presents a significant risk to our loan portfolio. Timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrower’s business. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage

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payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation and collection actions, such as foreclosure. Approximately 20% of our loan portfolio also includes exposure to sectors that are expected to be subject to increased risk from COVID-19, including hotels, restaurants, retail, convenience stores, healthcare, and direct energy.

As a result of the adverse impact of COVID-19 on our customers, we have faced and may continue to face a decrease in demand for certain products, reduced access to our branches by our customers, and disruptions in the operations of its vendors. The pandemic could also result in recognition of additional credit losses in the Company’s loan portfolios and increase its allowance for credit losses as both businesses and consumers are negatively impacted by the economic downturn. In addition, in future periods the Company will be required to evaluate the impact of COVID-19 on the carrying value of certain of its assets, including goodwill, and to conduct impairments tests on those assets, which may result in impairment charges on these assets in future periods that could be material.

Effective March 2020, the Federal Reserve lowered the primary credit rate by 150 basis points to 0.25 percent to mitigate the effects of the COVID-19 pandemic and to support the liquidity and stability of banking institutions as they serve the increased demand for credit. We expect a long duration of reduced interest rates to negatively impact our net interest income, margin, cost of borrowing and future profitability and to have a material adverse effect on our financial results for the remainder of 2020.

In order to protect the health of our customers and employees, and to comply with applicable government restrictions, we have modified our business practices, including restricting employee travel, directing many employees to work remotely, cancelling in-person meetings and implementing our business continuity plans and protocols to the extent necessary. We may take further such actions that we determine are in the best interest of our employees, customers and communities or as may be required by government order. These precautions could impact demand for the Company’s products and services.

As many of our employees are required to work from home, our internal controls over financial reporting could also be negatively affected as the remote working environment could necessitate new processes, procedures, and controls. The increased reliance on remote access to information systems also increases the Company’s exposure to potential cybersecurity breaches and could impact the Company’s productivity. Additionally, the Company’s business customers are increasingly required to work remotely as well and may not have appropriately secured remote networks may be more vulnerable to cyber-attacks or phishing schemes that could also affect us. Furthermore, if a large proportion of the Company’s key employees were to contract COVID-19 or be quarantined as a result of the virus, then the Company’s operations could be adversely impacted and its business continuity plans may not prove effective.

Any of these occurrences could have a material adverse effect on the Company’s financial condition, results of operations and business. The extent to which the pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including the duration of the pandemic, government and regulatory responses to the pandemic, new information which may emerge concerning its severity and the actions necessary to contain it or address its impact, among others. Behavioral changes are not fully known and may not be temporary.

The potential effects of COVID-19 also could impact and heighten many of our risk factors included in Part I - “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. Including, but not limited to: risks associated with information technology and systems, including service interruptions or security breaches; disruptions in services provided by third parties; our ability to hire or retain key personnel; the analytical and forecasting models we use to estimate our loan losses and to measure the fair value of our financial instruments; general political or economic conditions in the U.S.; economic conditions in the geographic areas in which we operate; funding to provide liquidity; the failure to maintain an effective system of disclosure controls and procedures, including internal control over financial reporting; the value of our goodwill and other intangible assets; our susceptibility to fraud; the impact of governmental regulation and supervision; the soundness of other financial institutions; volatility in our stock price. However, as the COVID-19 situation is unprecedented and continuously evolving, the potential impacts to our risk factors that are further described in our Annual Report on Form 10-K for the year ended December 31, 2019, remain uncertain.

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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


Exhibit No.		Description
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		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).
4.3		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).
10.1		Subordinated Note Purchase Agreement between The First Bancshares, Inc. and the several purchasers of the Subordinated Notes, dated September 25, 2020 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 25, 2020).
10.2		Registration Rights Agreement between The First Bancshares, Inc. and the several purchasers of the Subordinated Notes, dated September 25, 2020 (incorporated by reference to Exhibit 10.2 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.

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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)

	/s/ M. RAY (HOPPY) COLE, JR.
November 6, 2020	M. Ray (Hoppy) Cole, Jr.
(Date)	Chief Executive Officer

	/s/ DONNA T. (DEE DEE) LOWERY
November 6, 2020	Donna T. (Dee Dee) Lowery, Executive
(Date)	Vice President and Chief Financial Officer