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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-09 · 208 added, 215 removed, 334 unchanged (56% of the section changed)

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Allowance for Credit Losses on Loans and Unfunded Commitments

The allowance for credit losses on loans, which is presented as a reduction of loans outstanding, and the allowance for unfunded commitments, which is recorded within Other Liabilities require high degrees of judgement.

The allowance for credit losses (ACL) on loans, which is presented as a reduction of loans outstanding, and the allowance for unfunded commitments, which is recorded within Other Liabilities require high degrees of judgement.

Each of these allowances reflects management’s estimate of losses that will result from the inability of our borrowers to make required loan payments.

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It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion.

The Company’s allowances for credit losses on loans and unfunded commitments reflect management’s best estimates within the range of expected credit losses.

The Company’s ACL on loans and unfunded commitments reflect management’s best estimates within the range of expected credit losses.

The Company recognizes in net income the amount needed to adjust either of these items for management’s current estimate of expected credit losses.

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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 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.

At September 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.

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Recent Developments:

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.

Our market areas and local economies continue to show signs of recovery from the impact of the COVID-19 pandemic, as vaccinations have reduced COVID-19 cases.

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%.

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 and third quarters of 2021, with non-PPP loans increasing by a total $420 million over that six month period, which represents 18.1% annualized growth.

The high deposit growth that we experienced beginning at the onset of the pandemic has continued in 2021, with total deposits increasing $1.2 billion thus far in the year, which represents annualized growth of 24.7%.

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.

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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.

While recent trends have been favorable, we remain uncertain of the future impact of COVID-19 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 $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%.

Net income amounted to $27.6 million, or $0.97 per diluted common share, for the three months ended September 30, 2021, an increase of 19.8% on a per share basis, compared to $23.3 million, or $0.81 per diluted common share, recorded in the third quarter of 2020.

For the nine months ended September 30, 2021, net income amounted to $85.1 million, or $2.99 per diluted common share, compared to $57.8 million, or $1.99 per diluted common share, for the nine months ended September 30, 2020, an increase of 50.3%.

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 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 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.

Net interest income for the third quarter of 2021 was $58.6 million, a 7.0% increase from the $54.7 million recorded in the third quarter of 2020.

Net interest income for the first nine months of 2021 was $172.6 million, a 6.4% increase from the $162.1 million recorded in the comparable period of 2020.

The increases in net interest income

for the periods presented were primarily due to higher levels of interest-earning assets and higher amortization of PPP loan fees, the effects of which were partially offset by lower net interest margins.

Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) for the third quarter of 2021 was 3.03%, which was 45 basis points lower than the 3.48% realized in the third quarter of 2020.

For the nine months ended September 30, 2021, our net interest margin was 3.17% compared to 3.63% 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 our high deposit growth.

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

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

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

We recorded a negative provision for loan losses of $1.4 million (reduction of the allowance for loan losses) for both the three and nine months ended September 30, 2021 compared to provisions for loan losses of $6.1 million and $31.0 million in the comparable periods of 2020, respectively.

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."

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.

Under the CECL methodology for providing for loan losses, we reversed $1.4 million in provision for loan losses during the third quarter of 2021 due to improving asset quality and improving economic forecasts.

During the three and nine months ended September 30, 2021, using the CECL methodology, we recorded a $1.0 million and $3.0 million in provision for unfunded commitments, respectively.

The provisions for 2021 were recorded primarily due to increases in construction and land development loan commitments during the second and third quarters of 2021 that had not been funded as of quarter end.

Our allowance for unfunded commitments at September 30, 2021 amounted to $11.1 million and is recorded within the line item "Other liabilities".

Annualized net loan charge-offs to average loans amounted to 0.00% for the third quarter of 2021 compared to annualized net recoveries to average loans of 0.06% in the third quarter of 2020.

For the nine months ended September 30, 2021, annualized net charge-offs to average loans amounted to 0.05% compared to 0.09% for the same period of 2020.

Total nonperforming assets amounted to $41 million at September 30, 2021, or 0.48% of total assets, compared to $47 million, or 0.64% of total assets, at December 31, 2020.

Noninterest Income

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.

Total noninterest income for the third quarter of 2021 was $16.5 million, a 23.0% decrease from the $21.5 million recorded for the third quarter of 2020.

For the nine months ended September 30, 2021 and 2020, total noninterest income was $58.9 million and $61.4 million, respectively, a decline of 4.6%.

These declines were the result of a variety of factors.

See additional discussion below.

Noninterest Expenses

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.

Noninterest expenses amounted to $40.8 million and $40.4 million in the third quarters of 2021 and 2020, respectively, an increase of 0.9%.

Noninterest expenses amounted to $121.9 million and $119.4 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of 2.1%.

Impacting these comparisons are the Company's acquisition of a business financing subsidiary on September 1, 2020, which has a current annual expense base of approximately $1.4 million and the sale of the Company's insurance subsidiary on June 30, 2021, which had an expense base of approximately $4.7 million.

See additional discussion below.

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.

Our effective tax rates were 20.1% and 21.4% for the three months ended September 30, 2021 and 2020, respectively, and 20.9% and 20.8% for the nine months September 30, 2021 and 2020, respectively.

Balance Sheet and Capital

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.

Total assets at September 30, 2021 amounted to $8.5 billion, a 16.5% increase from December 31, 2020.

The growth was driven by a significant increase in deposits.

Total loans amounted to $4.9 billion at September 30, 2021, an increase of $139 million, or 2.9% from December 31, 2020.

Loan growth for the nine months ended September 30, 2021, exclusive of PPP loans, was $312 million, an annualized growth rate of 8.8%.

A combination of low interest rates and economic recovery from the pandemic contributed to our 2021 loan growth.

Total deposits amounted to $7.4 billion at September 30, 2021, an increase of $1.2 billion, or 18.5%, from December 31, 2020.

Deposit growth for the nine months ended September 30, 2021 amounted to $1.2 billion, an annualized growth rate of 24.7%.

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.

We have deployed excess liquidity into investment securities, which amounted to $2.7 billion at September 30, 2021, an increase of $1.1 billion, or 64.9%, compared to December 31, 2020.

We remain well-capitalized by all regulatory standards, with an estimated Total Risk-Based Capital Ratio at September 30, 2021 of 14.73% compared to 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.

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, 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.

On October 15, 2021, we completed the acquisition of Select Bancorp, Inc., headquartered in Dunn, North Carolina, which operated 22 branches and had approximately $1.8 billion in assets as of the acquisition date.

The acquisition increased our market share in several existing markets, including the Triad, Triangle and Charlotte markets of North Carolina, as well as provided entry into several new markets, including Dunn, Goldsboro and Elizabeth City, North Carolina.

The financial position and earnings related to this acquisition will be included for the first time in the Company's financial results for the fourth quarter of 2021.

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 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,

Net interest income for the third quarter of 2021 was $58.6 million, an increase of $3.8 million, or 7.0%, from the $54.7 million recorded in the third quarter of 2020.

Net interest income on a tax-equivalent basis for the three month period ended September 30, 2021 amounted to $59.1 million, an increase of $4.0 million, or 7.4%, from the $55.1 million recorded in the third quarter of 2020.

Net interest income for the first nine months of 2021 was $172.6 million, an increase of $10.4 million, or 6.4%, from the $162.1 million recorded in the comparable period of 2020.

Net interest income on a tax-equivalent basis for the nine month period ended September 30, 2021 amounted to $174.1 million, an increase of $11.0 million, or 6.7%, from the $163.1 million recorded in the first nine months of 2020.

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

2021 2020 2021 2020

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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 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

For the three and nine months ended September 30, 2021, the increases in net interest income compared to the same periods in 2020 were primarily due to higher levels of interest-earning assets and the recognition of PPP loan fees, 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 June 30,

For the Three Months Ended September 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 $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.

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 $1,949 and $1,267 for the three months ended September 30, 2021 and 2020, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $1,227 and $1,555 for the three months ended September 30, 2021 and 2020, respectively.

(3) Includes tax-equivalent adjustments of $576 and $347 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.

For the Six Months Ended June 30,

For the Nine Months Ended September 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 $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.

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 $7,524 and $2,844 for the nine months ended September 30, 2021 and 2020, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $6,199 and $4,789 for the nine months ended September 30, 2021 and 2020, respectively.

(3) Includes tax-equivalent adjustments of $1,536 and $1,011 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).

Average loans outstanding for the third quarter of 2021 were $4.820 billion, which was $34 million, or 0.7%, higher than the $4.786 billion of average loans outstanding for the third quarter of 2020.

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).

As discussed below, we experienced strong loan growth in the second and third quarters of 2021.

Average loans outstanding for the nine months ended September 30, 2021 were $4.728 billion, which was $49 million, or 1.0%, higher than the $4.679 billion of average loans outstanding for the comparable period of 2020.

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

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.

The average balance of PPP loans outstanding for the nine months ended September 30, 2021 and 2020 were $184 million and $142 million, respectively.

As derived from the tables above, our average balance of total securities grew by $1.455 billion, or 143.6%, when comparing the third quarter of 2021 to the third quarter of 2020, and $1.275 billion, or 143.9% when comparing the first nine months of 2021 to the first nine 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).

Average total deposits outstanding for the third quarter of 2021 were $7.280 billion, which was $1.397 billion, or 23.8%, higher than the average deposits outstanding for the third quarter of 2020 ($5.883 billion).

Average total deposits outstanding for the first nine months of 2021 were $6.904 billion, which was $1.458 billion, or 26.8%, higher than the average deposits outstanding for the first nine months of 2020 ($5.447 billion).

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

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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.

Average borrowings decreased $20.5 million, or 25.2%, when comparing the third quarter of 2021 to the third quarter of 2020, and $167 million, or 73.2%, when comparing the first nine months of 2021 to the first nine months of 2020.

The net result of the balance sheet growth discussed above was that our average interest-earning assets for the three and nine months ended September 30, 2021 were 22.9% and 22.4% 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.”

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.

For the nine months ended September 30, 2021, our net interest margin was 3.17% compared to 3.63% 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 our 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 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.

In comparing the first nine months of 2021 to the first nine months of 2020, our yield on interest-earning assets declined by 70 basis points compared to a 35 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.

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.

Average short-term investments and securities comprised 35.6% of average interest-earning assets for the first nine months of 2021 compared to 22.0% in the first nine months of 2020.

In the first nine months of 2021, we processed $286 million in PPP loan forgiveness payments, out of a total of $353 million in PPP loans originated in 2020 and 2021, which resulted in $67 million in remaining PPP loans at September 30, 2021.

Including accelerated amortization arising from forgiveness, we recorded $2.1 million in PPP fees in third quarter of 2021 compared to $1.2 million for the third quarter of 2020.

For the nine months ended September 30, 2021, we recorded $7.8 million in PPP fees compared to $2.4 million for the same period of 2020.

At September 30, 2021, we have $4.3 million in remaining deferred PPP loan fees.

We recorded loan discount accretion of $1.2 million in the third quarter of 2021 compared to $1.6 million in the third quarter of 2020.

For the nine months ended September 30, 2021 and 2020, loan discount accretion amounted to $6.2 million and $4.8 million, respectively, with the 2021 increase being due to payoffs received on several former loss share loans in the second quarter of 2021, which resulted in $2.3 million of discount accretion.

Loan discount accretion had a 6 basis point impact on the net interest margin in the third quarter of 2021 compared to a 10 basis point impact in the third quarter of 2020.

For the first nine months of 2021 and 2020, loan discount accretion had a 11 basis point impact and a 10 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 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.

We recorded a negative provision for loan losses of $1.4 million (reduction of the allowance for credit losses on loans) for both the three and nine months ended September 30, 2021 compared to provisions for loan losses of $6.1 million and $31.0 million in the comparable periods of 2020, respectively.

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

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

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.

During the three and nine months ended September 30, 2021, using the CECL methodology, we recorded a $1.0 million and $3.0 million in provision for unfunded commitments, respectively.

Our allowance for unfunded commitments at September 30, 2021 amounted to $11.1 million and is recorded within the line item "Other liabilities".

Total noninterest income for the third quarter of 2021 was $16.5 million, a 23.0% decrease from the $21.5 million recorded for the third quarter of 2020.

For the nine months ended September 30, 2021 and 2020, total noninterest income was $58.9 million and $61.4 million, respectively, a decline of 4.6%.

Service charges on deposit accounts amounted to $3.2 million for the third quarter of 2021, a 25.0% increase from the $2.6 million recorded in the third quarter of 2020, with the third quarter of 2020 having declined significantly from historical levels at the onset of the pandemic.

For the nine months ended September 30, 2021 and 2020, service charges on deposit accounts amounted to $8.8 million and $8.2 million, respectively, an increase of 7.0%.

Other service charges, commissions and fees amounted to $6.5 million for the third quarter of 2021, an increase of 4.4% from the $6.2 million for the third quarter of 2020.

For the nine months ended September 30, 2021 and 2020, other service charges, commissions and fees amounted to $18.5 million and $14.9 million, respectively, an increase of 24.2%.

The increases were primarily due to higher bankcard revenue which totaled $13.4 million and $10.1 million for the nine months ended September 30, 2021 and 2020, respectively.

The number of credit and debit card transactions have increased significantly since the onset of the pandemic.

In connection with the Company's expectation that it will exceed $10 billion in total assets at December 31, 2021, it is expected that bankcard revenue will be impacted by the limit on debit card interchange fees effected by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 by approximately $10 million on an annual basis beginning July 1, 2022, the effects of which we expect will be partially offset by our planned elimination of rewards paid to customers on debit card transactions amounting to $1-$1.5 million, which is recorded in the "Other operating expenses" line of the consolidated statement of income.

Fees from presold mortgages amounted to $2.1 million for the third quarter of 2021, a decrease of 56.9%, compared to $4.9 million in the third quarter of 2020.

For the first nine months of 2021 and 2020, fees from presold mortgages amounted to $8.9 million and $9.7 million, respectively, a decline of 8.3%.

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 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.

Beginning 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 $1.2 million for the third quarter of 2021 compared to $2.4 million in the third quarter of 2020.

For the first nine months of 2021 and 2020, commissions from sales of insurance and financial products amounted to $5.9 million and $6.5 million, respectively.

The declines in 2021 are due to the sale of our property and casualty insurance agency subsidiary on June 30, 2021.

SBA consulting fees amounted to $1.1 million for the third quarter of 2021 compared to $2.0 million for the third quarter of 2020.

For the nine months ended September 30, 2021 and 2020, SBA consulting fees amounted to $6.1 million and $6.7 million, respectively.

In the second quarter of 2020, our SBA subsidiary, SBA Complete, began earning origination and servicing fees related to assisting client banks with PPP loans.

The fees associated with that PPP loan assistance declined significantly in the third quarter of 2021, as the client banks' PPP loans were forgiven.

SBA loan sale gains amounted to $1.7 million for the third quarter of 2021 compared to $2.9 million in the third quarter of 2020, with the decline being primarily being due to the timing of loan sales.

For the first nine months of 2021 and 2020, SBA loan sale gains amounted to $7.0 million and $5.5 million, respectively.

Gains for the first nine months of 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 realized securities gains of $8.0 million, whereas there were no securities sales during the first nine months of 2021.

Other gains (losses) amounted to a gain of $1.5 million in the first nine months of 2021, primarily due to a $1.7 million gain recorded in the second quarter of 2021 related to the sale of our insurance subsidiary.

Noninterest expenses amounted to $40.8 million and $40.4 million in the third quarters of 2021 and 2020, respectively, an increase of 0.9%.

Noninterest expenses amounted to $121.9 million and $119.4 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of 2.1%.

Personnel e xpense, which includes salaries expense and employee benefit expense, decreased 3.6% to $25.1 million in the third quarter of 2021 from $26.0 million in the third quarter of 2020.

For the nine months ended September 30, 2021 and 2020, personnel expense amounted to $75.1 million and $75.2 million, respectively, a decrease of 0.1%.

Personnel expense decreased for both periods due primarily to the sale of our insurance subsidiary on June 30, 2021.

The combined amount of occupancy and equipment expense decreased among the periods presented primarily due to the sale of our insurance subsidiary, amounting to $3.7 million and $3.9 million for the three month periods ending September 30, 2021 and 2020, respectively, and $11.4 million and $11.8 million for the nine month periods ending September 30, 2021 and 2020, respectively.

Merger expenses amounted to $0.3 million and $0.7 million for the three and nine months ended September 30, 2021, compared to none in 2020.

On June 1, 2021, the Company announced an acquisition agreement with Select and the Company completed the acquisition on October 15, 2021.

See Note 16 for additional information on the acquisition.

Intangibles amortization expense decreased from $0.9 million in the third quarter of 2020 to $0.7 million in the third quarter of 2021, and decreased from $3.0 million in the first nine months of 2020 to $2.4 million in the first nine 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.

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%.

Other operating expenses amounted to $11.0 million for the third quarter of 2021 compared to $9.5 million in the third quarter of 2020, an increase of 16.2%, and $32.3 million in the first nine months of 2021 compared to $29.3 million in the first nine months of 2020, an increase of 10.3%.

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 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.

For the three months ended September 30, 2021 and 2020, the provision for income taxes was $7.0 million, an effective tax rate of 20.1%, and $6.3 million, an effective tax rate of 21.4%, respectively.

For the nine months ended

September 30, 2021 and 2020, the provision for income taxes was $22.5 million, an effective tax rate of 20.9%, and $15.2 million, an effective tax rate of 20.8%, respectively.

The consolidated statements of comprehensive income reflect other comprehensive income of $2.9 million during the third quarter of 2021 compared to other comprehensive income of $0.1 million during the third quarter of 2020.

For the first nine months of 2021, the consolidated statements of comprehensive income reflect other comprehensive loss of $12.1 million compared to other comprehensive income of $12.4 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.

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FINANCIAL CONDITION

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.

Total assets at September 30, 2021 amounted to $8.5 billion, a 14.6% increase from December 31, 2020.

Total loans at September 30, 2021 amounted to $4.9 billion, a 2.9% increase from December 31, 2020, and total deposits amounted to $7.4 billion, a 18.5% 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 nine months of 2021.

$ in thousands

January 1, 2021 to June 30, 2021 Balance at

January 1, 2021 to September 30, 2021 Balance at

of period Internal

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Total deposits $ 6,273,596 1,159,169 — 7,432,765 18.5 %

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

As derived from the table above, for the first nine months of 2021, loans increased $138.5 million, or 2.9%.

Loan growth for the period, excluding PPP loans, was $312 million, or 8.8% 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%.

However, in the second and third quarters of 2021, we experienced strong, non-PPP loan growth of $244 million and $176 million, respectively, or annualized growth rates of 22.3% and 14.6%, respectively.

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.

PPP loans amounted to $67 million and $241 million at September 30, 2021 and December 31, 2020, respectively.

In 2021, we originated $112 million in new PPP loans and processed $286 million in PPP forgiveness payments related to both 2020 and 2021 originations.

The mix of our loan portfolio has shifted to a certain extent in 2021.

Real estate - mortgage - commercial and other loans have increased from 43% of our total loan portfolio at December 31, 2020 to 50% of our total loan portfolio at September 30, 2021, as our loan growth during 2021 has been concentrated in larger commercial real estate loans.

Commercial, financial, and agricultural loans have declined from 17% to 12% over the same period due primarily to the forgiveness and payoffs of PPP loans.

Real estate - mortgage - residential loans have declined slightly from 21% to 19% as customers have refinanced their mortgages with other lenders due to the low mortgage interest rates in the market.

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.

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.

For the nine month period ended September 30, 2021, total deposits increased by $1.159 billion, or 18.5% (24.7% annualized) to $7.4 billion, an increase of $1.2 billion, or 18.5%, from December 31, 2020.

Deposit growth in our transaction accounts (checking, money market and savings), was especially strong, ranging from 20-25% growth for the nine 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.

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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.

Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% at December 31, 2020 to 40.9% at September 30, 2021.

Nonperforming Assets

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ASSET QUALITY DATA ($ in thousands )

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

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

Nonperforming assets

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Allowance for loan losses to nonperforming loans 163.71 % 117.53 %

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.

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

Due to the continued impact of government stimulus and relief programs, the nonperforming asset level at September 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 June 30, 2021, total nonaccrual loans amounted to $33.0 million, compared to $35.1 million at December 31, 2021.

At September 30, 2021, total nonaccrual loans amounted to $31.3 million, compared to $35.1 million at December 31, 2020.

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 June 30, 2021 At December 31, 2020

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

Commercial, financial, and agricultural $ 9,529 9,681

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Total nonaccrual loans $ 31,268 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.

In the table above, nonaccrual loans arising from our SBA division totaled $17.4 million and $18.4 million at September 30, 2021 and December 31, 2020, respectively.

The unguaranteed portions of those SBA loans totaled $12.0 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 September 30, 2021, SBA loans accounted for approximately $9.0 million of our nonaccrual loans in the "Commercial, financial and agricultural” category and $8.4 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.

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

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

At September 30, 2021, total accruing TDRs amounted to $7.6 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 $1.8 million at September 30, 2021, are excluded from TDR consideration at September 30, 2021.

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

As of September 30, 2021

($ in thousands) Total

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SBA loans 17,385 151,060 11.51 % 38

SBA - PPP loans — 155,514 — % —

PPP loans — 66,876 — % —

Other 109 83,972 0.13 % —

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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

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.

As reflected in Note 6 to the financial statements, total classified loans were $53.3 million at September 30, 2021 compared to $60.5 million at December 31, 2020.

Loans graded special mention were $40.7 million at September 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 $0.8 million at June 30, 2021 and $2.4 million at December 31, 2020.

Total foreclosed real estate amounted to $1.8 million at September 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 June 30, 2021 At December 31, 2020

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

Vacant land and farmland $ 344 753

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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 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 recorded a $1.4 million negative provision for credit losses on loans for both the three and nine months ended September 30, 2021 compared to provision for loan losses of $6.1 million and $31.0 million in the comparable periods of 2020, respectively.

The higher provisions in 2020 were 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 reversed $1.4 million in provision for loan losses during the third quarter 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.

In reviewing forecasts during 2021, management noted generally improved economic projections, however with 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 each of the 2021 quarter-end 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 projections at March 31, 2021 were materially consistent with the adoption-date forecast projections under the baseline scenario, and resulted in no provision for loan losses.

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

However, the impact of the improved forecast was substantially offset by the need to reserve for expected losses associated with the high non-PPP loan growth we

experienced during the quarter, as well as an increase in certain qualitative reserve factors management determined was necessary to recognize the higher risk associated with our decision to match less conservative loan structures being offered in the marketplace in order to grow loan balances.

These factors combined to result in management determining that recording no provision for loan losses was appropriate for the second quarter of 2021.

In the third quarter 2021, the same economic forecast scenario again reflected incremental improvement from the previous forecasts.

Additionally, although we carried forward the higher qualitative reserve factor related to competitive loan underwriting structures, we noted that our asset quality metrics continued to improve and that loan growth, while still strong, declined from the second quarter.

These factors combined to result in management concluding that a negative adjustment (loan loss provision reversal) of $1.4 million to the allowance for credit losses on loans was appropriate for the third quarter of 2021.

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 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.

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 forecasts.

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 and third quarters of 2021, we recorded $1.9 million and $1.0 million of provision for credit losses on unfunded commitments, respectively, primarily due to successive increases in construction and land development loan commitments during those periods.

The resulting allowance for unfunded commitments at September 30, 2021 amounted to $11.1 million and is reflected in the line item "Other Liabilities."

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) Six Months

June 30, 2021 Twelve Months

($ in thousands) Nine Months

September 30, 2021 Twelve Months

Ended December 31,

2020 Six Months

June 30, 2020

2020 Nine Months

September 30, 2020

Loans outstanding at end of period $ 4,869,841 4,731,315 4,813,736

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Allowance for loan losses as a percent of loans at end of period 1.31 % 1.11 % 1.02 %

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.

As previously discussed, as of September 30, 2021, we have granted approximately $1.8 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 1.31% and 1.11% at September 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 unfunded commitments such as unfunded loan commitments and letters of credit.

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.

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 $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.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $948 million line of credit with the FHLB (of which $7 million and $8 million were outstanding at September 30, 2021 and December 31, 2020, respectively), 2) a $100 million federal funds line with a correspondent bank (of which none was outstanding at September 30, 2021 or December 31, 2020), and 3) an approximately $126 million line of credit through the Federal Reserve's discount window (of which none was outstanding at September 30, 2021 or December 31, 2020).

Unused and available lines of credit amounted to $1.2 billion at September 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 39.9% at June 30, 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 40.9% at September 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 June 30, 2021, and have no current plans to do so.

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

Capital Resources

The Company is regulated by the Board of Governors of the Federal Reserve Board (“FRB”) and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission.

The Company is regulated by the Board of Governors of the Federal Reserve Board (“FRB”) and is subject to the securities registration and public reporting regulations of the SEC.

Our banking subsidiary, First Bank, is also regulated by the FRB and the North Carolina Office of the Commissioner of Banks.

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Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FRB and FDIC regulations.

The capital conservation buffer requirement began to be phased in on January 1, 2016, at 0.625% of risk weighted assets, and increased each year until fully implemented at 2.5% on January 1, 2019.

In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators.

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

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

At September 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.

June 30, 2021 December 31, 2020

September 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 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.

At September 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 nine months of 2021, resulting primarily from a strong increase in deposits.

The decline in the risk based capital ratios from December 31, 2020 to September 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 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.

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

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

SHARE REPURCHASES

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.

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

For the nine months ended September 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 September 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