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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 284 added, 166 removed, 265 unchanged (63% of the section changed)

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For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization.

For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis (as discussed in Notes 7 and 15 to the consolidated financial statements, we sold the operations of our insurance agency on June 30, 2021 and derecognized the carrying amounts of the related intangible assets).

For SBA Complete, the consulting firm we acquired in 2016, the identifiable intangible asset related to the customer list was determined to have a life of approximately seven years, with amortization occurring on a straight-line basis.

At March 31, 2021, we had three reporting units – 1) First Bank with $227.6 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill.

If the carrying value of a reporting unit were ever to exceed its fair value, we

would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill.

At June 30, 2021, we had two reporting units – 1) First Bank with $227.6 million in goodwill, and 2) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill.

If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill.

If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess.

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Recent Developments:

See Note 1 to the Consolidated Financial Statements.

The impact of the COVID-19 pandemic has lessened in 2021, as vaccinations have significantly reduced COVID-19 cases in our market area and the economy has made steady progress in its recovery.

Most of our employees that had worked remotely during the pandemic returned to work in the office in June 2021.

After experiencing lower loan demand during the pandemic period from March 2020 to March 2021 (excluding PPP loans), we experienced high growth in the second quarter of 2021, with non-PPP loans increasing by a total $244 million, which represents annualized loan growth of 22.3%.

The high deposit growth that we experienced beginning at the onset of the pandemic continued during the first two quarters of 2021, with total deposits increasing $460 million in the first quarter of 2021 and another $438 million in the second quarter of 2021, with both increases representing annualized growth in excess of 25%.

The high deposit growth was likely due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives.

Low interest rates have also resulted in high levels of mortgage loan refinancings, which increased our mortgage loan sales income, but reduced our level of mortgage loans outstanding.

Thus far our asset quality ratios have remained favorable, with continued low levels of nonperforming assets and low loan charge-offs.

Recently, there has been an emergence of new, more virulent strains of COVID-19 that are now spreading at higher transmission rates than prior strains.

We are uncertain what impact this will have on the Company and its market areas.

Also see Note 1 to the Consolidated Financial Statements for additional information.

FINANCIAL OVERVIEW

Net income amounted to $28.2 million, or $0.99 per diluted common share, for the three months ended March 31, 2021, an increase of 59.7% on a per share basis, compared to $18.2 million, or $0.62 per diluted common share, recorded in the first quarter of 2020.

The increase in earnings was driven by lower credit costs and higher noninterest income.

Net income amounted to $29.3 million, or $1.03 per diluted common share, for the three months ended June 30, 2021, an increase of 83.9% on a per share basis, compared to $16.4 million, or $0.56 per diluted common share, recorded in the second quarter of 2020.

For the six months ended June 30, 2021, net income amounted to $57.5 million, or $2.02 per diluted common share, compared to $34.5 million, or $1.18 per diluted common share, for the six months ended June 30, 2020, an increase of 71.2%.

The higher earnings for both periods in 2021 were primarily driven by lower credit costs compared to 2020.

Net Interest Income and Net Interest Margin

Net interest income for the first quarter of 2021 was $55.2 million, a 0.9% increase from the $54.8 million recorded in the first quarter of 2020.

The increase in net interest income was due to higher levels of interest-earning assets and the recognition of PPP loan fees, the effects of which were mostly offset by a lower net interest margin.

Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) for the first quarter of 2021 was 3.27%, which was 69 basis points lower than the 3.96% realized in the first quarter of 2020.

The decline was primarily due to the impact of lower interest rates and the lower incremental reinvestment rates realized from funds provided by the high deposit growth.

Driven by high deposit growth, average interest-earning assets increased by 23.3% in the first quarter of 2021 compared to the first quarter of 2020.

The funds provided by the in-flow of deposits were used primarily to either purchase investment securities or were held in our account at the Federal Reserve Bank, each of which increased net interest income but negatively impacted our net interest margin.

Additionally, in March 2020, the Federal Reserve Bank decreased interest rates by 150 basis points, which negatively impacted our net interest margin beginning in the second quarter of 2020.

In the first quarter of 2021, we processed $111 million in PPP loan forgiveness payments related to 2020 originations and also originated approximately $111 million in new PPP loans, which resulted in an unchanged balance of total PPP loans of $241 million from December 31, 2020.

Including accelerated amortization of deferred PPP loan fees, we recorded a total of $3.0 million in PPP fee-related interest income during the first quarter of 2021, which, when combined with the note rate of 1.00%, resulted in a total yield on PPP loans of 6.16% for the quarter.

We have $9.0 million in remaining deferred PPP loan fees, of which $3.1 million relates to 2020 originations and $5.9 million relates to 2021 originations.

Allowance for Credit Losses, Provision for Credit Losses and Asset Quality

On January 1, 2021, we adopted the Current Expected Credit Loss (CECL) methodology for estimating credit losses, which resulted in an increase of $14.6 million in our allowance for loan losses and an increase of $7.5 million in our allowance for unfunded commitments.

Net interest income for the second quarter of 2021 was $58.8 million, an 11.7% increase from the $52.6 million recorded in the second quarter of 2020.

Net interest income for the first six months of 2021 was $114.0 million, a

6.2% increase from the $107.4 million recorded in the comparable period of 2020.

The increases in net interest income were primarily due to higher levels of interest-earning assets, the recognition of PPP loan fees, and higher discount accretion, the effects of which were partially offset by lower net interest margins.

See additional discussion below.

Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) for the second quarter of 2021 was 3.22%, which was 27 basis points lower than the 3.49% realized in the second quarter of 2020.

For the six months ended June 30, 2021, our net interest margin was 3.24% compared to 3.71% for the same period of 2020.

The declines in 2021 were primarily due to the impact of lower interest rates and the lower incremental reinvestment rates realized from funds provided by high deposit growth.

Allowance for Credit Losses, Provisions for Loan Losses and Unfunded Commitments, and Asset Quality

On January 1, 2021, the Company adopted CECL, which resulted in an adoption-date increase of $14.6 million in our allowance for loan losses and an increase of $7.5 million in our allowance for unfunded commitments.

The tax-effected impact of those two items amounted to $17.1 million and was recorded as an adjustment to our retained earnings as of January 1, 2021.

We recorded no provision for credit losses in the first quarter of 2021 compared to $5.6 million in the first quarter of 2020.

The higher provision in 2020 was primarily related to estimated incurred loan losses associated with the pandemic that was emerging at the time.

Under the CECL methodology for recording expected credit losses adopted at January 1, 2021, which resulted in the increases to the allowance for credit losses noted above, we determined that no further adjustments were necessary for the first quarter of 2021.

We recorded no provision for loan losses for the three or six months ended June 30, 2021 compared to $19.3 million and $24.9 million in the comparable periods of 2020.

The high provisions in 2020 were primarily related to estimated incurred losses associated with the pandemic that was emerging at the time.

Under the CECL methodology for providing for loan losses, we determined that no provisions for loan losses were required during the first six months of 2021.

See additional discussion below in the section "Allowance for Credit Losses and Provision for Credit Losses."

Total net loan charge-offs for the first quarters of 2021 and 2020 amounted to $1.1 million and $2.5 million, respectively, or 0.10% and 0.22% of average loans on an annualized basis, respectively.

Total nonperforming assets amounted to $50 million at March 31, 2021, or 0.65% of total assets, compared to $37.0 million at December 31, 2020, or 0.64% of total assets.

At March 31, 2021, loans on deferral status associated with the pandemic amounted to $5.9 million.

During the second quarter of 2021, using the CECL methodology, we recorded a $1.9 million in provision for unfunded commitments.

The provision was recorded primarily due to an increase in construction and land development loan commitments during the second quarter of 2021 that had not been funded as of quarter end.

Our allowance for unfunded commitments at June 30, 2021 amounted to $10.0 million and is recorded within the line item "Other liabilities".

Annualized net loan charge-offs to average loans amounted to 0.07% and 0.08% for the three and six months ended June 30, 2021 compared to 0.12% and 0.17% for the same periods of 2020, respectively.

Total nonperforming assets amounted to $42 million at June 30, 2021, or 0.51% of total assets, compared to $50 million, or 0.65% of total assets, at December 31, 2020.

During the second quarter of 2021, we sold a nonaccrual relationship totaling $5.6 million that was primarily responsible for the decline in nonaccrual loans during the period.

Noninterest Income

Total noninterest income for the first quarter of 2021 was $20.7 million, a 50.8% increase from the $13.7 million recorded for the first quarter of 2020.

The increases in noninterest income in 2021 are primarily due to fees earned as a result of high mortgage loan activity, SBA consulting fees related to client assistance with PPP originations, and increased SBA loan sale gains.

Total noninterest income for the second quarter of 2021 was $21.4 million, an 18.4% decrease from the $26.2 million recorded for the second quarter of 2020, with the 2021 decrease being primarily due to the absence of securities gains compared to $8.0 million recorded in the second quarter of 2020.

The 2021 decrease was partially offset by higher bankcard fees and other gains (losses) of $1.5 million, which is primarily due to the gain recognized on the sale of the operating assets of First Bank Insurance Services in June 2021.

For the six months ended June 30, 2021 and 2020, total noninterest income was $42.0 million and $39.9 million, respectively.

The increase in noninterest income in 2021 was primarily due to higher bankcard fees, the gain from the First Bank Insurance Sale, higher presold mortgage fees as a result of high mortgage loan activity, and increased SBA loan sale gains.

See additional discussion below.

Noninterest Expenses

Noninterest expenses amounted to $40.1 million in each of the first quarters of 2021 and 2020 with no significant variances in individual line items.

Noninterest expenses amounted to $41.0 million and $38.9 million in the second quarters of 2021 and 2020, respectively, and $81.1 million and $79.0 million for the first six months of 2021 and 2020, respectively.

The 2021 periods include noninterest expenses related to the Company's business financing subsidiary, which was acquired on September 1, 2020 and has a current annual expense base of approximately $1.4 million.

See additional discussion below.

Our effective tax rate was 21.3% and 20.3% for the three months ended March 31, 2021 and 2020, respectively, with the 2021 increase being due to a higher proportion of fully-taxable income.

Our effective tax rate was 21.3% and 20.7% for the three months ended June 30, 2021 and 2020, respectively, and 21.3% and 20.5% for the six months ended June 30, 2021 and 2020, respectively.

The 2021 increases were due to higher proportions of fully-taxable income.

Balance Sheet and Capital

We continued to experience high balance sheet growth during the first quarter of 2021, with total assets increasing by $447 million, or 24.8% annualized.

Total assets at March 31, 2021 amounted to $7.7 billion compared to $7.3 billion at December 31, 2020.

This growth was driven by a $460 million, or 29.7% annualized, increase in deposits from December 31, 2020.

The high deposit growth is believed to be due to a combination of stimulus funds and changes in customer behaviors during the pandemic, as well as ongoing growth initiatives by the Company.

Total loans amounted to $4.6 billion at March 31, 2021 compared to $4.7 billion at December 31, 2020.

Our level of outstanding loans has been negatively impacted by high mortgage loan refinancing activity, commercial loan payoffs, and soft demand arising from the pandemic.

We remain well-capitalized by all regulatory standards, with an estimated Total Risk-Based Capital Ratio at March 31, 2021 of 15.49%, an increase from the 15.37% reported at December 31, 2020.

Total assets at June 30, 2021 amounted to $8.2 billion, a 12.5% increase from December 31, 2020.

The growth was driven by an increase in deposits.

Loan growth for the first six months of 2021, exclusive of $86 million of net PPP loan decreases related to forgiveness, amounted to $136 million, an annualized growth rate of 6.1%.

Total loans amounted to $4.8 billion at June 30, 2021, an increase of $51 million, or 1.1% from December 31, 2020.

Excluding PPP loans, our level of outstanding loans has been impacted by high mortgage loan refinancing activity, commercial loan payoffs, and until the second quarter of 2021, lower demand resulting from the pandemic.

Deposit growth during the first six months of 2021 totaled $898 million, an annualized growth rate of 28.9%.

Total deposits amounted to $7.2 billion at June 30, 2021, compared to of $6.3 billion at December 31, 2020.

We believe the high deposit growth was likely due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives.

We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at June 30, 2021 of 15.05%, a decrease from the 15.37% reported at December 31, 2020.

Other Business Matters

On June 1, 2021, we announced that we have reached an agreement to acquire Select Bancorp, Inc., headquartered in Dunn, North Carolina, which currently operates 22 branches and has $1.8 billion in assets.

This transaction is subject to regulatory and shareholder approval by both companies, and is expected to be completed during the fourth quarter of 2021.

The acquisition would increase the Company's market share in several existing markets, including the Triad, Triangle and Charlotte markets of North Carolina, as well as provide entry into several new markets, including Dunn, Goldsboro and Elizabeth City, North Carolina.

On June 30, 2021, we completed the sale of the operations and substantially all of the operating assets of our property and casualty insurance agency subsidiary, First Bank Insurance Services, to Bankers Insurance, LLC for an initial purchase price valued at $13.0 million and a future earn-out payment of up to $1.0 million.

We recorded a gain of $1.7 million related to the sale.

Approximately $10.2 million of intangible assets were derecognized from our balance sheet as a result of this transaction, including $7.4 million in goodwill and $2.8 million in other intangibles.

Components of Earnings

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We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.

Net interest income for the three month period ended March 31, 2021 amounted to $55.2 million, an increase of $0.5 million, or 0.9%, from the $54.8 million recorded in the first quarter of 2020.

Net interest income on a tax-equivalent basis for the three month period ended March 31, 2021 amounted to $55.7 million, an increase of $0.6 million, or 1.1%, from the $55.1 million recorded in the first quarter of 2020.

($ in thousands) Three Months Ended March 31,

Net interest income for the second quarter of 2021 was $58.8 million, an increase of $6.2 million, or 11.7%, from the $52.6 million recorded in the second quarter of 2020.

Net interest income on a tax-equivalent basis for the three month period ended June 30, 2021 amounted to $59.3 million, an increase of $6.3 million, or 11.9%, from the $53.0 million recorded in the second quarter of 2020.

Net interest income for the first six months of 2021 was $114.0 million, an increase of $6.6 million, or 6.2%, from the $107.4 million recorded in the comparable period of 2020.

Net interest income on a tax-equivalent basis for the six

month period ended June 30, 2021 amounted to $115.0 million, an increase of $7.0 million, or 6.4%, from the $108.0 million recorded in the first six months of 2020.

($ in thousands) Three Months Ended June 30 Six Months Ended June 30,

2021 2020 2021 2020

Net interest income, as reported $ 58,759 52,624 $ 113,997 107,383

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There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

For the three months ended March 31, 2021, the higher net interest income compared to the same period of 2020 was primarily due to higher levels of interest-earning assets and the recognition of PPP fees, which were mostly offset by a lower net interest margin.

For the three and six months ended June 30, 2021, the higher net interest income were primarily due to higher levels of interest-earning assets, the recognition of PPP loan fees, and higher discount accretion, the effects of which were partially offset by lower net interest margins

The following table presents an analysis of net interest income.

For the Three Months Ended March 31,

For the Three Months Ended June 30,

($ in thousands) Average

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(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $3,395, and $345 for the three months ended March 31, 2021 and 2020, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $1,341 and $1,841 for the three months ended March 31, 2021 and 2020, respectively.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $2,180, and $1,233 for the three months ended June 30, 2021 and 2020, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $3,631 and $1,393 for the three months ended June 30, 2021 and 2020, respectively.

(3) Includes tax-equivalent adjustments of $517 and $330 in 2021 and 2020, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status.

This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

Average loans outstanding for the first quarter of 2021 were $4.684 billion, which was $171 million, or 3.8%, higher than the average loans outstanding for the first quarter of 2020 ($4.513 billion).

For the Six Months Ended June 30,

($ in thousands) Average

Volume Average

Rate Interest

or Paid Average

Volume Average

Rate Interest

Loans (1) $ 4,681,604 4.45 % $ 103,368 $ 4,625,798 4.66 % $ 107,261

Taxable securities 1,906,549 1.45 % 13,702 802,485 2.57 % 10,245

Non-taxable securities 99,622 1.62 % 797 19,757 2.86 % 281

Short-term investments, primarily interest-bearing cash 456,066 0.57 % 1,281 400,934 0.95 % 1,886

Total interest-earning assets 7,143,841 3.36 % $ 119,148 5,848,974 4.11 % 119,673

Cash and due from banks 83,486 75,984

Premises and equipment 122,485 114,624

Other assets 373,472 416,009

Total assets $ 7,723,284 $ 6,455,591

Interest bearing checking $ 1,241,662 0.08 % $ 491 $ 935,792 0.14 % $ 674

Money market deposits 1,713,714 0.20 % 1,717 1,248,796 0.42 % 2,602

Savings deposits 560,550 0.09 % 242 440,508 0.19 % 416

Time deposits >$100,000 540,865 0.57 % 1,539 638,216 1.65 % 5,247

Other time deposits 221,239 0.36 % 398 246,807 0.74 % 908

Total interest-bearing deposits 4,278,030 0.21 % 4,387 3,510,119 0.56 % 9,847

Borrowings 61,356 2.51 % 764 302,566 1.62 % 2,443

Total interest-bearing liabilities 4,339,386 0.24 % 5,151 3,812,685 0.65 % 12,290

Noninterest bearing checking 2,436,138 1,716,212

Other liabilities 57,895 61,570

Shareholders’ equity 889,865 865,124

Total liabilities and

shareholders’ equity $ 7,723,284 $ 6,455,591

Net yield on interest-earning assets and net interest income 3.22 % $ 113,997 3.69 % $ 107,383

Net yield on interest-earning assets and net interest income – tax-equivalent (2) 3.24 % $ 114,956 3.71 % $ 108,047

Interest rate spread 3.12 % 3.46 %

Average prime rate 3.25 % 3.84 %

(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $5,575 and $1,578 for the six months ended June 30, 2021 and 2020, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $4,972 and $3,234 for the six months ended June 30, 2021 and 2020, respectively.

(3) Includes tax-equivalent adjustments of $959 and $664 in 2021 and 2020, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status.

This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

Average loans outstanding for the second quarter of 2021 were $4.679 billion, which was $60 million, or 1.3%, lower than the average loans outstanding for the second quarter of 2020 ($4.739 billion).

Excluding PPP loan balances, our level of outstanding loans trended downward from the onset of the pandemic in March 2020 through March 2021, due to the negative impact of high mortgage loan refinancing activity, commercial loan payoffs, and soft demand arising from the pandemic.

As discussed below, we experienced strong loan growth in the second quarter of 2021.

Average loans outstanding for the six months ended June 30, 2021 were $4.682 billion, which was $56 million, or 1.2%, higher than the average loans outstanding for the comparable period of 2020 ($4.626 billion).

The higher amount of average loans outstanding in 2021 was primarily due to the origination of PPP loans since March 31, 2020.

We had $241 million in outstanding PPP loans as of March 31, 2021, with an average balance of $237 million.

Excluding PPP loan balances, average loans outstanding were approximately 1.5% lower for the three months ended March 31, 2021, respectively, compared to the first quarter of 2020.

As derived from the tables above, our average balance of total securities grew by $864 million, or 100.9%, when comparing the first quarter of 2021 to the first quarter of 2020.

This increase was due to higher levels of investment purchases arising from the cash provided by the high deposit growth experienced in recent periods.

For the first quarter of 2021, average short-term investments, primarily interest-bearing cash, amounted to $494 million, which was $267 million, or 117.9%, higher than for the first quarter of 2020 ($227million).

The higher level of short-term investments in 2021 was also due to the high deposit growth experienced, as discussed in the following paragraph.

Average total deposits outstanding for the first quarter of 2021 were $6.474 billion, which was $1.524 billion, or 30.8%, higher than the average deposits outstanding for the first quarter of 2020 ($4.950 billion).

The average balance of PPP loans outstanding for the six months ended June 30, 2021 and 2020 were $219 million and $89 million, respectively.

As derived from the tables above, our average balance of total securities grew by $1.501 billion, or 190.4%, when comparing the second quarter of 2021 to the second quarter of 2020, and $1.184 billion, or 144.0% when comparing the first six months of 2021 to the first six months of 2020.

These increases were due to higher levels of investment purchases arising from the cash provided by the high deposit growth experienced in recent periods, as discussed in the following paragraph.

Average total deposits outstanding for the second quarter of 2021 were $6.952 billion, which was $1.450 billion, or 26.4%, higher than the average deposits outstanding for the second quarter of 2020 ($5.502 billion).

Average total deposits outstanding for the first six months of 2021 were $6.714 billion, which was $1.488 billion, or 28.5%, higher than the average deposits outstanding for the first six months of 2020 ($5.226 billion).

The majority of the growth has occurred in our transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts).

We believe the high deposit growth was due to a combination of factors including:

1) the deposit of PPP funds into customer checking accounts, 2) the government’s stimulus payments, 3) consumer savings habits, and 4) positive results from our deposit account growth initiatives.

We also utilized funds provided by our high deposit growth to pay down a substantial portion of our borrowings since March 31, 2020.

Average borrowings decreased $255 million, or 80.6%, when comparing the first quarter of 2021 to the first quarter of 2020.

The net result of the balance sheet growth discussed above was that our average interest-earning assets for the three months ended March 31, 2021 were 23.3% higher than for the comparable period in 2020, which, as it relates to the net interest income we recorded, slightly more than offset the impact of the decline in our net interest margin, which is discussed below.

We also utilized funds provided by our high deposit growth to pay down a substantial portion of our borrowings since the prior year.

Average borrowings decreased $228 million, or 78.8%, when comparing the second quarter of 2021 to the second quarter of 2020, and $241 million, or 79.7%, when comparing the first six months of 2021 to the first six months of 2020.

The net result of the balance sheet growth discussed above was that our average interest-earning assets for the three and six months ended June 30, 2021 were 21.1% and 22.1% higher than for the comparable periods in 2020, respectively.

As it relates to the net interest income we recorded, the impact from the higher average interest-earning assets more than offset the impact of the decline in our net interest margin, which is discussed below.

See additional information regarding changes in our loans and deposits in the section below entitled “Financial Condition.”

The lower margin was primarily due to the impact of lower interest rates, as discussed in the following paragraph, and the lower incremental reinvestment rates from realized from funds provided by the high deposit growth,

For the six months ended June 30, 2021, our net interest margin was 3.24% compared to 3.71% for the same period of 2020.

The declines in 2021 were primarily due to the impact of lower interest rates and the lower incremental reinvestment rates realized from funds provided by high deposit growth.

From August 2019 to March 2020, the Federal Reserve cut interest rates by 225 basis points, which played a significant role in our asset yields declining by more than our cost of funds since those interest rate cuts.

In comparing the first quarter of 2021 to the first quarter of 2020, our yield on interest-earning assets declined by 105 basis points compared to a 51 basis point decline in the cost of our interest-bearing liabilities.

In comparing the first six months of 2021 to the first six months of 2020, our yield on interest-earning assets declined by 75 basis points compared to a 41 basis point decline in the cost of our interest-bearing liabilities.

See additional discussion in Item 3 - Quantitative and Qualitative Disclosures About Market Risk.

Another factor negatively impacting our net interest margin has been our high deposit growth, which, due to lower loan growth, has resulted in a higher percentage of our earning assets being comprised of short-term investments and securities, each of which generally yield less than loans.

Short-term investments and securities comprised 32% of average interest-earning assets for the first quarter of 2021 compared to 19% in the first quarter of 2020.

Our PPP loans outstanding totaled $241 million at both March 31, 2021 and December 31, 2020, while no PPP loans were outstanding at March 31, 2020.

We have $9.0 million in remaining deferred PPP loan fees, of which $3.1 million relates to 2020 originations and $5.9 million relates to 2021 originations

We recorded loan discount accretion of $1.3 million in the first quarter of 2021, compared to $1.8 million in the first quarter of 2020.

The lower loan discount accretion was primarily attributable to lower accretion on acquired loans due to the natural paydowns in our acquired loan portfolios.

Average short-term investments and securities comprised 35% of average interest-earning assets for the first six months of 2021 compared to 21% in the first six months of 2020.

In the first six months of 2021, we processed $198 million in PPP loan forgiveness payments related to 2020 originations and also originated approximately $112 million in new PPP loans, which resulted in a remaining balance of total PPP loans of $156 million at June 30, 2021.

Including accelerated amortization of deferred PPP loan fees, we recorded a total of $2.7 million and $5.7 million in PPP fee-related interest income during the three and six months ended June 30, 2021, respectively, compared to $1.3 million in fees recorded in the second quarter of 2020, with no such fees recorded in the first quarter of 2020.

When these fees are combined with the note rate of 1.00%, the total yield on PPP loans was 6.35% for the second quarter of 2021 and 6.25% for the first half of 2021

compared to 3.97% for each of the three and six month periods ended June 30, 2020.

At June 30, 2021, we have $6.2 million in remaining deferred PPP loan fees, of which $0.9 million relates to 2020 originations and $5.3 million relates to 2021 originations.

We recorded loan discount accretion of $3.6 million in the second quarter of 2021, compared to $1.4 million in the second quarter of 2020.

For the six months ended June 30, 2021 and 2020, loan discount accretion amounted to $5.0 million and $3.2 million, respectively.

In the second quarter of 2021, we accreted approximately $2.3 million of remaining discount accretion on five former failed-bank loans that paid off during the quarter.

Loan discount accretion had a 20 basis point impact on the net interest margin in the second quarter of 2021 compared to a 9 basis point impact in the second quarter of 2020.

For the first six months of 2021 and 2020, loan discount accretion had a 14 basis point impact and a 11 basis point impact, respectively, on the net interest margin.

See additional information regarding net interest income in the section entitled “Interest Rate Risk.”

We recorded no provision for credit losses in the first quarter of 2021 compared to $5.6 million in the first quarter of 2020.

The higher provision in 2020 was primarily related to estimated incurred loan losses associated with the pandemic that was emerging at the time.

Under the CECL methodology for recording expected credit losses adopted at January 1, 2021, for the first quarter of 2021, we determined that no provisions for credit losses were necessary as it relates to loans, unfunded commitments or held to maturity securities.

We recorded no provision for loan losses for the three or six months ended June 30, 2021 compared to $19.3 million and $24.9 million in the comparable periods of 2020.

The higher provisions in 2020 were primarily related to estimated incurred losses associated with the pandemic that was emerging at the time.

Under the CECL methodology for providing for loan losses, we determined that no provisions for loan losses were required during the first six months of 2021.

See additional discussion below in the section "Allowance for Credit Losses and Provision for Credit Losses."

Total noninterest income for the first quarter of 2021 was $20.7 million, a 50.8% increase from the $13.7 million recorded for the first quarter of 2020.

Service charges on deposit accounts amounted to $2.7 million for the first quarter of 2021, an 18.1% decrease compared to $3.3 million in the first quarter of 2020.

The decline was primarily due to fewer instances of customer overdrafts.

Other service charges, commissions and fees amounted to $5.5 million for the first quarter of 2021, an increase of 35.7% from the $4.1 million for the first quarter of 2020.

The increase was primarily due to a $0.9 million increase in bankcard revenue.

Additionally, the first quarter of 2020 included a $0.5 million charge related to impairment of our SBA servicing asset.

Fees from presold mortgages amounted to $4.5 million for the first quarter of 2021, an increase of 146.8%, compared to $1.8 million in the first quarter of 2020.

The increase in 2021 was primarily due to higher mortgage loan origination volume arising from low mortgage loan interest rates.

Commissions from sales of insurance and financial products did not vary significantly for the period presented, amounting to approximately $2.2 million and $2.1 million for the first quarters of 2021 and 2020, respectively.

SBA consulting fees amounted to $2.8 million for the first quarter, an increase of 169.1%, compared to $1.0 million for the first quarter of 2020.

The increase was due to fees earned by the Company's SBA subsidiary, SBA Complete, primarily related to assisting its third-party client banks with the PPP loan program.

SBA Complete recorded approximately $1.6 million in PPP-related fees for the three months ended March 31, 2021.

At March 31, 2021, SBA Complete had $0.6 million in remaining deferred PPP revenue that will be recorded as income upon completing the forgiveness process for its client banks.

SBA loan sale gains amounted to $2.3 million for the first quarter of 2021 compared to $0.6 million in the first quarter of 2020.

During the second quarter of 2021, using the CECL methodology, we recorded a $1.9 million in provision for unfunded commitments.

The provision was recorded primarily due to an increase in construction and land development loan commitments during the second quarter of 2021 that had not been funded as of quarter end.

Our allowance for unfunded commitments at June 30, 2021 amounted to $10.0 million and is recorded within the line item "Other liabilities".

Total noninterest income for the second quarter of 2021 was $21.4 million, an 18.4% decrease from the $26.2 million recorded for the second quarter of 2020, with the 2021 decrease being due to the absence of securities gains compared to $8.0 million recorded in the second quarter of 2020.

For the six months ended June 30, 2021 and 2020, total noninterest income was $42.0 million and $39.9 million, respectively.

The increases in noninterest income in 2021 were primarily due to bankcard fees, fees earned as a result of high mortgage loan activity, SBA consulting fees related to client assistance with PPP originations, and increased SBA loan sale gains.

Service charges on deposit accounts amounted to $2.8 million for the second quarter of 2021, a 23.4% increase over the $2.3 million for the second quarter of 2020, with the second quarter of 2020 having declined significantly from historical levels at the onset of the pandemic.

For each of the six months ended June 30, 2021 and 2020, service charges on deposit accounts amounted to $5.6 million.

Other service charges, commissions and fees amounted to $6.5 million for the second quarter of 2021, an increase of 40.5% from the $4.6 million for the second quarter of 2020.

For the six months ended June 30, 2021 and 2020, other service charges, commissions and fees amounted to $12.0 million and $8.7 million, respectively.

The increase was primarily due to increases of $1.5 million and $2.3 million in bankcard revenue for the three and six months ended June 30, 2021 compared to the same periods in 2020, respectively.

Also affecting comparability is that a $0.5 million charge related to impairment of the Company's SBA servicing asset was recorded in the first quarter of 2020 due to market conditions that existed at the time.

Fees from presold mortgages amounted to $2.3 million for the second quarter of 2021, a decrease of 24.7%, compared to $3.0 million in the second quarter of 2020.

For the first six months of 2021 and 2020, fees from presold mortgages amounted to $6.8 million and $4.9 million, respectively.

Mortgage loan volumes increased significantly beginning in the second quarter of 2020 at the onset of the pandemic primarily due to declines in interest rates.

In the second quarter of 2021, mortgage loan volumes declined due to increases in mortgage interest rates.

Commissions from sales of insurance and financial products amounted to approximately $2.5 million and $2.1 million for the second quarters of 2021 and 2020, respectively, and $4.7 million and $4.2 million for the first six months of 2021 and 2020, respectively.

This line item includes commissions earned from our wealth management division and commissions earned from the sales of property and casualty insurance by First Bank Insurance Services.

The increases in 2021 were primarily due to higher commissions from our wealth management division

due to increases in investment assets under management.

In the second quarter of 2021, we completed the sale of the operations and substantially all of the operating assets of First Bank Insurance Services to Bankers Insurance, LLC.

Commissions earned by First Bank Insurance Services amounted to $1.4 million and $2.7 million for the three and six months ended June 30, 2021 and $5.4 million for calendar year 2020.

In the future, we are eligible to receive referral fees from Bankers Insurance, but expect the portion of this line item related to First Bank Insurance Services to be minimal for the near future.

Our wealth management division was not included in, and is not impacted, by the sale.

SBA consulting fees amounted to $2.2 million for the second quarter of 2021, a decrease of 41.5%, compared to $3.7 million for the second quarter of 2020.

In the second quarter of 2020, the Company's SBA subsidiary, SBA Complete, earned significant fees related to assisting client banks with PPP loan originations, with a lower level of such assistance provided in the second quarter of 2021.

For the six months ended June 30, 2021 and 2020, SBA consulting fees amounted to $5.0 million and $4.8 million, respectively.

Including origination fees, on-going servicing fees and fees associated with forgiveness services, SBA Complete's PPP fees amounted to $0.8 million in the second quarter of 2021 compared to $3.0 million for the second quarter of 2020, and $2.4 million for the first half of 2021 compared to $3.0 million for the first half of 2020.

At June 30, 2021, SBA Complete had $0.4 million in remaining deferred PPP revenue that will be recorded as income upon completing the forgiveness process for its client banks.

SBA loan sale gains amounted to $3.0 million for the second quarter of 2021 compared to $2.0 million in the second quarter of 2020.

For the first six months of 2021 and 2020, SBA loan sale gains amounted to $5.3 million and $2.6 million, respectively.

The first quarter of 2020 was significantly impacted by temporary pandemic-related market conditions.

The first quarter of 2021 was favorably impacted by the SBA increasing the guarantee percentage on most loans from 75% to 90% as part of the economic relief package.

Noninterest expenses amounted to $40.1 million in each of the first quarters of 2021 and 2020.

Personnel e xpense, which includes salaries expense and employee benefit expense, was unchanged at $24.7 million for each of the first quarters of 2021 and 2020.

The combined amount of occupancy and equipment expense did not vary significantly among the periods presented, amounting to $3.9 million and $4.1 million for three month periods ending March 31, 2021 and 2020, respectively.

Intangibles amortization expense decreased from $1.1 million in the first quarter of 2020 to $0.9 million in the first quarter of 2021.

The periods in 2021 were favorably impacted by the SBA increasing the marketable, guaranteed percentage on most loans from 75% to 90% as part of the economic relief package.

During the second quarter of 2020, we sold approximately $220 million in securities at a gain of $8.0 million, whereas there were no securities sales in 2021.

Other gains (losses) amounted to a gain of $1.5 million in the second quarter of 2021, primarily due to a $1.7 million gain related to the aforementioned sale of the operations and substantially all of the assets of First Bank Insurance Services.

As previously discussed, we sold the operations of First Bank Insurance Services during the second quarter of 2021, which had annual noninterest expenses of approximately $4.7 million.

Personnel e xpense, which includes salaries expense and employee benefit expense, increased 3.4% to $25.3 million in the second quarter of 2021 from $24.5 million in the second quarter of 2020.

For the six months ended June 30, 2021 and 2020, personnel expense amounted to $50.0 million and $49.1 million, respectively, an increase of 1.8%.

The combined amount of occupancy and equipment expense did not vary significantly among the periods presented, amounting to $3.7 million for each of the three month periods ending June 30, 2021 and 2020, and $7.7 million and $7.8 million for the six month periods ending June 30, 2021 and 2020, respectively.

Merger expenses amounted to $0.4 million for the three and six months ended June 30, 2021, compared to none in 2020.

As discussed previously at Note 16 to the Consolidated Financial Statements, on June 1, 2021, the Company announced an acquisition agreement with Select Bancorp, Inc.

Intangibles amortization expense decreased from $1.0 million in the second quarter of 2020 to $0.8 million in the second quarter of 2021, and decreased from $2.0 million in the first six months of 2020 to $1.7 million in the first six months of 2021.

The declines were primarily a result of the amortization of intangible assets associated with acquisitions that typically have amortization schedules that decline over time.

Foreclosed property losses were $0.2 million for each of the three months ending March 31, 2021 and 2020.

Other operating expenses amounted to $10.4 million for the first quarter of 2021 compared to $10.1 million in the first quarter of 2020, an increase of 2.5%.

The increase in 2021 was primarily a result of higher FDIC insurance expense in 2021 and increased technology costs.

For the three months ended March 31, 2021 and 2020, the provision for income taxes was $7.6 million, an effective tax rate of 21.3%, and $4.6 million, an effective tax rate of 20.3%, respectively.

Other operating expenses amounted to $10.9 million for the second quarter of 2021 compared to $9.7 million in the second quarter of 2020, an increase of 12.6%, and $21.3 million in the first six months of 2021 compared to $20.0

million in the first six months of 2020, an increase of 7.5%.

The increases in 2021 were primarily a result of higher bankcard and technology expenses.

For the three months ended June 30, 2021 and 2020, the provision for income taxes was $7.9 million, an effective tax rate of 21.3%, and $4.3 million, an effective tax rate of 20.7%, respectively.

For the six months ended June 30, 2021 and 2020, the provision for income taxes was $15.6 million, an effective tax rate of 21.3%, and $8.9 million, an effective tax rate of 20.5%, respectively.

The increase in the effective tax rate in 2021 was primarily due to a higher proportion of fully-taxable income.

The consolidated statements of comprehensive income reflect other comprehensive loss of $18.5 million during the first quarter of 2021 compared to other comprehensive income of $16.1 million during the first quarter of 2020.

The consolidated statements of comprehensive income reflect other comprehensive income of $3.5 million during the second quarter of 2021 compared to other comprehensive loss of $3.9 million during the second quarter of 2020.

For the first six months of 2021, the consolidated statements of comprehensive income reflect other comprehensive loss of $15.1 million compared to other comprehensive income of $12.2 million for the comparable period of 2020.

The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains (losses) of our available for sale securities.

Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase.

Longer term interest rates increased late in the first quarter of 2021, which decreased the value of our fixed rate securities, while in the first quarter of 2020, longer term interest rates decreased, which increased the value of our fixed rate securities.

The variances in unrealized gains/losses for the periods presented were consistent with the changes in market interest rates.

Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.

FINANCIAL CONDITION

Total assets at March 31, 2021 amounted to $7.7 billion, a 6.1% increase from December 31, 2020.

Total loans at March 31, 2021 amounted to $4.6 billion, a 2.3% decrease from December 31, 2020, and total deposits amounted to $6.7 billion, a 7.3% increase from December 31, 2020.

The following table presents information regarding the nature of changes in our levels of loans and deposits for the first three months of 2021.

Total assets at June 30, 2021 amounted to $8.2 billion, a 12.5% increase from December 31, 2020.

Total loans at June 30, 2021 amounted to $4.8 billion, a 1.1% increase from December 31, 2020, and total deposits amounted to $7.2 billion, a 14.3% increase from December 31, 2020.

The following table presents information regarding the nature of changes in our levels of loans and deposits for the first six months of 2021.

$ in thousands

January 1, 2021 to March 31, 2021 Balance at

January 1, 2021 to June 30, 2021 Balance at

of period Internal

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Total deposits $ 6,273,596 897,762 — 7,171,358 14.3 %

As derived from the table above, for the first three months of 2021, loans declined $107.3 million, or 2.3%.

Our level of outstanding loans has been negatively impacted by high mortgage loan refinancing activity, commercial loan payoffs, and soft demand arising from the pandemic.

PPP loans amounted to $241 million at both March 31, 2021 and December 31, 2020, with $111 million in new PPP loans, which was offset by $111 million in PPP forgiveness payments.

We generally believe that our market area is beginning to emerge from the pandemic, and thus, we expect economic activity to increase.

Accordingly, excluding the impact of PPP loan forgiveness, we expect to experience organic loan growth during the remainder of 2021.

The mix of our loan portfolio remains substantially the same at March 31, 2021 compared to December 31, 2020.

Also, the majority of our real estate loans are personal and commercial loans where real estate provides additional

security for the loan.

As derived from the table above, for the first six months of 2021, loans increased $50.7 million, or 1.1%.

Loan growth for the period, excluding PPP loans, was $136 million, or 6.1% annualized.

Our level of outstanding loans has been negatively impacted by high mortgage loan refinancing activity, commercial loan payoffs, and the generally soft demand during the pandemic through March 2021.

However, in the second quarter of 2021, we experienced strong, non-PPP, loan growth of $244 million, an annualized growth rate of 22.3%.

We believe the growth was as a result of our local economies recovering from the pandemic, as well as our increased willingness to meet competitor loan terms, including interest rate and loan structure.

PPP loans amounted to $156 million and $241 million at June 30, 2021 and December 31, 2020, respectively, with $112 million in new PPP loans originated in 2021, that was offset by $198 million in PPP forgiveness payments received in 2021.

The mix of our loan portfolio remains substantially the same at June 30, 2021 compared to December 31, 2020.

Also, the majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

Note 6 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

For the three month period ended March 31, 2021, we experienced strong growth in our deposit base, with total deposits increasing by $460 million, or 7.3% from December 31, 2020.

Deposit growth in our transaction accounts (checking, money market and savings), was especially strong, ranging from 7-10% growth for the three month period.

We believe this high deposit growth is due to a combination of stimulus funds and changes in customer behaviors during the pandemic, as well as our ongoing deposit growth initiatives.

After experiencing 27.2% deposit growth for calendar year 2020, we have continued to experience high growth during 2021.

For the six month period ended June 30, 2021, total deposits increased by $898 million, or 14.3% (28.9% annualized).

Deposit growth in our transaction accounts (checking, money market and savings), was especially strong, ranging from 14-20% growth for the six month period.

We believe this high deposit growth has likely been due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives.

We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.

Our liquidity levels have increased over the period.

Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% at December 31, 2020 to 37.5% at March 31, 2021.

Due primarily to our deposit growth exceeding our loan growth, our liquidity levels have increased.

Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% at December 31, 2020 to 39.9% at June 30, 2021.

Nonperforming Assets

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ASSET QUALITY DATA ($ in thousands )

As of/for the quarter ended March 31, 2021 As of/for the quarter ended December 31, 2020

As of/for the quarter ended June 30, 2021 As of/for the quarter ended December 31, 2020

Nonperforming assets

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Allowance for loan losses to nonperforming loans 158.52 % 117.53 %

As shown in the table above, nonperforming assets increased from December 31, 2020 to March 31, 2021, which was primarily driven by one borrower relationship amounting to $5.5 million being placed on nonaccrual status in the first quarter of 2021 and which was not directly related to the impact of the pandemic.

Due primarily to government stimulus and relief programs, the nonperforming asset level at March 31, 2021 may not reflect the full impact of COVID-19.

As shown in the table above, nonperforming assets decreased from December 31, 2020 to June 30, 2021, which was primarily driven by the sale of one nonaccrual relationship amounting to $5.6 million.

Due primarily to the continued impact of government stimulus and relief programs, the nonperforming asset level at June 30, 2021 may not reflect the full impact of COVID-19.

We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the allowance for loan losses discussed below.

At March 31, 2021, total nonaccrual loans amounted to $39.6 million, compared to $35.1 million at December 31, 2021.

As noted above, the increase was primarily driven by one borrower relationship.

At June 30, 2021, total nonaccrual loans amounted to $33.0 million, compared to $35.1 million at December 31, 2021.

As noted above, the decrease was primarily driven by the sale of one borrower relationship.

The following is the composition, by loan type, of all of our nonaccrual loans at each period end.

($ in thousands) At March 31, 2021 At December 31, 2020

($ in thousands) At June 30, 2021 At December 31, 2020

Commercial, financial, and agricultural $ 9,476 9,681

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Total nonaccrual loans $ 32,993 35,076

In the table above, nonaccrual loans arising from our SBA division totaled $17.3 million and $18.4 million at June 30, 2021 and December 31, 2020, respectively.

The unguaranteed portions of those SBA loans totaled $11.8 million and $12.1 million as of the same periods, respectively.

As of June 30, 2021, SBA loans accounted for approximately $9.1 million of our nonaccrual loans in the "Commercial, financial and agricultural” category and $8.2 million of our nonaccrual loans in the "Real estate - mortgage - commercial and other" category.

As of December 31, 2020, SBA loans accounted for approximately $9.3 million of our nonaccrual loans in the "Commercial, financial and agricultural” category and $9.1 million of our nonaccrual loans in the "Real estate - mortgage - commercial and other" category.

Our SBA loans have been the category of loans most impacted by the effects of the pandemic.

TDRs are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties.

At March 31, 2021, total accruing TDRs amounted to $8.6 million, compared to $9.5 million at December 31, 2020, with the decrease being attributed to several TDRs paying off during the period.

COVID-19 related deferrals, which amounted to $5.9 million at March 31, 2021, are excluded from TDR consideration at March 31, 2021.

The following table presents geographic information regarding our nonperforming loans (nonaccrual loans and TDRs) at March 31, 2021.

As of March 31, 2021

At June 30, 2021, total accruing TDRs amounted to $8.0 million, compared to $9.5 million at December 31, 2020, with the decrease being attributed to several TDRs paying off during the period.

COVID-19 related deferrals, which amounted to $2.1 million at June 30, 2021, are excluded from TDR consideration at June 30, 2021.

The following table presents geographic information regarding our nonperforming loans (nonaccrual loans and TDRs) at June 30, 2021.

As of June 30, 2021

($ in thousands) Total

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Eastern Region (NC) $ 5,932 1,128,429 0.53 % $ 120

Triangle Region (NC) 10,663 985,508 1.08 % 252

Central Region (NC) 6,016 863,229 0.70 % 305

Triad Region (NC) 4,790 614,504 0.78 % —

Western Region (NC) 2,847 612,668 0.46 % 124

Triangle Region (NC) 266 424,370 0.06 % —

Charlotte Region (NC) 962 385,990 0.25 % —

Southern Piedmont Region (NC) 2,012 159,518 1.26 % 65

Western Region (NC) 3,383 581,433 0.58 % 21

South Carolina Region 742 204,208 0.36 % 40

Former Virginia Region 81 336 24.11 % 209

SBA loans 17,307 158,695 10.91 % 135

SBA - PPP loans — 155,514 — % —

Other 145 74,939 0.19 % 37

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Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret

Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake

Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly, Forsyth, Alamance

Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg

Southern Piedmont North Carolina Region - Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland

Central North Carolina Region - Randolph, Chatham, Montgomery, Stanley, Moore, Richmond, Lee, Harnett, Cumberland

Triad North Carolina Region - Davidson, Rockingham, Guilford,, Forsyth, Alamance

Western North Carolina Region – Buncombe, Henderson, McDowell, Madison, Transylvania

Triangle North Carolina Region - Wake

Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg

Southern Piedmont North Carolina Region - Scotland, Robeson, Bladen

South Carolina Region - Chesterfield, Dillon, Florence

Former Virginia Region - Wythe, Washington, Montgomery, Roanoke

Other includes loans originated on a national basis through the Company’s SBA Lending Division and through the Company's Credit Card Division

As reflected in Note 6 to the financial statements, total classified loans were $63.1 million at March 31, 2021 compared to $60.5 million at December 31, 2020.

Special mention loans decreased from $61.3 million at December 31, 2020 to $52.3 million at March 31, 2021.

SBA loans - loans originated on a national basis through the Company's SBA Lending Division

SBA - PPP loans - loans originated through the SBA's Paycheck Protection Program

Other includes loans originated through the Company's Credit Card Division and our former Virginia region

As reflected in Note 6 to the financial statements, total classified loans were $56.2 million at June 30, 2021 compared to $60.5 million at December 31, 2020.

Loans graded special mention were $39.6 million at June 30, 2021 compared to $61.3 million at December 31, 2020.

Thus far, except for SBA loans, which is a relatively small portion of total loans, our loan portfolio has not shown significant signs of stress related to the pandemic.

Foreclosed real estate includes primarily foreclosed properties.

Total foreclosed real estate amounted to $1.8 million at March 31, 2021 and $2.4 million at December 31, 2020.

Total foreclosed real estate amounted to $0.8 million at June 30, 2021 and $2.4 million at December 31, 2020.

Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and favorable overall asset quality.

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The following table presents the detail of all of our foreclosed real estate at each period end:

($ in thousands) At March 31, 2021 At December 31, 2020

($ in thousands) At June 30, 2021 At December 31, 2020

Vacant land and farmland $ 517 753

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Our estimate of credit losses on loans under CECL is determined using a complex model, based primarily on the utilization of discounted cash flows, that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the allowance for loan losses and resulting provision for credit losses.

We recorded no provision for credit losses on loans in the first quarter of 2021 compared to $5.6 million in the first quarter of 2020.

The higher provision in 2020 was primarily related to our estimate of probable incurred losses associated with the pandemic that was emerging at the time.

Under the CECL methodology for recording expected credit losses on loans adopted as of January 1, 2021, which resulted in the increase to the allowance for credit losses on loans noted above, we determined that no further adjustment was necessary for the first quarter of 2021, and thus no provisions for credit losses recorded.

The primary factors that resulted in this determination were an immaterial change in loan balances outstanding, the immaterial change in the level of the Company's past due and classified loans, and the relatively consistent economic projections in the forecasts utilized.

See Note 2 to the consolidated financial statements for additional information, which includes discussion noting that a more negative forecast scenario was utilized at March 31, 2021 compared to the scenario used on the January 1, 2021 CECL adoption date.

We recorded no provision for credit losses on loans in the first and second quarters of 2021 compared to $5.6 million and $19.3 million in the first and second quarters of 2020, respectively.

The higher provisions in 2020 was primarily related to our estimate of probable incurred losses associated with the pandemic that was emerging at the time.

Under the CECL methodology for providing for loan losses, we determined that no provisions for loan losses were required during the first six months of 2021, as discussed in the following paragraph.

We based our adoption date allowance for credit loss adjustment primarily on a baseline forecast of economic scenarios, which reflected ongoing threats to the economy, primarily arising from the pandemic.

In reviewing forecasts during 2021, management noted high degrees of volatility in the monthly forecasts.

Given the uncertainty that the volatility is indicative of and the inherent imprecision of a forecast accurately projecting economic statistics during these unprecedented times, management elected to base both its March 31, 2021 and June 30, 2021 computations of the allowance for credit losses primarily on an alternative, more negative forecast, that management judged to more appropriately reflect the inherent risks to its loan portfolio.

These more negative forecast's projections at March 31, 2021 were materially consistent with the adoption-date forecast's projections under the baseline scenario, and resulted in no provision for loan losses.

In the second quarter of 2021, the same forecast improved from March 31, 2021, which would tend to decrease the amount of required allowance for loan losses necessary.

The impact of the improved forecast was substantially offset by the high non-PPP loan growth we experienced during the quarter, as discussed previously.

We also increased certain qualitative factors in our model to recognize the higher risk associated with our second quarter 2021 decision to match less conservative loan structures being offered in the marketplace in order to grow loan balances.

The result of the above factors resulted in management concluding that no adjustment to the allowance for loan losses was required for the second quarter of 2021.

We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions.

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For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense.

($ in thousands) Three Months

March 31, 2021 Twelve Months

($ in thousands) Six Months

June 30, 2021 Twelve Months

Ended December 31,

2020 Three Months

March 31, 2020

2020 Six Months

June 30, 2020

Loans outstanding at end of period $ 4,782,064 4,731,315 4,770,063

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Allowance for loan losses as a percent of loans at end of period 1.36 % 1.11 % 0.89 %

As previously discussed, as of March 31, 2021, we have granted approximately $5.9 million in loan deferrals under the CARES act provisions, which is reduction from the highest level of $774 million in loan deferrals at June 30, 2020.

The ratio of our allowance to total loans was 1.42% and 1.11% at March 31, 2021 and December 31, 2020, respectively.

As previously discussed, as of June 30, 2021, we have granted approximately $2.1 million in loan deferrals under the CARES act provisions, which is reduction from the highest level of $774 million in loan deferrals at June 30, 2020.

The ratio of our allowance to total loans was 1.36% and 1.11% at June 30, 2021 and December 31, 2020, respectively.

The increase in this ratio was a result of the adoption of CECL on January 1, 2021.

In addition to the allowance for credit losses on loans, we maintain an allowance for lending-related commitments such as unfunded loan commitments and letters of credit.

In addition to the allowance for credit losses on loans, we maintain an allowance for unfunded commitments such as unfunded loan commitments and letters of credit.

Under CECL, we estimate expected credit losses associated with these commitments over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The allowance for lending-related commitments on off-balance sheet credit exposures is adjusted as a provision for credit loss expense.

The allowance for unfunded commitments on off-balance sheet credit exposures is adjusted as a provision for credit loss expense.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Methodology is based on a loss rate approach that starts with the probability of funding based on historical experience.

Similar to methodology

discussed above related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecast.

The allowance for lending-related commitments of $8.1 million and $0.6 million at March 31, 2021 and December 31, 2020, respectively, is separately classified on the balance sheet within Other Liabilities.

We recorded no provision for credit losses on unfunded commitments during the first quarter of 2021 for primarily the same reasons noted above related to loans.

This methodology is based on a loss rate approach that starts with the probability of funding based on historical experience.

Similar to the allowance for credit losses on

loans methodology discussed above, adjustments are made to the historical losses for current conditions and reasonable and supportable forecast.

The allowance for unfunded commitments amounted to $0.6 million at December 31, 2020 under pre-CECL methodology.

At our January 1, 2021 adoption of CECL, an upward adjustment of $7.5 million was recorded.

In the second quarter of 2021, we recorded $1.9 million of provision for credit losses on unfunded commitments primarily due to an increase in construction and land development loan commitments during the second quarter of 2021.

The resulting allowance for unfunded commitments at June 30, 2021 amounted to $10.0 million and is reflected in the line item "Other Liabilities."

We believe our allowance levels are adequate at each period end, based on the respective methodologies utilized, as described above.

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Thus far in the COVID-19 pandemic, we have seen our liquidity levels increase, with increases in deposits account balances leading to higher cash levels.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $969 million line of credit with the FHLB (of which $7 million and $8 million were outstanding at March 31, 2021 and December 31, 2020, respectively), 2) a $100 million federal funds line with a correspondent bank (of which none was outstanding at March 31, 2021 or December 31, 2020), and 3) an approximately $135 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at March 31, 2021 or December 31, 2020).

Unused and available lines of credit amounted to $1.2 billion at March 31, 2021.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $927 million line of credit with the FHLB (of which $7 million and $8 million were outstanding at June 30, 2021 and December 31, 2020, respectively), 2) a $100 million federal funds line with a correspondent bank (of which none was outstanding at June 30, 2021 or December 31, 2020), and 3) an approximately $135 million line of credit through the Federal Reserve's discount window (of which none was outstanding at June 30, 2021 or December 31, 2020).

Unused and available lines of credit amounted to $1.2 billion at June 30, 2021.

Our overall liquidity has increased since December 31, 2020 due primarily to the strong deposit growth which has exceeded loan growth.

Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% at December 31, 2020 to 37.5% at March 31, 2021.

Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% at December 31, 2020 to 39.9% at June 30, 2021.

We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future.

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Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity.

We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities.

We have no off-balance

sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities.

Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics.

We have not engaged in significant derivative activities through March 31, 2021, and have no current plans to do so.

We have not engaged in significant derivative activities through June 30, 2021, and have no current plans to do so.

Capital Resources

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The FRB has not advised us of any requirement specifically applicable to us.

At March 31, 2021, our capital ratios exceeded the regulatory minimum ratios discussed above.

At June 30, 2021, our capital ratios exceeded the regulatory minimum ratios discussed above.

The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Risk-based capital ratios:

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First Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above.

At March 31, 2021, First Bank significantly exceeded the minimum ratios established by the

regulatory authorities.

The reduction in our leverage ratio reflected in the table above was due to the significant balance sheet growth experienced in the first three months of 2021, resulting primarily from a strong increase in deposits.

At June 30, 2021, First Bank significantly exceeded the minimum ratios established by the regulatory authorities.

The reduction in our leverage ratio reflected in the table above was due to the significant balance sheet growth experienced in the first six months of 2021, resulting primarily from a strong increase in deposits.

The decline in the risk based capital ratios from December 31, 2020 to June 30, 2021 was due to increases in securities and loans balances.

BUSINESS DEVELOPMENT AND OTHER SHAREHOLDER MATTERS

The following is a list of business development and other miscellaneous matters affecting the Company and First Bank, our bank subsidiary.

• On March 15, 2021, the Company announced a quarterly cash dividend of $0.20 per share payable on April 25, 2021 to shareholders of record on March 31, 2021.

This dividend rate represents an 11% increase over the dividend rate declared in the first quarter of 2020.

• On June 15, 2021, the Company announced a quarterly cash dividend of $0.20 per share payable on July 25, 2021 to shareholders of record on June 30, 2021.

This dividend rate represents an 11.1% increase over the dividend rate declared in the second quarter of 2020.

SHARE REPURCHASES

For the three months ended March 31, 2021, we repurchased 106,744 shares of our common stock at an average price of $37.81 per share, which totaled $4.0 million.

At March 31, 2021, we had authority from our Board of Directors to repurchase up to an additional $16.0 million in shares of the Company’s common stock.

There were no share repurchases in the three months ended June 30, 2021.

For the six months ended June 30, 2021, we repurchased 106,744 shares of our common stock at an average price of $37.81 per share, which totaled $4.0 million.

At June 30, 2021, we had authority from our Board of Directors to repurchase up to an additional $16.0 million in shares of the Company’s common stock.

We may repurchase shares of our stock in open market and privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis