FIRST BANCORP /NC/ 10-Q

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition Critical Accounting Policies The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for credit losses on loans and unfunded commitments and intangible assets are policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements. Allowance for Credit Losses on Loans and Unfunded Commitments 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. Management uses a systematic methodology to determine its allowance for credit losses on loans and off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company’s estimate of these items involves a high degree of judgment; therefore, management’s process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. 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. See Note 2 - Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 6 — Loans, Allowance for Credit Losses and Asset Quality Information - in this Quarterly Report on Form 10-Q, and “Allowance for Credit Losses and Provision for Credit Losses” below. Intangible Assets Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements. When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill. The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency or a consulting firm, as we did in 2016 and 2017, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. 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. Page 43 Index 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. 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. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions. Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, we test goodwill for impairment annually on October 31 or on an interim basis if an event triggering impairment may have occurred, by comparing the fair value of our reporting units to their related carrying value, including goodwill. The conclusion of our last review was that none of our goodwill was impaired. We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above. Current Accounting Matters See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted. Recent Developments: COVID-19 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 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. 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. 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 $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 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 Page 44 Index 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 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 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 $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. Income Taxes 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. Page 45 Index Balance Sheet and Capital 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 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 Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. 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 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 $163.1 million recorded in the first nine months of 2020. Page 46 Index ($ in thousands) Three Months Ended September 30 Nine Months Ended September 30, 2021 2020 2021 2020 Net interest income, as reported $ 58,553 54,733 $ 172,550 162,116 Tax-equivalent adjustment 576 347 1,536 1,011 Net interest income, tax-equivalent $ 59,129 55,080 $ 174,086 163,127 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 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. Page 47 Index For the Three Months Ended September 30, 2021 2020 ($ in thousands) Average Volume Average Rate Interest Earned or Paid Average Volume Average Rate Interest Earned or Paid Assets Loans (1) (2) $ 4,820,007 4.09 % $ 50,957 $ 4,785,848 4.38 % $ 52,739 Taxable securities 2,274,336 1.46 % 8,381 973,183 2.03 % 4,958 Non-taxable securities 193,511 1.41 % 688 39,754 1.89 % 189 Short-term investments, primarily interest-bearing cash 447,759 0.47 % 528 495,771 0.64 % 802 Total interest-earning assets 7,735,613 3.11 % 60,554 6,294,556 3.71 % 58,688 Cash and due from banks 82,204 89,282 Premises and equipment 123,190 116,660 Other assets 378,320 403,614 Total assets $ 8,319,327 $ 6,904,112 Liabilities Interest bearing checking $ 1,349,796 0.06 % $ 194 $ 1,065,485 0.10 % $ 273 Money market deposits 1,865,477 0.13 % 613 1,407,314 0.29 % 1,014 Savings deposits 617,064 0.06 % 96 483,089 0.12 % 152 Time deposits >$100,000 504,437 0.44 % 558 604,887 1.15 % 1,747 Other time deposits 214,686 0.30 % 165 236,672 0.58 % 347 Total interest-bearing deposits 4,551,460 0.14 % 1,626 3,797,447 0.37 % 3,533 Borrowings 60,822 2.45 % 375 81,362 2.06 % 422 Total interest-bearing liabilities 4,612,282 0.17 % 2,001 3,878,809 0.41 % 3,955 Noninterest bearing checking 2,728,815 2,085,345 Other liabilities 59,244 61,633 Shareholders’ equity 918,986 878,325 Total liabilities and shareholders’ equity $ 8,319,327 $ 6,904,112 Net yield on interest-earning assets and net interest income 3.00 % $ 58,553 3.46 % $ 54,733 Net yield on interest-earning assets and net interest income – tax-equivalent (3) 3.03 % $ 59,129 3.48 % $ 55,080 Interest rate spread 2.94 % 3.30 % Average prime rate 3.25 % 3.25 % (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 $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 $347 in 2021 and 2020, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense. Page 48 Index For the Nine Months Ended September 30, 2021 2020 ($ in thousands) Average Volume Average Rate Interest Earned or Paid Average Volume Average Rate Interest Earned or Paid Assets Loans (1) $ 4,728,258 4.36 % $ 154,325 $ 4,679,479 4.57 % $ 160,000 Taxable securities 2,030,491 1.45 % 22,081 859,800 2.36 % 15,203 Non-taxable securities 131,263 1.51 % 1,487 26,471 2.37 % 470 Short-term investments, primarily interest-bearing cash 453,267 0.53 % 1,809 432,782 0.83 % 2,688 Total interest-earning assets 7,343,279 3.27 % $ 179,702 5,998,532 3.97 % 178,361 Cash and due from banks 83,115 80,523 Premises and equipment 122,605 115,303 Other assets 373,918 411,290 Total assets $ 7,922,917 $ 6,605,648 Liabilities Interest bearing checking $ 1,278,103 0.07 % $ 685 $ 979,339 0.13 % $ 948 Money market deposits 1,764,857 0.18 % 2,330 1,302,021 0.37 % 3,617 Savings deposits 579,595 0.08 % 338 454,805 0.17 % 568 Time deposits >$100,000 528,589 0.53 % 2,097 627,025 1.49 % 6,996 Other time deposits 219,031 0.34 % 563 243,404 0.69 % 1,251 Total interest-bearing deposits 4,370,175 0.18 % 6,013 3,606,594 0.50 % 13,380 Borrowings 61,180 2.49 % 1,139 228,295 1.68 % 2,865 Total interest-bearing liabilities 4,431,355 0.22 % 7,152 3,834,889 0.57 % 16,245 Noninterest bearing checking 2,534,262 1,840,133 Other liabilities 57,839 61,056 Shareholders’ equity 899,461 869,570 Total liabilities and shareholders’ equity $ 7,922,917 $ 6,605,648 Net yield on interest-earning assets and net interest income 3.14 % $ 172,550 3.61 % $ 162,116 Net yield on interest-earning assets and net interest income – tax-equivalent (2) 3.17 % $ 174,086 3.63 % $ 163,127 Interest rate spread 3.05 % 3.40 % Average prime rate 3.25 % 3.64 % (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 $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. Page 49 Index 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 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 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 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). 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 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 $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.” 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. 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 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 35.6% of average interest-earning assets for the first nine months of 2021 compared to 22.0% in the first nine months of 2020. Page 50 Index 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 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. 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. See additional discussion below in the section "Allowance for Credit Losses and Provision for Credit Losses." 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". 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. Beginning in the second quarter of 2021, mortgage loan volumes declined due to increases in mortgage interest rates. Page 51 Index 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%. 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. 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 $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 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 Page 52 Index 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. 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. 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 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 September 30, 2021 Balance at beginning of period Internal Growth, net Growth from Acquisitions Balance at end of period Total percentage growth Total loans $ 4,731,315 138,526 — 4,869,841 2.9 % Deposits – Noninterest bearing checking 2,210,012 555,348 — 2,765,360 25.1 % Deposits – Interest bearing checking 1,172,022 274,237 — 1,446,259 23.4 % Deposits – Money market 1,581,364 317,808 — 1,899,172 20.1 % Deposits – Savings 519,266 107,350 — 626,616 20.7 % Deposits – Brokered 20,222 (12,807) — 7,415 (63.3) % Deposits – Internet time 249 (249) — — (100.0) % Deposits – Time>$100,000 543,894 (68,179) — 475,715 (12.5) % Deposits – Time<$100,000 226,567 (14,339) — 212,228 (6.3) % Total deposits $ 6,273,596 1,159,169 — 7,432,765 18.5 % 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 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 $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. Page 53 Index 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 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 $1.2 billion, or 18.5%, from December 31, 2020. Deposit growth in our transaction accounts (checking, money market and savings), was especially strong, ranging from 20-25% growth for the nine month period. We believe this high deposit growth has likely been due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services. Due primarily to our deposit growth exceeding our loan growth, our liquidity levels have increased. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% at December 31, 2020 to 40.9% at September 30, 2021. Nonperforming Assets Nonperforming assets include nonaccrual loans, TDRs, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows: ASSET QUALITY DATA ($ in thousands ) As of/for the quarter ended September 30, 2021 As of/for the quarter ended December 31, 2020 Nonperforming assets Nonaccrual loans $ 31,268 35,076 TDRs – accruing 7,600 9,497 Accruing loans >90 days past due — — Total nonperforming loans 38,868 44,573 Foreclosed real estate 1,819 2,424 Total nonperforming assets $ 40,687 46,997 Asset Quality Ratios – All Assets Net charge-offs to average loans - annualized — % 0.07 % Nonperforming loans to total loans 0.80 % 0.94 % Nonperforming assets to total assets 0.48 % 0.64 % Allowance for loan losses to total loans 1.31 % 1.11 % 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 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 September 30, 2021, total nonaccrual loans amounted to $31.3 million, compared to $35.1 million at December 31, 2020. As noted above, the decrease was primarily driven by the sale of one borrower relationship. Page 54 Index The following is the composition, by loan type, of all of our nonaccrual loans at each period end. ($ in thousands) At September 30, 2021 At December 31, 2020 Commercial, financial, and agricultural $ 9,529 9,681 Real estate – construction, land development, and other land loans 373 643 Real estate – mortgage – residential (1-4 family) first mortgages 4,334 6,048 Real estate – mortgage – home equity loans/lines of credit 1,018 1,333 Real estate – mortgage – commercial and other 15,923 17,191 Consumer loans 91 180 Total nonaccrual loans $ 31,268 35,076 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 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. 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 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 Nonperforming Loans Total Loans Nonperforming Loans to Total Loans Total Foreclosed Real Estate Region (1) Eastern Region (NC) $ 5,219 1,156,041 0.45 % $ 353 Central Region (NC) 5,456 877,288 0.62 % 233 Triad Region (NC) 4,320 621,319 0.70 % 362 Western Region (NC) 2,559 622,897 0.41 % 124 Triangle Region (NC) 266 458,771 0.06 % — Charlotte Region (NC) 959 455,231 0.21 % 591 Southern Piedmont Region (NC) 2,050 160,666 1.28 % 3 South Carolina Region 545 215,720 0.25 % 115 SBA loans 17,385 151,060 11.51 % 38 PPP loans — 66,876 — % — Other 109 83,972 0.13 % — Total $ 38,868 4,869,841 0.80 % $ 1,819 (1) The counties comprising each region are as follows: Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret 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 Page 55 Index Southern Piedmont North Carolina Region - Scotland, Robeson, Bladen South Carolina Region - Chesterfield, Dillon, Florence SBA loans - loans originated on a national basis through the Company's SBA Lending Division 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 $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 $1.8 million at September 30, 2021 and $2.4 million at December 31, 2020. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and favorable overall asset quality. We believe that the fair values of the items of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. The following table presents the detail of all of our foreclosed real estate at each period end: ($ in thousands) At September 30, 2021 At December 31, 2020 Vacant land and farmland $ 344 753 1-4 family residential properties 884 517 Commercial real estate 591 1,154 Total foreclosed real estate $ 1,819 2,424 Allowance for Credit Losses and Provision for Credit Losses On January 1, 2021, we adopted CECL 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, which is recorded within Other Liabilities. 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. The allowance for loan loss accounting in effect at December 31, 2020 and all prior periods was based on our estimate of probable incurred loan losses as of the reporting date ("Incurred Loss" methodology). Under the CECL methodology, our allowance for credit losses on loans is based on the total amount of loan losses that are expected over the remaining life of the loan portfolio. 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 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 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 Page 56 Index 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 $11.1 million and is reflected in the line item "Other Liabilities." We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area. Page 57 Index For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense. ($ in thousands) Nine Months Ended September 30, 2021 Twelve Months Ended December 31, 2020 Nine Months Ended September 30, 2020 Loans outstanding at end of period $ 4,869,841 4,731,315 4,813,736 Average amount of loans outstanding $ 4,728,258 4,702,743 4,679,479 Allowance for loan losses, at beginning of year $ 52,388 21,398 21,398 Adoption of CECL 14,575 — — Provision (reversal) for loan losses (1,400) 35,039 31,008 65,563 56,437 52,406 Loans charged off: Commercial, financial, and agricultural (2,887) (5,608) (4,256) Real estate – construction, land development & other land loans (66) (51) (51) Real estate – mortgage – residential (1-4 family) first mortgages (138) (478) (478) Real estate – mortgage – home equity loans / lines of credit (139) (524) (404) Real estate – mortgage – commercial and other (1,838) (968) (545) Consumer loans (485) (873) (707) Total charge-offs (5,553) (8,502) (6,441) Recoveries of loans previously charged-off: Commercial, financial, and agricultural 1,065 745 603 Real estate – construction, land development & other land loans 784 1,552 856 Real estate – mortgage – residential (1-4 family) first mortgages 499 754 594 Real estate – mortgage – home equity loans / lines of credit 540 487 373 Real estate – mortgage – commercial and other 419 621 584 Consumer loans 311 294 251 Total recoveries 3,618 4,453 3,261 Net (charge-offs) recoveries (1,935) (4,049) (3,180) Allowance for credit losses on loans, at end of period $ 63,628 52,388 49,226 Ratios: Net charge-offs (recoveries) as a percent of average loans (annualized) 0.05 % 0.09 % 0.09 % Allowance for loan losses as a percent of loans at end of period 1.31 % 1.11 % 1.02 % 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. We believe our allowance levels are adequate at each period end, based on the respective methodologies utilized, as described above. It must be emphasized, however, that the determination of the allowances using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. See “Critical Accounting Policies – Allowance for Credit Losses on Loans and Unfunded Commitments” above. Page 58 Index In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and value of other real estate. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations. Liquidity, Commitments, and Contingencies Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash. 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 $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 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. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate. The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2020, detail of which is presented in Table 18 on page 74 of our 2020 Annual Report on Form 10-K. We are not involved in any other legal proceedings that, in our opinion, could have a material effect on our consolidated financial position. Off-Balance Sheet Arrangements and Derivative Financial Instruments 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. 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 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 SEC. Our banking subsidiary, First Bank, is also regulated by the FRB and the North Carolina Office of the Commissioner of Banks. We must comply with regulatory capital requirements established by the FRB. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations. Page 59 Index Under Basel III standards and capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The capital standards require us to maintain minimum ratios of “Common Equity Tier 1” capital to total risk-weighted assets, “Tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 7.00%, 8.50% and 10.50%, respectively. Common Equity Tier 1 capital is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier 1 capital is comprised of Common Equity Tier 1 capital plus Additional Tier 1 Capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. 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. 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 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. September 30, 2021 December 31, 2020 Risk-based capital ratios: Common Equity Tier 1 to Tier 1 risk weighted assets 12.57 % 13.19 % Minimum required Common Equity Tier 1 capital 7.00 % 7.00 % Tier I capital to Tier 1 risk weighted assets 13.52 % 14.28 % Minimum required Tier 1 capital 8.50 % 8.50 % Total risk-based capital to Tier II risk weighted assets 14.77 % 15.37 % Minimum required total risk-based capital 10.50 % 10.50 % Leverage capital ratios: Tier 1 capital to quarterly average total assets 9.30 % 9.88 % Minimum required Tier 1 leverage capital 4.00 % 4.00 % First Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above. 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 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 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 Page 60 Index 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. See also Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”