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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-02-26 · 1000 added, 863 removed, 138 unchanged (93% of the section changed)

1 unchanged sentence

Management’s Discussion and Analysis is intended to assist readers in understanding our results of operations and changes in financial position for the past three years.

This discussion should be read in conjunction with the consolidated financial statements and accompanying notes beginning on page 78 of this report and the supplemental financial data contained in Tables 1 through 21 beginning on page 60 of this report.

This discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Report.

This discussion may contain forward-looking statements that involve risks and uncertainties.

1 unchanged sentence

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company.

Overview - 2020 Compared to 2019

We reported net income per diluted common share of $2.81 in 2020, a 9.4% decrease compared to 2019.

Our outstanding loan balances increased by 6.2% and our total deposits increased 27.2%.

Financial Highlights

($ in thousands except per share data) 2020 2019 Change

Net interest income

$ 218,122 216,204 0.9 %

Provision for loan losses 35,039 2,263 1,448.3 %

Noninterest income

81,346 59,529 36.6 %

Noninterest expenses

161,298 157,194 2.6 %

Income before income taxes

103,131 116,276 (11.3) %

Income tax expense

21,654 24,230 (10.6) %

$ 81,477 92,046 (11.5) %

Net income per common share

$ 2.81 3.10 (9.4) %

2.81 3.10 (9.4) %

Balances At Year End

$ 7,289,751 6,143,639 18.7 %

4,731,315 4,453,466 6.2 %

6,273,596 4,931,355 27.2 %

Return on average assets

1.20 % 1.53 %

Return on average common equity

9.32 % 11.32 %

Net interest margin (taxable-equivalent)

3.56 % 4.00 %

For the year ended December 31, 2020, the Company recorded net income of $81.5 million, or $2.81 per diluted common share compared to $92.0 million, or $3.10 per diluted common share, for 2019.

Earnings for 2020 were impacted by a higher provision for loan losses related to estimated losses arising from the economic impact of COVID-19.

The impact of the higher provisions for loan losses were partially offset by higher noninterest income realized in 2020.

Net interest income for the year ended December 31, 2020 amounted to $218.1 million, a 0.9% increase from the $216.2 million recorded in 2019.

The increase in net interest income in 2020 was primarily due to growth in average interest-earning assets, which increased by approximately 13.1% during the year as a result of funds received from our high deposit growth, and which offset a lower net interest margin.

Also, see the section entitled "Net Interest Income" for additional information.

Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) was 3.56% compared to 4.00% for 2019.

The lower 2020 margin was primarily due to the impact of lower interest rates and the lower incremental reinvestment rates realized from the funds received from our high deposit growth.

We recorded a provision for loan losses of $35.0 million compared to $2.3 million for 2019.

The increase in 2020 was primarily related to estimated probable losses arising from the economic impact of COVID-19.

For the years ended December 31, 2020 and 2019, total noninterest income was $81.3 million and $59.5 million, respectively.

The increase primarily related to 1) increased fees from presold mortgages due to higher mortgage origination activity, 2) gains on sales of securities, and 3) higher SBA consulting fees associated with the Paycheck Protection Program ("PPP") loan program.

See the section entitled "Noninterest Income" for additional information.

Noninterest expenses for the years ended December 31, 2020 and 2019, amounted to $161.3 million and $157.2 million, respectively, an increase of 2.6% in 2020.

The increase was primarily due to higher mortgage commission expense resulting from increases in mortgage loan volume in 2020.

See the section entitled "Noninterest Expense" for additional information.

Total assets at December 31, 2020 amounted to $7.3 billion, a 18.7% increase from a year earlier.

The growth was driven by an increase in deposits of $1.3 billion, or 27.2% during 2020.

In addition to deposits arising from PPP loans, we believe this high deposit growth was 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.

Loan growth for 2020 was $278 million, or 6.2%, which included $241 million in PPP loans.

Loan growth in 2020 was negatively impacted by a number of large commercial loan payoffs, as well as high levels of refinanced mortgage loans.

With the excess liquidity resulting from the high deposit growth, during 2020 we paid down our borrowings by $239 million, or 79.4%, and reduced our level of brokered deposits by $66 million, or 76.5%.

We also purchased investment securities, with total investment securities amounting to $1.6 billion at December 31, 2020, an increase of $731 million, or 82.1%, compared to a year earlier.

During 2020, we repurchased 1,117,208 shares of the Company's common stock at an average stock price of $28.53, which totaled $31.9 million.

Overview - 2019 Compared to 2018

We reported net income per diluted common share of $3.10 in 2019, a 3.0% increase compared to 2018.

Our outstanding loan balances increased by 4.8% and total deposits increased 5.8%.

Financial Highlights

($ in thousands except per share data) 2019 2018 Change

Net interest income

$ 216,204 207,430 4.2 %

Provision (reversal) for loan losses

2,263 (3,589) n/m

Noninterest income

59,529 58,942 1.0 %

Noninterest expenses

157,194 156,483 0.5 %

Income before income taxes

116,276 113,478 2.5 %

Income tax expense

24,230 24,189 0.2 %

$ 92,046 89,289 3.1 %

Net income per common share

$ 3.10 3.02 2.6 %

3.10 3.01 3.0 %

Balances At Year End

$ 6,143,639 5,864,116 4.8 %

4,453,466 4,249,064 4.8 %

4,931,355 4,659,339 5.8 %

Return on average assets

1.53 % 1.57 %

Return on average common equity

11.32 % 12.27 %

Net interest margin (taxable-equivalent)

4.00 % 4.09 %

n/m – not meaningful

For the year ended December 31, 2019, we recorded net income of $92.0 million, or $3.10 per diluted common share, an increase of 3% in earnings per share from the $89.3 million, or $3.01 per diluted common share, for 2018.

The higher earnings in 2019 were primarily related to higher net interest income associated with our growth.

Net interest income for the year ended December 31, 2019 amounted to $216.2 million, a 4.2% increase from the $207.4 million recorded in 2018.

The increase in net interest income was primarily due to growth in interest-earning assets.

Also, see the section entitled “Net Interest Income” for additional information.

Our net interest margin (tax-equivalent net interest income divided by average earning assets) was 4.00% for 2019 compared to 4.09% for 2018.

The decrease in the net interest margin realized in 2019 was primarily due to a combination of lower loan discount accretion and funding costs that rose by more than asset yields.

We recorded a provision for loan losses of $2.3 million in 2019 compared to negative provision for loan losses of $3.6 million (reduction of the allowance for loan losses) in 2018.

The negative provision for 2018 was due primarily to several large loan recoveries realized in the first quarter of 2018 totaling $3.7 million.

For the year ended December 31, 2019, noninterest income amounted to $59.5 million compared to $58.9 million for 2018, an increase of 1.0%.

Increases were experienced in i) service charges on deposit accounts due to strong deposit growth, ii) interchange income due to increased credit and debit card usage, and iii) in fees from presold mortgages due to higher mortgage origination activity.

Those increases were substantially offset by lower SBA loan sale gains and lower SBA consulting fees.

See the section entitled “Noninterest Income” for additional information.

Noninterest expenses for the year ended December 31, 2019 amounted to $157.2 million compared to $156.5 million in 2018, an increase of 0.5%.

A 5.4% increase in salaries expense associated with wage increases and the growth of the Company was substantially offset by lower merger and acquisition expenses and lower intangibles amortization expense.

See the section entitled “Noninterest Expense” for additional information.

Total assets at December 31, 2019 amounted to $6.1 billion, a 4.8% increase from a year earlier.

Loan growth for the year ended December 31, 2019 amounted to $204.4 million, or 4.8%, and deposit growth amounted to $272.0 million, or 5.8%.

Within deposits, our retail deposits (excludes brokered deposits and internet time deposits) grew 9.7% during 2019, with 14.8% growth in noninterest-bearing checking accounts.

As a result of the strong retail deposit growth, we reduced our level of brokered deposits by $153.7 million, or 64.1%, from $239.9 million at December 31, 2018 to $86.1 million at December 31, 2019.

Internet time deposits decreased from $3.4 million at December 31, 2018 to $0.7 million at December 31, 2019.

Additionally, we paid down borrowings by $106 million, or 26.0%, during 2019.

During 2019, we repurchased 281,593 shares of the Company's common stock at an average price of $35.51, which totaled $10 million.

Recent Developments Related to COVID-19

Our business has been, and continues to be, impacted by COVID-19.

In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the United States.

Efforts to limit the spread of COVID-19 have included shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate.

As the current pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including, among other things, its severity;

the duration of the outbreak;

the impact to our customers, employees and vendors;

the impact to the financial services and banking industry;

and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, or inaction by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related).

COVID-19 has negatively affected, and is expected to continue to negatively affect, our business, financial position and operating results.

In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but could be increasingly material.

Overview and 2021 Highlights

The Company is a financial holding company headquartered in Southern Pines, North Carolina.

We provide diversified financial services primarily though our principal subsidiary, First Bank, including commercial and consumer banking services, mortgage lending, SBA lending, accounts receivable financing, and investment advisory services.

As of December 31, 2021, the Bank had a 121 branch network throughout North Carolina and South Carolina and 1,207 full-time equivalent employees.

We have grown organically as well as through strategic acquisitions.

On October 15, 2021, we acquired Select which was headquartered in Dunn, North Carolina and operated through 22 branches in North Carolina, South Carolina, and Virginia.

As of the acquisition date, Select had total assets of $1.8 billion, total loans of $1.3 billion, and total deposits of $1.6 billion.

The conversion of Select’s core processing and related systems to the Bank’s systems will occur in March 2022.

Until such time, Select branches will continue to operate under their current nam e.

The merger with Select, combined with organic growth over the year, resulted in significant growth to assets, liabilities and equity during 2021.

Our total assets at December 31, 2021 were $10.5 billion, a 44.2% increase from a year earlier;

total loans increased $1.4 billion to total $6.1 billion at December 31, 2021, and deposits grew $2.9 billion from the prior year end to total $9.1 billion.

We earned net income of $95.6 million, or $3.19 diluted EPS, during 2021 compared to net income of $81.5 million, or $2.81 diluted EPS, in 2020.

The main drivers to the increase in net income are as follows:

• Net interest income increased $28.3 million, or 13%, due to the combination of both higher interest income and lower interest expense.

The NIM on a tax-equivalent basis was 3.16% for 2021, a decrease of 41 basis points from 2020.

The growth in average earning assets offset the decline in yields.

• Interest income was a primary driver of higher net interest income and included a $5.9 million increase in interest income from loans and a $13.3 million increase in interest income from investment securities.

Loan interest income was up related to the $315.6 million increase in average volume of loans driven by both organic growth and the Select acquisition.

The increase in interest income from investment securities was due to higher average balances, which increased $1.4 billion in 2021, related to our decision to invest excess liquidity, which arose from high deposit growth, into investment securities.

• Reduced interest expense of $10.0 million also contributed to the the improved net interest income.

We continued to reprice deposits downward given the low interest rate environment and lowered the cost of interest-bearing deposits by 27 basis points to 0.17% for 2021.

Our total cost of deposits declined to 0.13% from 0.50% in 2020.

The effects from the decline in funding costs were partially offset by an increase in average balance in interest-bearing liabilities.

• Provision for loans losses of $9.6 million was down from the $35.0 million provision in 2020 due to improving asset quality and improving economic forecasts which are factors in our CECL model calculations.

The higher provision in 2020 was driven by historical estimates of probable losses incurred in the portfolio taking into consideration the impact of the COVID-19 pandemic on the overall economic environment and the potential impact on our loan portfolio.

The provision for 2021 was related to the initial ACL for Select's non-PCD loans acquired of $14.1 million.

Partially offsetting the initial Select provision, we reduced our ACL reserves $4.5 million during the year due to the economic forecast improvements in 2021.

• Noninterest income declined $7.7 million, which resulted primarily from a $3.2 million decrease in mortgage banking income related to lower levels of activity, a $1.9 million decrease in commissions on sales of financial and insurance products due to the sale of the majority of the assets of First Bank Insurance mid-year, and a loss of $1.2 million on security sales as compared to a gain of $8.0 million in 2020.

Partially offsetting these reductions were higher levels of transactions and number of accounts generating service charge income and bankcard revenue.

(See Noninterest Income section below for further discussion).

• Noninterest expense increased $23.4 million, primarily related to $16.8 million in merger expenses related to the Select acquisition.

Also related to the Select acquisition were incremental costs of $2.3 million in personnel expense and $4.7 million in higher operating costs.

(See Noninterest Expense section below for further discussion).

• Income tax expense was up $3.0 million relative to the higher pre-tax income.

The effective tax rate of 20.5% was fairly consistent with the prior year.

Total loans amounted to $6.1 billion at December 31, 2021, an increase of $1.4 billion, or 28.5% from December 31, 2020.

Core legacy loan growth for the year ended December 31, 2021, which we define as growth exclusive of PPP loans and loans acquired from Select, amounted to $382.8 million, a growth rate of 8.6%.

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

Also contributing to our core growth is a continued focus on expansion in high-growth markets, hiring experienced bankers, and providing high levels of service to achieve growth.

The ACL on loans increased $26.4 million from the balance of $52.4 million at December 31, 2020.

The increase in the ACL on loans was mainly due to a $14.6 million allowance recorded at adoption of the CECL standard as of January 1, 2021.

The other driver was the Select loans acquired requiring a $4.9 million allowance recorded on the PCD loans and $14.1 million allowance on the initial provision for credit losses for the non-PCD loans.

The ACL was 1.30% of total loans at December 31, 2021.

With our adoption of CECL,we increased the allowance for unfunded commitments by $7.5 million.

We also recorded an initial allowance on unfunded commitments of $3.9 million with the acquisition of Select.

Our asset quality remained strong in 2021.

At December 31, 2021, net charge offs as a percentage of average loans was 0.05% as compared to 0.09% for the prior year.

The total NPAs of $52.6 million were 0.50% of total

assets at December 31, 2021.

Total nonperforming assets increased $11.9 million in the fourth quarter of 2021 as a result of the acquisition of Select.

We continue to deploy excess liquidity into investment securities, which amounted to $3.1 billion at December 31, 2021, an increase of $1.5 billion, or 94.0%, compared to a year earlier.

Total deposits amounted to $9.1 billion at December 31, 2021, an increase of $2.9 billion, or 45.4%, from December 31, 2020.

Core legacy deposit growth for the year ended December 31, 2021, which we define as organic growth exclusive of deposits acquired from Select, totaled $1.35 billion, a growth rate of 21.5%.

The high core 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 continue to emphasize relationship banking to new and existing customers and continually work to identify and introduce new products that will attract and retain customers.

We remain well-capitalized by all regulatory standards, with a total capital ratio at December 31, 2021 of 14.67% compared to 15.37% reported at December 31, 2020.

The Company’s TCE ratio was 8.38% at December 31, 2021, a decrease of 70 basis points from a year earlier, with the decline resulting from the acquisition of Select and the high balance sheet growth experienced in 2021.

Impact of COVID-19

Our business has been, and continues to be, impacted by COVID-19 and its variants.

While the economies of our markets have generally improved in 2021, the current pandemic is ongoing and dynamic in nature, and there are many related uncertainties, including, among other things, its severity and new variants that may arise;

its ultimate duration and infection spikes that may occur;

the impact on our customers, employees and vendors;

the impact on the financial services and banking industry;

and the ongoing impact on the economy as a whole.

Impact on our Operations.

In the State of North Carolina, many jurisdictions declared health emergencies.

The resulting closures and/or limited operations of non-essential businesses and related economic disruption have impacted our operations as well as the operations of our customers.

Financial services have been identified as a Critical Infrastructure Sector by the Department of Homeland Security.

Accordingly, our business remains open.

To address the issues arising as a result of COVID-19, and in order to facilitate the continued delivery of essential

services while maintaining a high level of safety for our customers as well as our employees, we have implemented our Business Continuity Plans.

Among other things, significant actions taken under these plans include:

• Implemented our communications plans to ensure our employees, customers and critical vendors are kept abreast of developments affecting our operations.

• After temporarily closing all of our financial center lobbies and other corporate facilities to non-employees, except for certain limited cases by appointment only, we reopened our financial center lobbies in late May 2020.

Those facilities remain open, with limited exceptions.

• Expanded remote-access availability so that a significant portion of our workforce has the capability to work from home or other remote locations.

At the height of the pandemic, many jurisdictions in North Carolina in which we operate declared health emergencies related to COVID-19.

The resulting closures and/or limited operations of non-essential businesses and related economic disruption impacted our operations as well as the operations of our customers.

While most businesses have reopened and restrictions are currently limited in our areas, the occurrence of variants of the COVID-19 virus may result in future restrictions or closures.

We continue to address the issues as they arise in order to facilitate the continued delivery of essential services while maintaining a high level of safety for our customers as well as our employees, including:

• Implementing our communications plans to ensure our employees, customers and critical vendors are kept abreast of developments affecting our operations;

• Temporarily closing financial center lobbies, limiting access to drive-through only or by appointment, as necessary given spikes in COVID-19 infection rates or due to staffing constraints;

• Expanding remote-access availability so that a significant portion of our workforce has the capability to work from home or other remote locations.

All activities are performed in accordance with our compliance and information security policies designed to ensure customer data and other information is properly safeguarded;

• Instituted mandatory social distancing policies and mask protocols for those employees not working remotely.

Members of certain operations teams have been split into two teams that rotate their work location between work and home.

Notwithstanding the foregoing actions, the COVID-19 outbreak could still, among other things, greatly affect our routine and essential operations due to staff absenteeism, particularly among key personnel;

further limit access to or result in further closures of our branch facilities and other physical offices;

exacerbate operational, technical or security-related risks arising from a remote workforce;

and result in adverse government or regulatory agency orders.

The business and operations of our third-party service providers, many of whom perform critical services for our business, could also be significantly impacted, which in turn could impact us.

As a result, we are currently unable to fully assess or predict the extent of the effects of COVID-19 on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.

• Instituting mandatory social distancing policies and mask protocols for those employees not working remotely and who are unvaccinated.

Members of certain operations teams may split into two teams that rotate their work location between work and home as necessary.

Impact on our Financial Position and Results of Operations .

Our financial position and results of operations are particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors, and the decline in the value of assets held by us.

While its effects continue to materialize, the COVID-19 pandemic has resulted in a decrease in commercial activity throughout our market area, as well as nationally.

This decrease in commercial activity has increased the risk that certain customers (including businesses and individuals), vendors and counterparties will be unable to meet existing payment or other obligations to us.

The national public health crisis arising from the COVID-19 pandemic (and public expectations about it), could further destabilize the financial markets and geographies in which we operate.

Due to the expectation of higher borrower defaults, we recorded an elevated provision for loan losses in 2020.

See further information related to the risk exposure of our loan portfolio under the sections captioned "Provision for Loan Losses," “Loans,” and “Allowance for Loan Losses” elsewhere in this discussion.

In addition, the economic pressures and uncertainties arising from the COVID-19 pandemic have resulted in and may continue to result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer.

Consumers affected by COVID-19 may continue to demonstrate changed behavior even after the crisis is over.

For example, consumers may decrease discretionary spending on a permanent or long-term basis and certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to return to full social interaction.

We lend to customers operating in such industries including retail/strip centers, hotels/lodging, restaurants, entertainment and commercial real estate, among others, that have been significantly impacted by COVID-19 and we are continuing to monitor these customers closely.

To help mitigate the adverse effects of COVID-19, loan customers may apply for a deferral of payments, or portions thereof, for up to 90 days.

After 90 days, customers may apply for an additional deferral.

Additionally, the temporary closures of bank branches and the safety precautions implemented at re-opened branches could result in consumers becoming more comfortable with technology and devaluing face-to-face interaction.

Our business is relationship driven and such changes could necessitate changes to our business practices to accommodate changing consumer behaviors.

The potential changes in behaviors driven by COVID-19 also present heightened liquidity risks, for example, arising from increased demand for our products and services (such as unusually high draws on credit facilities) or decreased demand for our products and services.

The impact of the COVID-19 pandemic lessened in 2021, and we experienced increased commercial activity throughout our market areas.

We have not realized significant negative impact on our loan portfolio or asset quality.

Further, all COVID-19 deferral status loans have returned to regular payment schedules.

While the economic pressures and uncertainties arising from the COVID-19 pandemic have resulted in, and may continue to result in, specific changes in consumer and business spending and borrowing habits, we have seen improvements in many industries in which we have loan exposure including retail/strip centers, hotels/lodging, restaurants, entertainment, and commercial real estate.

See further information related to the risk exposure of our loan portfolio under the sections captioned "Provision for Credit Losses," “Loans,” and “Allowance for Credit Losses” elsewhere in this discussion.

Legislative and Regulatory Developments .

Recent actions taken by the federal government and the Federal Reserve and other bank regulatory agencies to mitigate the economic effects of COVID-19 will also have an impact on our financial position and results of operations.

These actions are further discussed below.

In an emergency measure aimed at blunting the economic impact of COVID-19, the Federal Reserve lowered the target for the federal funds rate to a range of between zero to 0.25% effective in March 2020.

Our earnings and cash flows are largely dependent upon our net interest income.

Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds.

Our earnings can be adversely affected by decreases in market interest rates if the interest rates received on loans and other investments fall more quickly and to a larger degree than the interest rates paid on deposits and other borrowings.

The decline in interest rates has already led to new all-time low yields across the US Treasury maturity curve.

In September 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with the Federal Open Market Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time, with the majority of the members of the Federal Reserve Open Market Committee expecting short-term interest rates to be near zero through 2023.

Other actions taken by the Federal Reserve in an effort to provide monetary stimulus to counteract the economic disruption caused by COVID-19 include:

• Expanded reverse repo operations, adding liquidity to the banking system.

• Restarted quantitative easing.

• Lowered the interest rate on the discount window by 1.50% to 0.25%.

• Reduced reserve requirement ratios to zero percent.

• Encouraged banks to use their capital and liquidity buffers to lend.

• Introduced and expanded several new programs that will operate on a temporary basis to help preserve market liquidity.

government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by the COVID-19.

The Phase 1 legislation, the Coronavirus Preparedness and Response Supplemental Appropriations Act ("CARES Act"), was enacted on March 6, 2020 and, among other things, authorized funding for research and development of vaccines and allocated money to state and local governments to aid containment and response measures.

The Phase 2 legislation, the Families First Coronavirus Response Act, was enacted on March 18, 2020 and provides for paid sick/medical leave, establishes no-cost coverage for coronavirus testing, expands unemployment benefits, expands food assistance, and provides additional funding to states for the ongoing economic consequences of the pandemic, among other provisions.

Phase 3 legislation of the CARES Act was enacted on March 27, 2020.

Among other provisions, the CARES Act (i) authorized the Secretary of the Treasury to make loans, loan guarantees and other investments, up to $500 billion, for assistance to eligible businesses, states and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a $349 billion loan program called the Paycheck Protection Program (“PPP”) for loans to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments, (iii) provided certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provides eligible recipients with an additional $600 per week on top of the unemployment amount determined by each State and (v) expanded tele-health services in Medicare.

The Phase 3.5 legislation, the Paycheck Protection Program and Healthcare Enhancement Act of 2020 (the “PPPHE Act”), was enacted on April 24, 2020.

Among other things, the PPPHE Act provided an additional $310 billion of funding for the PPP of which, $30 billion is specifically allocated for use by banks and other insured depository institutions that have assets between $10 billion and $50 billion.

The Paycheck Protection Program Flexibility Act of 2020” (“PPPF Act”) was enacted in June 2020 and modified the PPP as follows:

(i) established a minimum maturity of five years for all loans made after the enactment of the PPPF Act and permits an extension of the maturity of existing loans to five years if the borrower and lender agree;

(ii) extended the “covered period” of the CARES Act from June 30, 2020, to December 31, 2020;

(iii) extended the eight-week “covered period” for expenditures that qualify for forgiveness to the earlier of 24 weeks following loan origination or December 31, 2020;

(iv) extended the deferral period for payment of principal, interest and fees to the date on which the forgiveness amount is remitted to the lender by the SBA;

(v) changed requirements such that the borrower must use at least 60% (down from 75%) of the proceeds of the loan for payroll costs, and up to 40% (up from 25%), for other permitted purposes, as a condition to obtaining forgiveness of the loan;

(vi) delayed from June 30, 2020 to December 31, 2020 the date by which employees must be rehired to avoid a reduction in the amount of forgiveness of a loan, and creates a “rehiring safe harbor” that allows businesses to remain eligible for loan forgiveness if they make a good faith attempt to rehire employees or hire similarly qualified employees, but are

unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with social distancing measures;

and (vii) allows borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose which of the two would be more advantageous.

In July 2020, the CARES Act was amended to extend, through August 8, 2020, the SBA’s authority to make commitments under the PPP.

The SBA’s existing authority had previously expired on June 30, 2020.

In August 2020, President Trump signed four executive actions to provide additional COVID-19 relief.

The first action authorized the Lost Wages Assistance Program (“LWAP”), which provides for a $400-per-week payment to those currently receiving more than $100 a week in unemployment benefits due to disruptions caused by COVID-19.

The LWAP per-week payment was retroactive to the week ending August 1, 2020.

The second executive action extended the moratorium on payments and interest accrual on student loans held by the government until the end of 2020.

The moratorium was previously set to expire September 30, 2020.

The third action instructed the Department of the Treasury and the Department of Housing and Urban Development to help provide temporary assistance to renters and homeowners and promote their ability to avoid eviction or foreclosure, including forbearance of monthly mortgage payments for up to 180 days.

The fourth executive action allows employers to defer, for the period from September 1, 2020 through December 31, 2020, the employee portion of Social Security payroll taxes for certain individuals earning less than approximately $104 thousand per year.

In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, and the Economic Aid Act were enacted to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the COVID-19 pandemic.

Among other things, the legislation includes (i) payments of $600 for individuals making up to $75,000 per year, (ii) extension of the Federal Pandemic Unemployment Compensation program to include a $300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to transportation, education, agriculture, nutrition and other public health measures and (v) approximately $325 billion for small business relief, including approximately $284 billion for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less.

We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S.

The Federal Reserve created various additional lending facilities and expanded existing facilities to help provide financing in response to the financial disruptions caused by COVID-19.

The programs include, among others, the Paycheck Protection Program Liquidity Facility (“PPP Facility”), which is intended to extend loans to banks making PPP loans.

The Federal Reserve announced extensions through March 31, 2021 for several of its lending facilities, including the PPP Facility, that were generally scheduled to expire on or around December 31, 2020.

As more fully discussed in the section captioned “Loans” elsewhere in this document, we are currently participating in the PPP as a lender.

We have not participated in the PPP Facility.

The federal government and the Federal Reserve and other bank regulatory agencies have taken actions to mitigate the economic effects of COVID-19.

The Federal Reserve lowered the target for the federal funds rate to a range of between zero to 0.25% effective in March 2020.

Recently, in response to inflationary concerns, the Federal Reserve indicated that it expects to increase the targeted federal funds rate during 2022.

Our earnings and cash flows are largely dependent on our net interest income, as is discussed in detail below under "Interest Rate Risk." Increasing short term rates could negatively impact our NIM if funding costs rise.

Banks and bank holding companies have been particularly impacted by the COVID-19 pandemic as a result of disruption and volatility in the global capital markets.

This disruption has impacted our cost of capital and may adversely affect our ability to access the capital markets if we need or desire to do so and, although the ultimate impact cannot be reliably estimated at this time in light of the uncertainties and ongoing developments noted herein, such impacts could be material.

Furthermore, bank regulatory agencies have been (and are expected to continue to be) proactive in responding to both market and supervisory concerns arising from the COVID-19 pandemic as well as the potential impact on customers, especially borrowers.

As shown during and following the financial crisis of 2007-2008, periods of economic and financial disruption and stress have, in the past, resulted in increased scrutiny of banking organizations.

We are closely monitoring the potential for new laws and regulations impacting lending and funding practices as well as capital and liquidity standards.

Such changes could require us to maintain significantly more capital, with common equity as a more predominant component, or manage the composition of our assets and liabilities to comply with formulaic liquidity requirements.

Outlook for 2021

Due to the COVID-19 pandemic, our outlook for 2021 is uncertain.

We believe our local economies and business conditions will continue to be negatively impacted by the pandemic.

While the U.S.

Government continues to implement measures to help offset the negative financial impact of the pandemic, we expect the negative impact to continue through at least the first half of 2021.

If the COVID-19 vaccination is effective and becomes more widely available and pandemic conditions improve, we expect our customer behaviors will return to more normal conditions

and commercial activity to improve.

Under that scenario, we expect an increase in traditional loan demand (non-PPP) and that deposits will decline as customer cash balances return to more normal levels.

We expect that the growth from traditional loan demand will be substantially offset in our aggregate loan portfolio by forgiveness of the $241 million in PPP loans that were outstanding at December 31, 2020.

We expect that interest rates will remain very low and that our net interest margin will be pressured down as a result of the maturity of securities and loans that were originated in periods of higher interest rates.

Our ability to further reduce funding costs is limited by their already low levels.

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 loan losses, intangible assets, and the fair value and discount accretion of acquired loans are three 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 Loan Losses

Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our consolidated financial statements.

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio.

Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses.

This model has two components.

The first component involves the estimation of losses on individually evaluated “impaired loans.” A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the original loan agreement.

A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, troubled debt restructured status, purchased credit impaired status, and type of collateral) and the loan is determined to be impaired.

The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.

The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans (“general reserve loans”).

General reserve loans are segregated into pools by loan type and risk grade and estimated loss percentages are assigned to each loan pool based on historical losses.

The historical loss percentages are then adjusted for any environmental factors used to reflect changes in the collectability of the portfolio not captured by historical data such.

In 2020, we have included environmental factors related to the COVID-19 pandemic.

See additional discussion the "Summary of Loan Loss Experience."

The reserves estimated for individually evaluated impaired loans are then added to the reserve estimated for general reserve loans.

This becomes our “allocated allowance.” The allocated allowance is compared to the actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded allowance to absorb losses inherent in the portfolio is recorded as a provision for loan losses.

The provision for loan losses is a direct charge to earnings in the period recorded.

Any remaining difference between the allocated allowance and the actual allowance for loan losses recorded on our books is our “unallocated allowance.”

Purchased loans are recorded at fair value at the acquisition date.

Therefore, amounts deemed uncollectible at the acquisition date represent a discount to the loan value and become a part of the fair value calculation.

Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses.

Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan and this accretion is referred to as “loan discount accretion.”

Within the purchased loan portfolio, loans are deemed purchased credit impaired at acquisition if the bank believes it will not be able to collect all contractual cash flows.

Performing loans with an unamortized discount or premium

that are not deemed purchased credit impaired are considered to be purchased performing loans.

Purchased credit impaired loans are individually evaluated as impaired loans, as described above, while purchased performing loans are evaluated as general reserve loans.

For purchased performing loan pools, any computed allowance that is in excess of remaining net discounts is a component of the allocated allowance.

Although we use the best information available to make evaluations, future material adjustments may be necessary if economic, operational, or other conditions change.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses.

Such agencies may require us to recognize additions to the allowance based on the examiners’ judgment about information available to them at the time of their examinations.

For further discussion, see “Nonperforming Assets” and “Allowance for Loan Losses and Provision for Loan Losses” below.

We had originally expected to adopt CECL on January 1, 2020.

However, congressional legislation passed in March 2020 and December 2020 resulted in the option to delay CECL until as late as January 1, 2022.

We expect to adopt CECL on January 1, 2021.

See Note 1 to the Consolidated Financial Statements for additional discussion of this matter.

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.

Bank regulatory agencies have been (and are expected to continue to be) proactive in responding to both market and supervisory concerns arising from the COVID-19 pandemic and its aftermath, as well as the potential impact on customers, especially borrowers.

We continue to monitor any potential for new laws and regulations impacting lending and funding practices as well as capital and liquidity standards.

Such changes could require us to maintain more capital, with common equity as a more predominant component, or manage the composition of our assets and liabilities to comply with formulaic liquidity requirements.

As discussed above, the economies of our market areas generally improved during 2021 as they recovered from the pandemic.

However, the ongoing impact on the Company of the continuing pandemic, including infection rate spikes and new strains of COVID-19, is uncertain.

The extent to which the COVID-19 pandemic has a further impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

Critical Accounting Policies and Estimates

The accounting principles we follow and our methods of applying these principles conform with GAAP and with general practices followed by the banking industry.

Certain policies inherently have a greater reliance on the use of estimates, assumptions, or judgments and as such, have a greater possibility of producing results that could be materially different than originally reported.

We have identified the determination of our ACL, business combinations and related fair value measurements, and intangible assets to be the accounting areas that require the most subjective or complex judgments, estimates, and assumptions, and where changes in those judgments, estimates, and assumptions (based on new or additional information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on our financial statements.

Our most significant accounting policies are presented in Note 1 to the accompanying consolidated financial statements.

These policies, along with the disclosures presented in the other notes to the consolidated financial statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Allowance for Credit Losses on Loans and Unfunded Commitments

The ACL replaces the allowance for loan and lease losses as a credit accounting estimate as of January 1, 2021, when we adopted ASU 2016–13, Financial Instruments–Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

The ACL represents management’s current estimate of credit losses for the remaining estimated life of financial instruments.

We perform periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectability of the portfolio.

We believe the accounting estimate related to the ACL is a “critical accounting estimate” as:

(1) changes in it can materially affect the provision for loan and lease losses and net income;

(2) it requires management to predict borrowers’ likelihood or capacity to repay, including evaluation of inherently uncertain future economic conditions;

(3) the value of underlying collateral must be estimated on collateral-dependent loans;

(4) prepayment activity must be projected to estimate the life of loans that often are shorter than contractual terms;

and (5) it requires estimation of a reasonable and supportable forecast period for credit losses.

Accordingly, this is a highly subjective process and requires significant judgment since it is difficult to evaluate current and future economic conditions in relation to an overall credit cycle and estimate the timing and extent of loss events that are expected to occur prior to end of a loan’s estimated life.

Our ACL is assessed at each balance sheet date and adjustments are recorded in the provision for loan losses.

The ACL is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast, and assumptions of probability of default and loss given default.

Loan balances considered

uncollectible are charged-off against the ACL.

There are many factors affecting the ACL, some of which are quantitative, while others require qualitative judgment.

Although management believes its process for determining the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change.

To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect our earnings or financial position in future periods.

PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date.

At acquisition, the allowance for credit losses on PCD assets is booked directly to the ACL.

Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses.

We believe that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date.

Actual losses incurred may differ materially from our estimates.

For example, the impact of COVID–19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread, and severity of the virus could affect our loss experience.

Additional information on the loan portfolio and ACL can be found in the sections of MD&A titled “Nonperforming Assets” and “Allowance for Credit Losses and Loan Loss Experience” below.

Business Combinations

Pursuant to applicable accounting guidance, we recognize assets acquired, including identified intangible assets (discussed further below), and the liabilities assumed in acquisitions at their fair values as of the acquisition date, with the related transaction costs expensed in the period incurred.

Specified items such as acquired operating lease assets and liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in accordance with accounting guidance that results in measurements that may differ from fair value.

Determining the fair value of assets acquired and liabilities assumed often involves estimates based on internal or third-party valuations which include appraisals, discounted cash flow analysis, or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, discount rates, credit risk, multiples of earnings, or other relevant factors.

The determination of fair value may require us to make point-in-time estimates about discount rates, future expected cash flows, market conditions, and other future events that can be volatile in nature and challenging to assess.

While we use the best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.

The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income.

Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise.

The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination.

Estimated loan losses for acquired loans are determined using methodologies and applying estimates and assumptions that were described previously in the Allowance for Credit Losses section.

Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default.

The actual cash flows on these loans could differ materially from the fair value estimates.

The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans.

Discounts on acquired non-PCD loans are amortized to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances.

Similarly, premiums or discounts on acquired debt are amortized to interest expense over their remaining lives.

Actual accretion or amortization of premiums and discounts from a business acquisition may differ materially from our estimates impacting our operating results.

Goodwill and Other Intangible Assets

We believe that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies.

ASC 350-10 establishes standards for the amortization of acquired intangible assets, generally over the estimated useful life of the related assets, and impairment assessment of

At December 31, 2021, we had core deposit and other intangibles of $17.8 million subject to amortization and $364.3 million of goodwill, which is not subject to amortization.

Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed.

Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.

An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment.

During 2020, with the heightened economic uncertainty and volatility surrounding COVID–19, we performed quarterly impairment assessments.

Generally, absent potential impairment indicators, we perform an annual assessment of whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value.

Impairment indicators considered include the condition of the economy and banking industry;

government intervention and regulatory updates;

the impact of recent events to financial performance and cost factors of the reporting unit;

performance of the Company's stock, and other relevant events.

During 2021 there were no triggers warranting interim impairment assessments and for the 2021 annual assessment, we concluded that it was more likely than not that the fair value exceeded its carrying value.

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 intangibles which represent the estimated value of the long-term deposit relationships acquired in the transaction.

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.

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 December 31, 2020, we had three reporting units – 1) First Bank with $227.6 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill.

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

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 economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's

stock price and market capitalization.

We believed such decreases were a triggering indicator requiring an interim goodwill impairment quantitative analysis.

Accordingly, during each quarter of 2020, we reviewed our goodwill for impairment.

For the first and third quarters of 2020, we performed an interim step-one goodwill impairment quantitative analysis.

In performing the quantitative goodwill impairment analysis, we used a combination of market and income approaches for First Bank, the market approach for First Bank Insurance and the income approach for SBA activities.

All inputs used in these approaches were evaluated by management at the evaluation date.

For the second quarter of 2020 and the annual fourth quarter 2020 review, management reviewed its goodwill for impairment primarily qualitatively by reviewing the factors and assumptions used in the analysis for the preceding quarter.

The conclusion of each review was that none of our goodwill was impaired.

The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible.

The estimated useful lives are periodically reviewed for reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization.

We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

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Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.

Fair Value and Discount Accretion of Acquired Loans

We consider the determination of the initial fair value of acquired loans and the subsequent discount accretion of the purchased loans to involve a high degree of judgment and complexity.

We determine fair value accounting estimates of newly assumed assets and liabilities in accordance with relevant accounting guidance.

However, the amount that we realize on these assets could differ materially from the carrying value reflected in our financial statements, based upon the timing of collections on the acquired loans in future periods.

Because of inherent credit losses and interest rate marks associated with acquired loans, the amount that we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans.

For non-impaired purchased loans, we accrete the discount over the lives of the loans in a manner consistent with the guidance for accounting for loan origination fees and costs.

For purchased credit-impaired (“PCI”) loans, the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans using the effective yield method, provided that the timing and the amount of future cash flows is reasonably estimable.

Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments.

The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.

Subsequent to an acquisition, estimates of cash flows expected to be collected are updated periodically based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions.

If there is a decrease in cash flows expected to be collected, the provision for loan losses is charged, resulting in an increase to the allowance for loan losses.

If the Company has a probable increase in cash flows expected to be collected, we will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the loan.

The impact of changes in variable interest rates is recognized prospectively as adjustments to interest income.

Merger and Acquisition Activity

See Note 2 to the consolidated financial statements for additional information.

ANALYSIS OF RESULTS OF OPERATIONS

Net interest income, the “spread” between earnings on interest-earning assets and the interest paid on interest-bearing liabilities, constitutes the largest source of our earnings.

Other factors that significantly affect operating results are the provision for loan losses, noninterest income such as service fees and noninterest expenses such as salaries, occupancy expense, equipment expense and other overhead costs, as well as the effects of income taxes.

Recent Accounting Standards and Pronouncements

For information relating to recent accounting standards and pronouncements, see Note 1 to our consolidated financial statements entitled “Summary of Significant Accounting Policies.”

RESULTS OF OPERATIONS

The following discussion reviews the results of operations and key drivers to change in the results of 2021 as compared to 2020.

For a description of our results of operations for 2020, refer to the "Overview - 2020 Compared to 2019" section of Item 7 in our 2020 Form 10-K.

Net Interest Income

Net interest income on a reported basis amounted to $218.1 million in 2020, $216.2 million in 2019, and $207.4 million in 2018.

For internal purposes and in the discussion that follows, we evaluate our net interest income on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest income.

Net interest income on a tax-equivalent basis amounted to $219.6 million in 2020, $217.8 million in 2019, and $209.0 million in 2018.

Management believes that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest 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.

The following is a reconciliation of reported net interest income to tax-equivalent net interest income.

Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds).

Changes in the net interest income are the result of changes in volume and the net interest spread which affects NIM.

Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities.

Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

NIM refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

Net interest income is also influenced by external factors such as local economic conditions, competition for loans and deposits, and market interest rates.

Net interest income amounted to $246.4 million in 2021, an increase of $28.3 million, or 11.5%, from the $218.1 million in 2020.

The increase was due in part to the Select acquisition and higher balances of investment securities, which more than offset the impact of the challenging rate environment.

For 2021, average interest-earning assets

increased $1.7 billion, or 27.8%, including growth of $315.6 million in average loans and $1.4 billion in average securities.

The growth in interest-earning assets was driven by funds provided from growth in deposits.

The Select acquisition in the fourth quarter also contributed to higher earning assets.

The impact on earnings of the interest-earning asset growth was partially offset by a decrease in our NIM on a tax-equivalent basis, which declined from 3.56% in 2020 to 3.16% in 2021.

For internal purposes, we evaluate our NIM on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest income then dividing by total average earning assets.

We believe that analysis of NIM on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest 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.

The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis.

($ in thousands) Year ended December 31,

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Net interest income, as reported $ 246,395 218,122 216,204

$ 218,122 216,204 207,430

Tax-equivalent adjustment 2,243 1,468 1,641

1,468 1,641 1,594

Net interest income, tax-equivalent $ 248,638 219,590 217,845

$ 219,590 217,845 209,024

Table 2 analyzes our net interest income.

Our net interest income on a tax-equivalent basis increased by 0.8% in 2020 and 4.2% in 2019.

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.

“Net interest margin” is a ratio we use to measure the spread between the yield on our earning assets and the cost of our funding and is calculated by dividing tax-equivalent net interest income by average earning assets.

The increase in net interest income in 2020 compared to 2019 was primarily due to the incremental earnings associated with the growth in our levels of interest-earning assets.

For 2020, average interest-earning assets increased $711.7 million, or 13.1%, including growth of $356.4 million in average loans and $250.4 million in average securities.

The growth in interest-earning assets was driven by funds provided from growth in deposits.

The impact on earnings of the interest-earning asset growth was substantially offset by a decrease in our net interest margin, which declined from 4.00% in 2019 to 3.56% in 2020.

The lower net interest margin was a result of excess liquidity, as well as the impact of lower interest rates.

During 2020, our level of average securities and other short-term investments increased by $705.7 million, or 93.9%.

The investment yields realized with the new funds in those asset classes was low, generally less than 1.50%, and thus negatively impacted the net interest margin.

Additionally, from August 2019 to March 2020, the Federal Reserve cut interest rates by 225 basis points, which resulted in our loan yields declining by more than our cost of funds.

In 2020, loan yields decreased by 55 basis points, from 5.08% in 2019 to 4.53% in 2020, while average funding costs decreased by only 32 basis points in 2020, from 0.66% in 2019 to 0.34% in 2020.

During 2020, our average balance of PPP loans was $167.3 million.

Those loans carry a 1% coupon rate and we also amortize fees that we received from the SBA when we originated the loans.

That amortization amounted to $4.1 million in 2020 and when combined with the 1% note rate resulted in a 3.56% yield for those loans, and thus did not significantly impact overall loan yields.

At December 31, 2020, we had $6.0 million in remaining deferred PPP origination fees that will be recognized over the lives of the loans, with accelerated amortization expected to result from the loan forgiveness process, substantially all of which we expect will occur over the first half of 2021.

Also see the section "Paycheck Protection Program (PPP) Loans" below for additional discussion.

The increase in net interest income in 2019 compared to 2018 was primarily due to growth in our interest-earning assets.

For 2019, average interest-earning assets increased $336.0 million, or 6.6%, including growth of $184.5 million in average loans and $281.3 million in average securities.

The growth in interest-earning assets was driven by funds provided from growth in deposits.

Our net interest margin decreased from 4.09% in 2018 to 4.00% in 2019, which partially offset the positive impact on net interest income of the growth of our interest-earning assets.

The lower net interest margin was a result of our funding costs increasing by more than our asset yields, largely as

a result of competitive pressures in deposit pricing.

In 2019, asset yields increased by seven basis points, from 4.52% in 2018 to 4.59% in 2019, primarily as a result of Federal Reserve interest rate increases during the second half of 2018, while average funding costs increased by 18 basis points in 2019, from 0.48% in 2018 to 0.66% in 2019.

The net interest margin for all periods benefited, by varying amounts, from the net accretion income, primarily associated with purchase accounting premiums/discounts associated with acquisitions.

As can be seen in the table below, we recorded $6.2 million in 2020, $6.0 million in 2019, and $7.1 million in 2018 in net accretion that increased net interest income.

Net interest margin, as reported 3.13 % 3.54 % 3.97 %

Net interest margin, tax-equivalent 3.16 % 3.56 % 4.00 %

The reduction in our NIM was in large part a result of excess liquidity, as well as the impact of lower interest rates.

While there were no interest rate reductions initiated by the Federal Reserve during 2021, the overall lower market rates impacted our portfolio yields on new and renewing assets.

During 2021, our level of average securities and other short-term investments increased by $1.4 billion, or 95.8% at lower market yields, generally less than 1.50%, thus negatively impacting the NIM.

Our NIM for all periods benefited, by varying amounts, from the net accretion income, primarily associated with purchase accounting premiums/discounts associated with acquisitions.

Presented in the table below is the amount of accretion which increased net interest income in each year.

($ in thousands) Year Ended

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$ 8,860 6,247 5,983

The biggest component of the purchase accounting adjustments in each year was loan discount accretion on purchased loans, which amounted to $3.8 million in 2020, $4.6 million in 2019, and $6.1 million in 2018.

Most of this loan discount accretion relates to our 2017 acquisitions of Carolina Bank and Asheville Savings Bank, with the declines in accretion being due to the natural paydowns in those acquired loan portfolios, which is expected to continue.

In addition to the loan discount accretion recorded on acquired loans, we recorded loan discount accretion of $2.5 million, $1.4 million, and $0.9 million in 2020, 2019, and 2018, respectively, on the discounts associated with the retained unguaranteed portions of SBA loans sold in the secondary market.

We entered that line of business in late 2016 and the higher discount accretion on those loans is associated with the continued growth in that business.

The biggest component of the purchase accounting adjustments in each year was loan discount accretion on purchased loans.

The increase in 2021 was driven by the acquisition of Select which resulted in $1.5 million in accretion during the fourth quarter of 2021, combined with $2.3 million in accelerated accretion earlier in the year from the payoff of several former failed-bank loans we previously acquired.

Generally the level of loan discount accretion will decline each year due to the natural paydowns in acquired loan portfolios.

At December 31, 2021, 2020, and 2019, unaccreted loan discount on purchased loans amounted to $17.2 million, $8.9 million, and $12.7 million, respectively.

We recorded an initial fair value loan discount mark of $19.3 million for the Select portfolio, which was reduced by the reclassification to ACL of $4.9 million related to PCD loans.

The Select acquired portfolio comprises the majority of the remaining unaccreted loan discount at December 31, 2021.

In addition to the loan discount accretion recorded on acquired loans, we record accretion on the discounts associated with the retained unguaranteed portions of SBA loans sold in the secondary market.

The level of SBA loan discount accretion will increase relative to the SBA loan portfolio with continued growth in that line of business.

At December 31, 2021, 2020, and 2019, unaccreted loan discount on SBA loans amounted to $6.0 million, $7.3 million, and $7.1 million, respectively.

Table 3 presents additional detail regarding the estimated impact that changes in loan and deposit volumes and changes in the interest rates we earned/paid had on our net interest income in 2019 and 2020.

For 2020, higher loan volume positively impacted interest income by $17.1 million, and lower interest rates on loans negatively impacted interest income by $24.8 million, which resulted in a decline in loan interest income of $7.7 million.

Higher volumes of total securities balances resulted in $6.1 million in additional interest income in 2020, which was almost completely offset by the impact of lower interest rates earned on those securities.

Lower interest rates on short-term investments (primarily overnight funds) in 2020 resulted in $6.7 million in lower interest income, which was partially offset by higher volume.

Lower interest rates paid on deposits drove a $8.7 million decrease in deposit interest expense in 2020.

Lower levels of borrowings and lower interest rates paid on borrowings resulted in a decrease in borrowings interest expense of $5.6 million in 2020.

Overall, as Table 3 indicates, net interest income grew $1.9 million in 2020, with higher earning asset volumes and lower borrowings volumes driving a $27.9 million increase in interest income, which was partially offset by a net $26.0 million negative impact associated with lower interest rates.

For 2019, Table 3 shows the higher amounts of loans and deposits outstanding drove a net increase of $14.3 million in net interest income, while the impact of higher deposit costs resulted in a $5.6 million decrease in total net interest income.

If our nonaccrual and restructured loans as of December 31, 2020, 2019 and 2018 had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period), gross interest income in the amounts of approximately $3,038,000 $1,763,000, and $1,616,000, for nonaccrual loans and $645,000, $662,000, and $974,000, for restructured loans would have been recorded for 2020, 2019, and 2018, respectively.

Interest income on such loans that was actually collected and included in net income in 2020, 2019 and 2018 amounted to approximately $652,000, $759,000, and $765,000, for nonaccrual

loans (prior to their being placed on nonaccrual status), and $483,000, $528,000, and $763,000, for restructured loans, respectively.

At December 31, 2020 and 2019, there were no commitments to lend additional funds to debtors whose loans were nonperforming.

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

Provision for Loan Losses

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered appropriate to absorb probable losses inherent in our loan portfolio.

Management’s determination of the adequacy of the allowance is based on our level of loan growth, an evaluation of the loan portfolio, current economic conditions, historical loan loss experience and other risk factors.

For the years ended December 31, 2020, 2019, and 2018, we recorded a provision for loan losses of $35.0 million, $2.3 million, and a negative provision for loan losses of $3.6 million, respectively.

The increase in 2020 was primarily related to estimated probable losses arising from the economic impact of COVID-19, as discussed below.

In March 2020, the COVID-19 pandemic began to impact our nation.

The subsequent closures of, or restrictions on, many businesses and job losses continue to result in widespread negative economic impacts.

Government took various steps to lessen the negative impacts, including stimulus payments and the SBA's relief program.

Under the SBA program, the SBA made six months of principal and interest payments on most of our SBA loans.

SBA loans that were greater than 30 days delinquent were not eligible for these payments.

This payment program was renewed by December 2020 legislation for an additional three months or eight months, depending on the industry, beginning in February 2021.

Additionally, as previously discussed, we implemented a loan deferral program that began in late March 2020 in which borrowers could apply for a deferral of the loan payments for up to 90 days and after that 90 day period, borrowers could re-apply for an additional 90 days of payment deferrals.

We are uncertain as to the extent that these programs have reduced probable loan losses, and due to that uncertainty and the temporary nature of the programs, we have not relied on these programs as significant positive factors in the risk grading of loans in our portfolio.

In determining the appropriate level of allowance for loan losses at December 31, 2020, we reviewed the industry types that we believed have significantly heightened risk as a result of the pandemic, which included, among others, hospitality, retail stores, and restaurants.

Based on that analysis, we assigned elevated loan loss reserve percentages for those loan types that brought the total reserve percentages to a level consistent with what we believe are the probable loss rates incurred in a stressed economic scenario.

The higher loss rates were generally determined based on our historical high one year loss rates for those loan types.

As a result of the analysis, approximately $24.8 million of COVID-19 related qualitative reserves are included in the Company's December 31, 2020 allowance for loan loss amount of $52.3 million at December 31, 2020.

Additionally, as a result of elevated net-charge offs and nonaccrual loans in our SBA portfolio, we assigned higher allowance reserves to our SBA portfolio in 2020, which also impacted the provision for loan losses in 2020.

See the sections "Nonperforming Assets" and "Allowance for Loan Losses" for additional discussion.

As noted above, beginning late in the first quarter of 2020, we offered a loan payment deferral program to borrowers negatively impacted by COVID-19.

At June 30, 2020, we had a total of $774 million in loans that were in this deferral program.

Most of these borrowers resumed payments in the second half of 2020, with total deferrals amounting to $186 million at September 30, 2020, while only $16.6 million remained in deferral status at December 31, 2020.

In 2019, our provision for loan losses was higher than previous years primarily due to higher net charge-offs.

The negative provision for 2018 was due primarily to several large loan recoveries realized in the first quarter of 2018 totaling $3.7 million.

Although our provision for loan losses was higher in 2019, it continued a trend in recent years until 2020 of being low compared to historical levels.

The low levels of provision for loan losses recorded in those years were primarily the result of a sustained period of stable and generally improving loan quality trends, which resulted in lower amounts of provision needed to adjust our allowance for loan losses to the appropriate amount.

This is driven by our allowance for loan loss model, which utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the current allowance for loan losses that is necessary.

Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on.

In recent years, the new periods being added into our model had generally lower levels of net charge-offs than the older periods rolling out of the model, and thus mostly offset provisions for loan losses that would normally be

required to reflect new loan growth and the net charge-offs experienced.

Thus, the low level of net charge-offs (or net recoveries) experienced in recent years has been the primary reason for the low (or negative) provisions for loan losses recorded in among the years presented until 2020.

As shown in Table 14, total net charge-offs (recoveries) for the years ended December 31, 2020, 2019, and 2018, were $4.0 million, $1.9 million, and ($1.3 million), respectively.

In 2020, the higher net charge-offs were driven by $3.2 million of net charge-offs in our SBA portfolio, and was concentrated in the "commercial, financial, and agricultural" category.

The higher net charge-offs in 2019 resulted from lower loan recoveries in comparison to 2018.

In 2018, we completed a loan sale of approximately $5.2 million in smaller balance nonperforming loans that resulted in loan charge-offs of $2.2 million.

However, this was more than offset by full payoffs on four loans received in the first quarter of 2018 that resulted in recoveries to the allowance for loan losses of $3.3 million.

See “Nonperforming Assets” below for further discussion of our asset quality, which impacts our provisions for loan losses.

The allowance is monitored and analyzed regularly in conjunction with our loan analysis and grading program, and adjustments are made to maintain an adequate allowance for loan losses.

See the section entitled “Allowance for Loan Losses and Loan Loss Experience” below for a more detailed discussion of the allowance for loan losses, including discussion of a change in the way that we expect to reserve for credit losses beginning in 2021 that may increase the levels and volatility of our provision for loan losses.

Noninterest Income

Our noninterest income amounted to $81.3 million in 2020, $59.5 million in 2019, and $58.9 million in 2018.

See Table 4 and the following discussion for an understanding of the components of noninterest income.

Management evaluates noninterest income on a non-GAAP basis that excludes items such as securities gains and losses and other miscellaneous gains and losses because management believes excluding those items results in a more meaningful reflection of noninterest income from recurring sources.

We refer to this as "adjusted noninterest income" - see Table 4 for a reconciliation of reported noninterest income to "adjusted noninterest income." Adjusted noninterest income amounted to $73.4 million in 2020, a 23.1% increase from the $59.6 million recorded in 2019, The 2019 adjusted noninterest income of $59.6 million was a 2.4% increase from the $58.2 million recorded in 2018.

Service charges on deposit accounts amounted to $11.1 million, $13.0 million, and $12.7 million, in 2020, 2019, and 2018, respectively.

The decrease in 2020 was primarily due to fewer instances of overdraft fees that we believe is likely associated with the generally higher levels of deposits maintained by our customers during 2020.

We believe the increase in 2019 was primarily due to growth in our number of checking accounts, which we have been promoting with new product offerings.

Total "Other service charges, commissions and fees" amounted to $20.1 million in 2020, a 3.2% increase from the $19.5 million in 2019.

The 2019 amount of $19.5 million was an 18.2% increase from the $16.5 million in 2018.

This category of noninterest income includes items such as credit and debit card interchange income, ATM charges, safety deposit box rentals, fees from sales of personalized checks, and check cashing fees.

The increases in this line item in 2019 and 2020 were primarily due to growth in credit and debit card interchange fees that we earn when our customers use their debit and credit cards issued by our bank.

Net interchange income amounted to $14.1 million in 2020, $13.8 million in 2019 and $12.0 million in 2018.

We believe the growth in card usage by our customers is due to customer payment preferences, as well as a result of ongoing promotion of these products.

General growth of our bank also contributed to the increase in this line item in 2019 and 2020.

Fees from presold mortgages amounted to $14.2 million in 2020, $3.9 million in 2019, and $2.7 million in 2018.

The increase in 2020 was primarily due to higher mortgage loan origination volume arising from historically low mortgage loan interest rates.

The increase in 2019 was also due to increased volumes in the mortgage industry due to declining interest rates, as well as the hiring of additional loan originators.

Commissions from sales of insurance and financial products amounted to $8.8 million in 2020, $8.5 million in 2019, and $8.7 million in 2018.

This line item includes commissions we receive from two primary sources – 1)

commissions from the sales of investment, annuity, and long term care insurance products, and 2) commissions from the sale of property and casualty insurance.

The following table presents the contribution of each source to the total amount recognized in this line item:

($ in thousands) For the year ended December 31,

Commissions earned from:

Amortization of net deferred loan fees also impacts interest income.

During 2021, we amortized net deferred PPP fees of $9.5 million as interest income compared to $4.1 million for 2020.

At December 31, 2021, we had $2.6 million in remaining deferred PPP origination fees that will be recognized over the lives of the loans, with accelerated amortization expected to result from the loan forgiveness process.

We expect substantially all of these fees will be recognized in the first quarter of 2022 as a result of the loan forgiveness process.

The following table presented the major components of the net interest income and NIM.

Average Balances and Net Interest Income Analysis

Year Ended December 31,

2021 2020 2019

Sales of investments, annuities, and long term care insurance

($ in thousands) Average

Rate Interest

or Paid Average

Rate Interest

or Paid Average

Rate Interest

Loans (1) (2)

$ 5,018,391 4.36 % $ 219,013 4,702,743 4.53 % 213,099 4,346,331 5.08 % 220,784

Sales of property and casualty insurance

Taxable securities

2,204,713 1.45 % 32,076 967,900 2.11 % 20,429 719,435 2.76 % 19,881

Non-taxable securities

162,878 1.49 % 2,402 34,108 2.13 % 725 32,200 3.13 % 1,007

As can be seen in the above table, sales of investments, annuities and long term care insurance increased in both 2019 and 2020, which was due to the increased growth and promotion of this line of business.

Sales of property and casualty insurance also increased slightly in 2020 due to increased growth and promotion.

The decline in this line item in 2019 was primarily due to lower contingent commissions compared to 2018, which can vary significantly and are impacted by the claims experience of the insurance carriers used by the Company.

We began offering SBA consulting services in 2016 with our May 2016 acquisition of SBA Complete.

In this line of business, SBA Complete assists community banks throughout the nation with SBA origination and servicing activities.

SBA consulting fees amounted to $8.6 million in 2020, $3.9 million in 2019, and $4.7 million in 2018.

The increases in 2020 were due to fees earned by our SBA subsidiary, SBA Complete, related to assisting its third-party client banks with the PPP, which amounted to $4.6 million.

SBA Complete also had $1.4 million in deferred revenue outstanding at December 31, 2020 that will be recorded as income upon the forgiveness portion of the PPP, which is expected to occur in the first half of 2021.

The decline in these fees from 2018 to 2019 was associated with lower origination activity of our client banks.

Shortly after the acquisition of SBA Complete, we began a SBA Lending Division, which originates SBA loans throughout the nation and sells the SBA guaranteed portion of those loans, which results in loan sale gains.

Loan sale volume can be volatile based on origination activity and the timing of the funding of loans in the pipeline.

SBA loan sale gains amounted to $8.0 million, $8.3 million and $10.4 million in 2020, 2019, and 2018, respectively.

Origination of SBA loans generally declined in 2020 due to the economic impact of COVID-19.

The decline from 2018 to 2019 was due to the natural volatility discussed above, as well as lower loan sale premium percentages.

Table 4 shows earnings from bank-owned life insurance income were stable with $2.5 million in 2020, $2.6 million in 2019, and $2.5 million in 2018.

During 2020, we sold approximately $220 million in mortgage-backed and commercial mortgage-backed securities at a gain of $8.0 million.

The securities sold were believed to be favorably impacted by historically low interest rates and Federal Reserve stimulus measures.

Securities gains or losses were not significant in 2019 or 2018, with 2019 having a net gain of $0.1 million, and 2018 having no gains or losses.

“Other gains (losses), net” amounted to a net loss of $0.1 million for 2020, a net loss of $0.2 million for 2019, and a net gain of $0.7 million in 2018.

This line item represents the net effects of miscellaneous gains and losses that are non-routine in nature.

The net gain of $0.7 million in 2018 primarily related to a gain on the sale of a previously closed branch building.

Noninterest Expenses

Total noninterest expenses totaled $161.3 million, $157.2 million, and $156.5 million, for 2020, 2019 and 2018, respectively.

Table 5 presents the components of our noninterest expense during the past three years.

Total personnel expense increased from $96.0 million in 2019 to $101.0 million in 2020, an increase of $5.0 million, or 5.2%.

Within personnel expense, salaries expense increased $5.8 million, or 7.3%, while employee benefits expense decreased from $16.8 million to $16.0 million.

Salaries expense increased primarily due to a $3.3 million increase in mortgage commission expense resulting from higher mortgage loan volume in 2020.

Within employee benefits, health care expense, for which the Company is self-insured, is the single largest item and decreased in 2020 compared to 2019 due to lower claims activity.

In 2019, total personnel expense increased from $92.0 million in 2018 to $96.0 million in 2019, an increase of $4.0 million, or 4.4%.

Within personnel expense, salaries expense increased $4.0 million, or 5.4%, while employee benefits expense was approximately the same in 2018 and 2019 at approximately $16.9 million.

Salaries expense

increased primarily due to normal wage increases for our employees, as well as the hiring of several experienced bankers.

Net occupancy expenses amounted to $11.3 million in 2020, $11.1 million in 2019, and $10.8 million in 2018.

The increase in 2020 and 2019 is primarily related to increased rent expense associated with several new leases executed during the years.

Equipment related expenses amounted to $4.3 million, $5.0 million, and $5.6 million, in 2020, 2019, and 2018, respectively.

In 2018, we accelerated $0.3 million in depreciation expense associated with our ATM fleet in anticipation of replacing our ATM's in early 2019.

This resulted in a decline in ATM depreciation expense in 2019, as well as lower associated repairs and maintenance costs.

In 2020, the decrease in this line item related to lower machine maintenance and miscellaneous equipment purchases due to spend control efforts.

Merger and acquisition expenses amounted to $0.2 million in 2019 and $2.4 million in 2018.

There were no merger and acquisition expenses in 2020.

The 2018 amount was primarily comprised of severance costs and data processing conversion expenses related to the acquisition of Asheville Savings Bank.

Intangible amortization expense amounted to $4.0 million, $4.9 million, and $5.9 million in 2020, 2019 and 2018, respectively.

In 2019 and 2020, intangible amortization expense declined due to the amortization schedules of those intangible assets generally declining over time.

Data processing expenses did not vary significantly among the periods presented, amounting to $3.2 million, $3.1 million, and $3.2 million in 2020, 2019, and 2018, respectively.

Marketing expense amounted to $2.0 million in 2020, $2.7 million in 2019, and $3.1 million in 2018.

The decrease in 2020 was primarily due to lowering marketing activity as a result of the pandemic.

The decrease from 2018 to 2019 was due to special promotional efforts in our new and expanded market area during 2018.

Non-credit losses remained relatively unchanged for the periods presented, amounting to $1.1 million in 2020, $1.0 million in 2019, and $1.0 million in 2018.

These losses primarily related to debit card and credit card fraud losses.

Table 6 presents the components of income tax expense and the related effective tax rates.

We recorded income tax expense of $21.7 million in 2020, $24.2 million in 2019, and $24.2 million in 2018.

Our effective tax rates were stable at 21.0% for 2020, 20.8% for 2019, and 21.3% for 2018.

We expect our effective tax rate to be approximately 21.0% in 2021.

Stock-Based Compensation

We recorded stock-based compensation expense of $2.5 million, $2.3 million, and $1.6 million, for the years ended December 31, 2020, 2019, and 2018, respectively.

The increases in this expense have been due to retention-based restricted stock grants made to certain officers during the years presented.

See Note 14 to the consolidated financial statements for more information regarding stock-based compensation.

ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION

At December 31, 2020, our total assets amounted to $7.3 billion, an 18.7% increase from 2019.

The following table presents detailed information regarding the nature of changes in our loans and deposits in 2019 and 2020.

($ in thousands)

2020 Balance at

period Internal

net Growth from Acquisitions Balance at

Loans outstanding

Other interest-earning assets, primarily overnight funds

485,337 0.50 % 2,427 455,349 0.75 % 3,431 350,434 2.41 % 8,435

Deposits – Noninterest-bearing

Total interest-earning assets

7,871,319 3.25 % 255,918 6,160,100 3.86 % 237,684 5,448,400 4.59 % 250,107

Deposits – Interest-bearing checking

Cash and due from banks

90,275 81,154 55,422

Deposits – Money market

Premises and equipment

125,738 116,425 117,465

Deposits – Savings

408,313 408,319 405,760

Deposits – Brokered time

$ 8,495,645 6,765,998 6,027,047

Deposits – Internet time

Liabilities and Equity

Interest-bearing checking accounts

$ 1,353,172 0.07 % $ 919 1,019,773 0.12 % 1,208 891,766 0.15 % 1,358

Deposits – Time >$100,000 – retail

Money market accounts

1,923,614 0.16 % 3,158 1,367,851 0.34 % 4,632 1,111,599 0.63 % 6,992

Deposits – Time <$100,000 – retail

Savings accounts

607,452 0.07 % 443 467,682 0.15 % 711 419,450 0.29 % 1,201

Total deposits

Time deposits >$100,000

552,346 0.46 % 2,549 616,171 1.33 % 8,215 704,332 1.93 % 13,598

Loans outstanding

Other time deposits

236,558 0.34 % 812 239,990 0.64 % 1,535 260,741 0.73 % 1,901

Deposits – Noninterest-bearing

Total interest-bearing deposits

4,673,142 0.17 % 7,881 3,711,467 0.44 % 16,301 3,387,888 0.74 % 25,050

Deposits – Interest-bearing checking

Short-term borrowings — — % — 71,955 1.42 % 1,022 209,613 2.54 % 5,324

Long-term borrowings 63,201 2.60 % 1,642 114,490 1.96 % 2,239 123,035 2.86 % 3,529

Total interest-bearing liabilities

4,736,343 0.13 % 9,523 3,897,912 0.50 % 19,562 3,720,536 0.91 % 33,903

Deposits – Money market

Noninterest-bearing checking accounts

2,728,768 1,932,823 1,436,329

Deposits – Savings

Total sources of funds

7,465,111 0.13 % 5,830,735 0.34 % 5,156,865 0.66 %

Deposits – Brokered time

Other liabilities

60,759 60,731 57,359

Deposits – Internet time

Shareholders’ equity

969,775 874,532 812,823

Deposits – Time >$100,000 – retail

Total liabilities and shareholders’ equity

$ 8,495,645 6,765,998 6,027,047

Deposits – Time <$100,000 – retail

Net yield on interest-earning assets and net interest income

3.13 % $ 246,395 3.54 % 218,122 3.97 % 216,204

Total deposits

Net yield on interest-earning assets and net interest income – tax-equivalent (3)

3.16 % $ 248,638 3.56 % 219,590 4.00 % 217,845

As shown in the table above, in 2020 and 2019, our total loans outstanding increased $277.8 million, or 6.2%, and $204.4 million, or 4.8%, respectively.

Loan growth for 2020 was primarily driven by the origination of $244.9 million in PPP loans, of which $240.7 million was outstanding at December 31, 2020.

We also assumed $14.6 million in loans with the acquisition of Magnolia Financial in 2020.

Loan growth for 2019 was organic and primarily driven by our expansion in high-growth markets, hiring of experienced bankers, and increases in SBA lending.

We generally intend to grow our loan portfolio.

We have experienced lenders in our markets and attempt to provide high levels of service to achieve growth.

The pandemic negatively impacted traditional (non-PPP) organic loan growth in 2020.

Our ability to grow our loans outstanding in the future will be impacted by changes in the pandemic, as well as changes in PPP loan balances.

During 2020, we experienced strong growth in our deposit base, with total deposits increasing by $1.3 billion, or 27.2% from December 31, 2019.

Deposit growth in our transaction accounts (checking, money market and savings), was especially strong, increasing $1.5 billion, or 29.5% from 2019.

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.

The high deposit growth in 2020 allowed us to reduce our level of brokered deposits by $65.9 million, or 76.5% during the year.

Additionally, we paid down our borrowings in 2020 by $239 million, or 79.4%, with the excess liquidity.

During 2019, we experienced an increase in total deposits of $272.0 million, or 5.8%.

Within total deposits, we grew our retail deposits (non-brokered deposits) by $426 million, or 9.6%.

Within our retail deposits, we experienced growth of $321.9 million, or 8.7%, in checking, money market and savings accounts, and had growth of $106.6 million, or 15.0%, in our retail time deposits.

The high retail deposit growth in 2019 allowed us to reduce our level of

brokered deposits by $154 million, or 64.1% during the year.

Additionally, we were able to pay down our borrowings in 2019 by $106 million.

Primarily as a result of our strong deposit growth, our liquidity levels have increased at December 31, 2020 compared to a year earlier.

Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings was 31.4% at December 31, 2020 compared to 21.4% at December 31, 2019.

Distribution of Assets and Liabilities

Table 7 sets forth the percentage relationships of significant components of our balance sheet at December 31, 2020, 2019, and 2018.

On the asset side, net loans to total assets decreased to 64% in 2020 compared to 72% for both 2019 and 2018, which was primarily due to the impact of the high deposit growth on total assets.

The funds provided by the high deposit growth also resulted in increased security purchases in 2020 and resulted in total securities to total assets increasing from 14% in 2019 to 22% in 2020.

On the liability side, as a result of the high deposit growth, deposits increased to 86% of total liabilities and shareholders' equity in 2020, up from 80% and 79% in 2019 and 2018, respectively.

In 2020 and 2019, we paid down our borrowings by $239 million and $106 million, respectively, which resulted in our borrowings decreasing to 1% and 5% of total liabilities and shareholders' equity for 2020 and 2019, respectively, compared to 7% for 2018.

Information regarding our securities portfolio as of December 31, 2020, 2019, and 2018 is presented in Tables 8 and 9.

The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income.

The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.

We obtain fair values for our investment securities from a third-party investment recordkeeper, who specializes in securities purchases and sales, recordkeeping, and valuation.

This recordkeeper provides us with a third-party report that contains an evaluation of internal controls that includes testwork of securities valuation.

We further test the values we receive by comparing the values for a significant sample of securities to another third-party valuation service on a quarterly basis.

Total securities amounted to $1.621 billion, $890 million, and $603 million, at December 31, 2020, 2019, and 2018, respectively.

The increase in securities in 2020 and 2019 was primarily due to deploying excess cash balances into fixed rate securities that we initiated to realize higher yields.

The majority of our “government-sponsored enterprise” securities carry one maturity date, often with an issuer call feature.

At December 31, 2020, of the $70.2 million in available for sale government-sponsored enterprise securities, $40.0 million were issued by the Federal Farm Credit Bank system, and the remaining $30.2 million were issued by the Federal Home Loan Bank system.

Nearly all of our $1.338 billion in available for sale mortgage-backed securities at December 31, 2020 were issued by Freddie Mac, Fannie Mae, Ginnie Mae, or the SBA, each of which is a government agency or government-sponsored corporation and guarantees the repayment of the securities.

Included in this total are commercial mortgage-backed securities of $428.5 million.

Mortgage-backed securities vary in their repayment in correlation with the underlying pools of mortgage loans.

Our investment policy permits us to hold up to 15% of our securities portfolio in corporate bonds.

These bonds have the most credit risk of any of our securities.

At December 31, 2020, our $45.2 million investment in corporate bonds was comprised of the following:

Interest rate spread

3.14 % 3.36 % 3.68 %

Average prime rate

3.25 % 3.54 % 5.28 %

(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, in the amounts of $9,690, $4,755, and $1,264 for 2021, 2020, and 2019, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $8,814, $6,328, and $5,974 in 2021, 2020, and 2019, respectively.

(3) Includes tax-equivalent adjustments of $2,243, $1,468, and $1,641 in 2021, 2020, and 2019, respectively, to reflect the federal and state 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.

The following table presents additional detail regarding the estimated impact that changes in loan and deposit volumes and changes in the interest rates we earned/paid had on our net interest income in 2021 and 2020.

Volume and Rate Variance Analysis

Year Ended December 31, 2021 Year Ended December 31, 2020

Change Attributable to Change Attributable to

($ in thousands) Changes

in Volumes Changes

in Rates Total

(Decrease) Changes

in Volumes Changes

in Rates Total

Interest income:

Loans $ 14,040 (8,126) 5,914 17,128 (24,813) (7,685)

Taxable securities 22,055 (10,408) 11,647 6,055 (5,507) 548

Non-taxable securities 2,316 (639) 1,677 50 (332) (282)

Other interest-earning assets, primarily overnight funds 188 (1,192) (1,004) 1,658 (6,662) (5,004)

Total interest income 38,599 (20,365) 18,234 24,891 (37,314) (12,423)

Interest expense:

Interest bearing checking accounts 311 (600) (289) 173 (323) (150)

Money market accounts 1,399 (2,873) (1,474) 1,240 (3,600) (2,360)

Savings accounts 158 (426) (268) 106 (596) (490)

Time deposits >$100,000 (571) (5,095) (5,666) (1,439) (3,944) (5,383)

Other time deposits (20) (703) (723) (142) (224) (366)

Total interest-bearing deposits 1,277 (9,697) (8,420) (62) (8,687) (8,749)

Short-term borrowings (1,022) — (1,022) (2,726) (1,577) (4,303)

Long-term borrowings (1,167) 570 (597) (213) (1,076) (1,289)

Total interest expense (912) (9,127) (10,039) (3,001) (11,340) (14,341)

Net interest income $ 39,511 (11,238) 28,273 27,892 (25,974) 1,918

Note - Changes attributable to both volume and rate are allocated equally between rate and volume variances.

Overall, as demonstrated in the above table, net interest income grew $28.3 million in 2021, with higher earning asset volumes and lower rates on interest-bearing liabilities, which was partially offset by lower yields on interest-earning assets, driving the increase.

• For 2021, higher loan volume positively impacted interest income by $14.0 million, partially offset by lower interest rates on loans which negatively impacted interest income by $8.1 million, resulting in an increase in loan interest income of $5.9 million.

• Higher volumes of total securities balances contributed $24.4 million in additional interest income in 2021.

This was partially offset by the impact of lower interest rates earned on those securities resulting in a negative impact of $11.0 million on interest income.

• Lower interest rates on other interest-earning assets (primarily overnight funds and presold mortgages held for sale) in 2021 resulted in $1.2 million in lower interest income, which was partially offset by higher volume.

• Lower interest rates paid on deposits drove a $9.7 million decrease in deposit interest expense in 2021.

Reductions in rates on deposits more than offset the higher volumes of interest-bearing demand balances.

• Lower levels of borrowings resulted in a decrease in borrowings interest expense of $1.6 million in 2021.

Provision for Credit Losses (Loans and Unfunded Commitments)

Prior to our implementation of CECL, the provision for credit losses was based on the then-applicable Incurred Loss model and represented an estimate of probable incurred losses in the loan portfolio at the end of each reporting period.

Under CECL, the provision for credit losses represents our current estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments.

Our estimate of credit losses under CECL is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for loan losses and provision for unfunded commitments which represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances.

The allowance for unfunded commitments is included in other liabilities in the consolidated balance sheets.

The provision for loan losses was $9.6 million in 2021 under the CECL method, compared to $35.0 million in 2020 under the Incurred Loss method.

The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined under the applicable accounting standards in effect at each balance sheet date.

Under the CECL methodology, during 2021 we reversed $4.5 million in provision for credit losses due to improving asset quality and better economic forecasts.

Offsetting the provision reversal was the "Day 2" provision expense of $14.1 million which was the calculated ACL recorded for Non-PCD loans acquired from Select after the initial credit mark adjustment was recorded to the loans.

The elevated provision expense in 2020 was primarily a result of the higher estimated incurred losses resulting from macroeconomic effects of the COVID-19 pandemic and exposures to loans with characteristics or in industries that had greater loss exposure due to the economic uncertainties brought on by COVID-19.

Total net charge-offs for 2021 were $2.7 million compared to $4.0 million in 2020.

In 2020, the higher net charge-offs were driven by $3.2 million of net charge-offs in our SBA portfolio, and was concentrated in the "commercial, financial, and agricultural" category.

Also under the CECL method, we recorded $5.4 million in provision for unfunded commitments, which included $3.9 million recorded in the fourth quarter of 2021 upon the acquisition of Select.

There was no provision for unfunded commitments in 2020 under the Incurred Loss method.

The provisions for 2021 were recorded primarily due to increases in construction and land development loan commitments during the year.

Additional discussion on the CECL method and our asset quality and credit metrics, which impact our provision for credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses and Loan Loss Experience" sections following.

Noninterest Income

Our noninterest income amounted to $73.6 million in 2021, $81.3 million in 2020, and $59.5 million in 2019.

Management evaluates noninterest income on a non-GAAP basis that excludes items such as securities gains and losses and other miscellaneous gains and losses because we believe excluding those items results in a more meaningful reflection of noninterest income from recurring sources.

We refer to this as "adjusted noninterest income." A reconciliation of reported noninterest income to adjusted noninterest income is presented in the table below.

Adjusted noninterest income amounted to $73.2 million in 2021, $73.4 million in 2020, and $59.6 million in 2019.

Noninterest Income

Year Ended December 31,

($ in thousands) 2021 2020 2019

Issuer Issuer

Ratings Maturity Date Amortized Cost Fair Value

Bank of America

A2 (1) various $ 7,000 7,409

Citigroup (senior) A3 (1) 3/1/2023 5,011 5,288

Citigroup (subordinated) Baa2 (1) 7/30/2022 1,002 1,058

Goldman Sachs

A2 (1) 1/22/2023 5,037 5,319

JP Morgan Chase

A2 (1) 1/25/2023 5,009 5,294

Financial Institutions, Inc.

BBB- (2) 4/15/2030 4,000 3,956

A3 (1) 2/13/2023 3,084 3,261

Eagle Bancorp, Inc.

BBB (2) 9/1/2024 2,527 2,635

First Citizens BancShares Not Rated 3/15/2030 10,000 10,165

First Citizens BancShares Trust Preferred Security Not Rated 6/15/2034 1,000 835

Total investment in corporate bonds

Service charges on deposit accounts

$ 12,317 11,098 12,970

Other service charges, commissions and fees - interchange income, net of interchange expense 18,480 14,142 13,814

Other service charges, commissions, and fees - other 7,036 5,955 5,667

Fees from presold mortgage loans

10,975 14,183 3,944

(1) Ratings issued by Moody’s

(2) Rating issued by Kroll Bond Rating Agency.

We have concluded that any unrealized losses associated with our corporate bonds are due to interest rate considerations and not due to credit concerns.

At December 31, 2020, 2019, and 2018, net unrealized gains (losses) of $20.4 million, $9.7 million, and ($12.4 million), respectively, were included in the carrying value of securities classified as available for sale.

Management evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates and the overall economic environment, not by concerns about the ability of the issuers to meet their obligations.

Net unrealized gains and losses, net of applicable deferred income taxes, are included as part of a separate component of shareholders’ equity (accumulated other comprehensive income) as of December 31, 2020, 2019, and 2018, respectively.

At December 31, 2020, we held $167.6 million in securities classified as held to maturity, which are carried at amortized cost.

These securities had fair values that exceeded their carrying values by $3.2 million at December 31, 2020.

Approximately $30.0 million of the securities held to maturity are mortgage-backed securities that have been issued by either Freddie Mac or Fannie Mae.

The remaining $137.6 million in securities held to maturity are comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation.

We have no significant concentration of bond holdings from one government entity, with the single largest exposure to any one entity being $5.6 million.

Management evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations.

The weighted average taxable-equivalent yield for the securities available for sale portfolio was 1.62% at December 31, 2020.

The expected weighted average life of the available for sale portfolio using the call date for above-market callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected life for mortgage-backed securities, was 5.7 years.

The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 2.11% at December 31, 2020.

The expected weighted average life of the held to maturity portfolio using the call date for above-market callable bonds, the expected life for mortgage-backed securities, and the maturity date for all other securities, was 7.9 years.

We expect the adoption of CECL to result in an insignificant amount of credit losses related to our securities portfolio.

The following table provides the names of issuers for which the Company has investment securities totaling in excess of 10% of shareholders’ equity and the fair value and amortized cost of these investments as of December 31, 2020.

All of these securities are issued by government sponsored corporations.

Commissions from sales of insurance and financial products

6,947 8,848 8,495

SBA consulting fees

7,231 8,644 3,872

SBA loan sale gains

7,329 7,973 8,275

Bank-owned life insurance income

2,885 2,533 2,564

Securities gains (losses), net

(1,237) 8,024 97

Other gains (losses), net

1,648 (54) (169)

Noninterest income

73,611 81,346 59,529

Non-GAAP adjustments - Exclude:

Securities (gains) losses, net

1,237 (8,024) (97)

Other (gains) losses, net

(1,648) 54 169

Adjusted noninterest income $ 73,200 73,376 59,601

Service charges on deposit accounts increased $1.2 million, or 11.0%, in 2021 as compared to 2020.

The increase in 2021 was primarily due to growth in the number of checking accounts generating fees, as well as higher NSF activity during the year.

Also contributing to the increase was the addition of Select deposit accounts and related income in the fourth quarter of 2021.

Total "Other service charges, commissions and fees" related to net interchange income from bankcard activity amounted to $18.5 million in 2021, a 30.7% increase from the $14.1 million in 2019.

The growth in card usage by our customers is related to the higher volume of outstanding cards giving rise to increased transaction volume as well as customer payment preferences.

General growth of our bank also contributed to the increase in this line item in 2021.

"Other service charges, commissions and fees - other" includes items such as SBA guarantee servicing fees, ATM charges, wire transfer fees, safety deposit box rentals, fees from sales of personalized checks, and check cashing fees.

The increases in this line item in 2021 of $1.1 million, or 18.2%, were primarily due to growth in the number of accounts and related transaction activity, as well as the Bank's deposit base increases.

Fees from presold mortgages amounted to $11.0 million in 2021, a decline of $3.2 million or 22.6% from 2020.

The decrease was due in part to lower originations, combined with a higher percentage of mortgages retained in the portfolio during 2021 as compared to the prior year.

Commissions from sales of insurance and financial products amounted to $6.9 million in 2021, down $1.9 million from 2020.

The decrease is due to the sale of the majority of the assets of First Bank Insurance, our property and casualty insurance subsidiary, in June 2021.

The reduction in SBA consulting services in 2021 of $1.4 million, or 16.3%, is directly related to the wind-down of the PPP loan program.

SBA Complete recognized $4.7 million in PPP fees during 2020 as compared to $3.2 million in 2021.

The increase in BOLI income in 2021 was related to the acquisition of Select which had $31.1 million in BOLI as of the date of acquisition.

During 2021, we sold approximately $106.5 million in securities at a loss of $1.2 million.

This is compared to sales transactions in 2020 of $219.7 million for a gain of $8.0 million.

The securities sold were in the normal course of business and our ALCO determination to adjust our portfolio in light of the market rates and the overall portfolio composition.

“Other gains (losses), net” amounted to a net gain of $1.6 million for 2021 related to the sale of the Company's property and casualty insurance subsidiary during the year.

Noninterest Expenses

Total noninterest expenses totaled $184.7 million, $161.3 million, and $157.2 million, for 2021, 2020, and 2019, respectively.

Noninterest Expenses

Year Ended December 31,

($ in thousands) 2021 2020 2019

Issuer Amortized Cost Fair Value % of

Shareholders’

Fannie Mae $ 571,245 585,035 65.5 %

Freddie Mac 549,811 552,830 61.9 %

Ginnie Mae 234,780 237,159 26.5 %

Salaries $ 86,815 84,941 79,129

Employee benefits 16,434 16,027 16,844

Total personnel expense 103,249 100,968 95,973

Occupancy expense 11,528 11,278 11,122

Equipment related expenses 4,492 4,285 5,023

Merger and acquisition expenses 16,845 — 192

Amortization of intangible assets 3,531 3,956 4,858

Credit card rewards and other expenses 4,609 3,599 2,759

Telephone and data lines 3,027 2,893 3,058

Software costs 5,133 5,035 4,326

Data processing expense 3,619 2,904 2,787

Advertising and marketing expense 2,580 2,297 3,120

Non-credit losses 1,129 1,024 1,074

Other operating expenses 24,914 23,059 22,902

Total $ 184,656 161,298 157,194

Total personnel expense increased from $101.0 million in 2020 to $103.2 million in 2021, an increase of $1.9 million, or 2.2%.

Within personnel expense, salaries expense increased $1.9 million, or 2.6%, while employee benefits expense increased $0.4 million, or 2.5%.

Within salaries expense, commissions declined $1.0 million, or 12.5%, related to the lower mortgage banking activity, while bonuses increased $2.1 million due to the improved corporate performance.

Merger and acquisition expenses amounted to $16.8 million in 2021 related to the acquisition of Select.

The expenses were primarily comprised of severance costs and data processing conversion expenses.

Credit card expenses have increased $1.0 million, or 28.1%, relative to the higher levels of outstanding cards and activity generating revenue.

Telephone and data, software costs, data processing expenses, and advertising and marketing expenses did not vary significantly among the periods presented, increasing in 2021 related to higher levels of activity and the incremental costs from Select commencing in the fourth quarter of the year.

Non-credit losses remained relatively unchanged for the periods presented, with losses primarily related to debit card and credit card fraud losses.

We recorded income tax expense of $24.7 million in 2021, $21.7 million in 2020, and $24.2 million in 2019.

Our effective tax rates were fairly stable at 20.5% for 2021, 21.0% for 2020, and 20.8% for 2019.

We expect our effective tax rate to be approximately 21.0% in 2022.

ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION

The loan portfolio is the largest category of our earning assets and is comprised of commercial loans, real estate mortgage loans, real estate construction loans, and consumer loans.

The majority of our loan portfolio is within our 36 county market area, which are located in western, central and eastern North Carolina and three counties in northeastern South Carolina.

The majority of our loan portfolio is within our North Carolina and South Carolina market areas.

We also have a portfolio of SBA loans that have been made on a nationwide basis.

The diversity of the economic bases of our market areas has historically provided a stable lending environment.

In 2020, loans outstanding increased $277.8 million, or 6.2%, whereas in 2019, loans outstanding increased $204.4 million, or 4.8%.

The growth in 2020 was primarily due to $240.9 million in PPP loans outstanding at December 31, 2020 (see discussion below) and $14.6 million in loans assumed from the acquisition of Magnolia Financial.

The growth in 2019 was generated internally and was concentrated primarily within our higher growth markets.

The majority of our loan portfolio over the years has been real estate mortgage loans, with loans secured by real estate historically comprising approximately 87% to 89% of our outstanding loan balances.

In 2020, our loans secured by real estate decreased to 82% of outstanding loan balances due to PPP loans, which are unsecured loans and are included in the line item "commercial, financial, and agricultural." Except for construction, land development and other land loans, the majority of our “real estate” loans are personal and commercial loans where cash flow from the borrower’s occupation or business is the primary repayment source, with the real estate pledged providing a secondary repayment source.

Table 10 provides a summary of the loan portfolio composition of our total loans at each of the past five year ends.

Commercial, financial, and agricultural loans increased from 9% at December 31, 2016 to 11% at December 31, 2019, due primarily to growth in loans made to municipalities and loans originated by our SBA Lending Division.

This category of loans further increased in 2020 to 17% of total loans as of December 31, 2020 due primarily to the $241 million in PPP loans outstanding at year-end.

Residential real estate loans have declined from 28% of total loans at December 31, 2016 to 21% of total loans at December 31, 2020.

This decline has been due to a combination of factors including consumers refinancing their home loans held by the Bank with long term fixed rate loans, which we typically sell in the secondary market.

Additionally, the Carolina Bank loan portfolio acquired during 2017 had only an 11% mix of residential real estate loans.

Commercial real estate loans as a percentage of total loans has increased steadily over the past five years and amounted to 43% of all loans at December 31, 2020.

Consistent with our community banking strategy, we have placed emphases on this type of loan growth and hired a number of experienced community bankers, who have originated a significant amount of business loans secured by real estate.

Also, growth in our SBA loan portfolio has contributed to the increase in this category.

Table 11 provides a summary of scheduled loan maturities over certain time periods, with fixed rate loans and adjustable rate loans shown separately.

Approximately 12% of our accruing loans outstanding at December 31, 2020 mature within one year and 51% of total loans mature within five years, with both of those measures being consistent with recent years.

As of December 31, 2020, the percentages of variable rate loans and fixed rate loans as compared to total performing loans were 26% and 74%.

In recent years, the mix of variable rate loans to fixed rate loans has been shifting to more fixed rate loans as fixed rate loans continue to be popular with many borrowers in order to lock in a low interest rate during the historically low interest rate environment that has been in effect.

Also at December 31, 2020, we held $241 million in PPP loans, which all carry a fixed rate of interest.

While fixed rate loans presents risk to our Company if interest rates rise, we measure our interest rate risk closely and, as

discussed in the section “Interest Rate Risk” below, we do not believe that an increase in interest rates would materially negatively impact our net interest income.

Paycheck Protection Program ("PPP") Loans

PPP loans, which we began originating in April 2020, are loans to qualified small businesses and other entities administered by the SBA under the provisions of the CARES Act and subsequent federal acts.

Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll and other eligible expenses.

The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA.

Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of five years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required until the date on which the forgiveness amount relating to the loan is remitted to the lender and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 40% of the loan forgiveness amount may be attributable to non-payroll costs.

In return for processing and booking a PPP loan, the SBA paid lenders a processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand;

3% for loans of more than $350 thousand and less than $2 million;

and 1% for loans of at least $2 million).

PPP loans include loans to businesses and other entities that are reported as commercial loans originated under the guidelines discussed above.

During 2020, we funded approximately $244.9 million of PPP loans and through December 31, 2020, we had received $4.0 million in forgiveness payments from the SBA.

At December 31, 2020, we had $240.9 million in PPP loans outstanding, which represented 30.8% of our commercial, financial, and agricultural loans and 5.1% of our total loans.

We expect that the majority of our outstanding PPP loans will be forgiven in 2021.

Also, we are originating new PPP loans in 2021 as a result of legislation that provided additional funds for this relief program.

During 2020, we amortized net deferred PPP fees of $4.1 million as interest income.

At December 31, 2020, we have $6.0 million in remaining deferred PPP origination fees that will be recognized over the lives of the loans, with accelerated amortization expected to result from the loan forgiveness process.

We expect substantially all of these fees will be recognized in the first half of 2021 as a result of the loan forgiveness process.

Nonperforming Assets

Nonperforming assets include nonaccrual loans, troubled debt restructurings, loans past due 90 or more days and still accruing interest, and foreclosed properties.

As a matter of policy we place all loans that are past due 90 or more days on nonaccrual basis, and thus there were no loans at any of the past five year ends that were 90 days past due and still accruing interest.

Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because management has determined that the collection of interest is doubtful.

Placing loans on nonaccrual status negatively impacts earnings because (i) interest accrued but unpaid as of the date a loan is placed on nonaccrual status is reversed and deducted from interest income, (ii) future accruals of interest income are not recognized until it becomes probable that both principal and interest will be paid and (iii) principal charged-off, if appropriate, may necessitate additional provisions for loan losses that are charged against earnings.

In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms.

Table 12 summarizes our nonperforming assets at the dates indicated.

In the past several years, we have generally benefited from improving economic conditions and successfully implemented a combination of strategies to reduce nonperforming assets.

However, in 2020, a portion of our SBA loan portfolio was delinquent, and thus those loans did not qualify for the SBA's relief payment plan.

Many of those loans defaulted for both pandemic and other reasons and were transferred to nonaccrual status.

Due primarily to those SBA loans, our total nonperforming loans increased from $33.9 million at December 31, 2019 to $44.6 million at December 31, 2020.

At December 31, 2020, we held $170 million in total SBA loans, of which $136 million were the unguaranteed portions of those loans.

Table 12a presents our nonperforming assets at December 31, 2020 by general geographic region.

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

($ in thousands) At December 31,

2020 At December 31,

Total loans amounted to $6.1 billion at December 31, 2021, an increase of $1.4 billion, or 28.5%, from December 31, 2020.

Net loan growth for the year was as follows:

($ in thousands)

Loans at December 31, 2020 $ 4,731,315

Organic net growth, exclusive of PPP loans 382,794

Growth from acquisitions, net 1,164,882

PPP loan activity (197,276)

Loans at December 31, 2021 $ 6,081,715

Organic loan growth percentage 8.1 %

Total loan growth percentage 28.5 %

The following table provides a summary of the loan portfolio composition at each of the past five year ends.

Loan Portfolio Composition

As of December 31,

2021 2020 2019 2018 2017

($ in thousands) Amount % of

Loans Amount % of

Commercial, financial, and agricultural

$ 648,997 11 % 782,549 17 % 504,271 11 % 457,037 11 % 381,130 10 %

Real estate – construction, land development, and other land loans

Real estate – construction, land development & other land loans

828,549 13 % 570,672 12 % 530,866 12 % 518,976 12 % 539,020 13 %

Real estate – mortgage – residential (1-4 family) first mortgages

1,021,966 17 % 972,378 21 % 1,105,014 25 % 1,054,176 25 % 972,772 24 %

Real estate – mortgage – home equity loans / lines of credit

331,932 5 % 306,256 6 % 337,922 8 % 359,162 8 % 379,978 9 %

Real estate – mortgage – commercial and other

Installment loans to individuals

Total nonaccrual loans

3,194,737 53 % 2,049,203 43 % 1,917,280 43 % 1,787,022 42 % 1,696,107 42 %

The nonaccrual table above generally indicates a net increase in nonaccrual loans during the year, with the “Commercial, financial and agricultural” and "Real estate - mortgage - commercial and other" categories experiencing the largest increases.

Both of the increases were primarily driven by SBA loans that were placed on nonaccrual status during 2020.

At December 31, 2020, we had $18.4 million in nonaccrual SBA loans compared to $9.0 million a year earlier.

The unguaranteed portions of those loans amounted to $12.1 million at December 31, 2020 and $5.2 million at December 31, 2019.

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.

Due to government and the Company's COVID-19 relief programs, the nonperforming asset level at December 31, 2020 does not likely reflect the full impact of COVID-19.

While there are still many uncertainties associated with the pandemic and the stimulus measures taken by the United States government to address it, higher unemployment levels and business closures would generally be expected to result in higher levels of nonperforming assets in the future.

As shown in Note 4 to the consolidated financial statements, our accruing past due loans (30 or more days) amounted to $22.3 million at December 31, 2020, a decrease of $1.4 million from the $23.7 million at December 31, 2019.

Due to government and the Company's COVID-19 relief programs, the past due amounts at December 31, 2020 have not been negatively impacted by the pandemic in a significant manner.

As previously discussed, since the onset of the pandemic in March 2020, we worked with many of our borrowers and provided loan payment deferrals, with the Company deferring payments on approximately $774 million loans at June 30, 2020.

Over the second half of 2020, most of those borrowers resumed making payments and loans on deferral status declined to $16.6 million, or 0.4% of total loans at December 31, 2020.

Management routinely monitors the status of certain large loans that, in management’s opinion, have credit weaknesses that could cause them to become nonperforming loans.

In addition to the nonperforming loan amounts discussed above and economic conditions that do not significantly worsen, management believes that an estimated $15 to $20 million of loans that were performing in accordance with their contractual terms at December 31, 2020 have the potential to develop problems in the near term depending upon the particular financial situations of the borrowers and economic conditions in general.

Management has taken these potential problem loans into consideration when evaluating the adequacy of the allowance for loan losses at December 31, 2020 (see discussion below).

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in the problem loan amounts and the potential problem loan amounts discussed above do not represent or result from trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity, or capital resources, or represent material credits about which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

We provide additional information regarding the credit quality classification status of our loans in tables contained in Note 4 to our consolidated financial statements.

Those tables indicate that at December 31, 2019 and December 31, 2020, our level of classified and nonaccrual loans to total loans amounted to approximately 1.3% and 1.4%, respectively.

We believe that government relief programs have resulted in fewer loans migrating to classified risk grades than would otherwise been the case as a result of the pandemic.

Instead, certain of those loans have been moved to Special Mention status, which resulted in that risk grade of loans increasing from $50.3 million at December 31, 2019 to $61.3 million at December 31, 2020.

Foreclosed properties includes primarily foreclosed real estate.

Total foreclosed real estate amounted to $2.4 million, $3.9 million, and $7.4 million, at December 31, 2020, 2019, and 2018, respectively.

Generally, we have experienced decreases in foreclosed real estate over the past several years primarily due to increased property sales activity and the improvement in our overall asset quality.

The following table presents the detail of our foreclosed real estate at each of the past two year ends:

$ in thousands At December 31, 2020 At December 31, 2019

Vacant land and farmland

1-4 family residential properties

Commercial real estate

Total foreclosed real estate

Consumer loans 57,238 1 % 53,955 1 % 56,172 1 % 71,392 2 % 74,348 2 %

Loans, gross 6,083,419 100 % 4,735,013 100 % 4,451,525 100 % 4,247,765 100 % 4,043,355 100 %

Unamortized net deferred loan costs (fees)

(1,704) (3,698) 1,941 1,299 (986)

Allowance for Loan Losses and Loan Loss Experience

The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses” for the period in which the charge is taken).

Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible.

Recoveries realized during the period are credited to this allowance.

We consider our procedures for recording the amount of the allowance for loan losses and the related provision for loan losses to be a critical accounting policy.

See the heading “Critical Accounting Policies” above for further discussion.

The factors that influence management’s judgment in determining the amount charged to operating expense include recent loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and current economic conditions.

We use a loan analysis and grading program to facilitate our evaluation of probable inherent loan losses and the adequacy of our allowance for loan losses.

In this program, credit risk grades are assigned by management and tested by an internal loan review department and also an independent third-party consulting firm.

The testing program includes an evaluation of a sample of new loans, loans we identify as having potential credit weaknesses, loans past due 90 days or more, loans originated by new loan officers, nonaccrual loans and any other loans identified during previous regulatory and other examinations.

Total loans $ 6,081,715 4,731,315 4,453,466 4,249,064 4,042,369

The majority of our loan portfolio over the years has been real estate mortgage loans, with all loan categories secured by real estate historically comprising approximately 87% to 89% of our outstanding loan balances.

In 2020, our total loans secured by real estate decreased to 82% of outstanding loan balances due to an increase in PPP loans, which are unsecured loans and are included in the line item "commercial, financial, and agricultural" as discussed further below.

Except for construction, land development, and other land loans, the majority of our real estate loans are personal and commercial loans where cash flow from the borrower’s occupation or business is the primary repayment source, with the real estate pledged providing a secondary repayment source.

Residential real estate loans declined from 25% of total loans at December 31, 2018 to 17% of total loans at December 31, 2021.

This decline was due to a combination of factors including consumers refinancing their home loans held by the Bank with long-term fixed rate loans, which we typically sell in the secondary market.

Additionally, the Select loan portfolio acquired during 2021 had only a 12.8% mix of residential real estate loans, thus driving down the overall portfolio percentage in this category.

Commercial real estate loans as a percentage of total loans increased to 53% at December 31, 2021 primarily due to the Select acquisition as 51% of its loan portfolio was in this category.

Commercial, financial, and agricultural loans returned to the historical level of approximately 11% of total loans at December 31, 2021, decreasing from 17% at the prior year end.

As noted above, the fluctuations were due primarily to PPP loans, which declined $197.3 million during 2021 due to forgiveness of loans.

We began originating PPP in April 2020 under the provisions of the CARES Act and subsequent federal acts.

These loans are fully guaranteed by the SBA and may be eligible for loan forgiveness under the provisions of the CARES Act.

During 2020, we funded approximately $247.5 million of PPP loans.

At December 31, 2020, we had a remaining balance of $240.9 million in PPP loans outstanding, which represented 30.8% of our commercial, financial, and agricultural loans and 5.1% of our total loans.

During 2021, we originated an additional $113.4 million of PPP loans, assumed $17.3 million from Select, and processed total PPP loan forgiveness of $339.2 million.

As of December 31, 2021, we had $39.0 million in outstanding PPP loans.

A summary of scheduled loan maturities, based on contractual maturity dates, over certain time periods is presented below, with fixed rate loans and adjustable rate loans shown separately.

Loan Maturities

As of December 31, 2021

one year Due after one year but

within five years Due after five years but

within fifteen years Due after fifteen

($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield

Variable Rate Loans:

Commercial, financial, and agricultural $ 101,174 3.48 % 33,572 3.65 % 50,198 5.68 % 1,133 4.90 % 186,077 4.14 %

Real estate – construction, land development & other land loans 180,121 4.54 % 90,530 3.81 % 28,986 4.46 % 12,097 4.91 % 311,734 4.33 %

Real estate – mortgage – residential (1-4 family) first mortgages 10,132 4.82 % 13,941 4.79 % 27,382 4.05 % 141,146 3.53 % 192,601 3.74 %

Real estate – mortgage – home equity loans / lines of credit 19,574 4.22 % 40,446 4.02 % 261,432 3.37 % 39 4.10 % 321,491 3.50 %

Real estate – mortgage – commercial and other 67,471 3.81 % 151,081 3.23 % 48,410 4.34 % 108,445 4.93 % 375,407 3.98 %

Consumer loans 7,479 5.42 % 3,424 4.15 % 88 4.40 % 1,173 5.65 % 12,164 5.08 %

Total at variable rates 385,951 4.14 % 332,994 3.60 % 416,496 3.88 % 264,033 3.95 % 1,399,474 3.95 %

Fixed Rate Loans:

Commercial, financial, and agricultural 39,400 3.30 % 205,477 3.49 % 109,662 3.00 % 98,488 2.71 % 453,027 3.18 %

Real estate – construction, land development & other land loans 131,834 3.69 % 173,941 4.34 % 209,936 3.55 % 206 3.55 % 515,917 3.85 %

Real estate – mortgage – residential (1-4 family) first mortgages 36,406 4.79 % 222,381 4.60 % 157,098 3.88 % 410,659 3.72 % 826,544 4.02 %

Real estate – mortgage – home equity loans / lines of credit 601 6.11 % 4,125 5.33 % 4,785 5.28 % 237 6.37 % 9,748 5.38 %

Real estate – mortgage – commercial and other 223,503 4.46 % 1,220,197 4.23 % 1,350,751 3.57 % 2,243 4.81 % 2,796,694 3.93 %

Consumer loans 15,487 6.74 % 21,263 5.87 % 6,378 5.99 % 2,487 16.90 % 45,615 6.78 %

Total at fixed rates 447,231 4.24 % 1,847,384 4.22 % 1,838,610 3.57 % 514,320 3.89 % 4,647,545 3.89 %

Subtotal 833,182 4.19 % 2,180,378 4.13 % 2,255,106 3.63 % 778,353 3.99 % 6,047,019 3.90 %

Nonaccrual loans 34,696 — — — 34,696

Total loans $ 867,878 2,180,378 2,255,106 778,353 6,081,715

The above table is based on contractual scheduled maturities.

Early repayment of loans or renewals at maturity are not considered in this table.

Approximately 14% of our accruing loans outstanding at December 31, 2021 mature within one year and 50% of total loans mature within five years, with both of those measures being consistent with recent years.

As of December 31, 2021, the percentages of variable rate loans and fixed rate loans as compared to total performing loans were 23% and 77%, respectively.

In recent years, the mix of variable rate loans to fixed rate loans has been shifting to more fixed rate loans which continue to be popular with many borrowers in order to lock in a low interest rate during the historically low interest rate environment that has been in effect.

While fixed rate loans present risk to our Company if interest rates rise, we measure our interest rate risk closely and, as discussed in the section “Interest Rate Risk” below, we do not believe that an increase in interest rates would materially negatively impact our net interest income.

The Company’s loan portfolio is not concentrated in loans to any single borrower or to a relatively small number of borrowers.

Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries, and geographic regions, the Company monitors exposure to credit risk that could arise from potential concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g.

principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios.

Additionally, there are industry practices that could subject the Company to increased credit risk should economic

conditions change over the course of a loan’s life.

For example, the Bank makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e.

balloon payment loans).

These loans are underwritten and monitored to manage the associated risks.

The Company has determined that there is no concentration of credit risk associated with its lending policies or practices.

Most of our business activity is with customers located within the markets where we have banking operations.

Therefore, our exposure to credit risk is significantly affected by changes in the economy within our markets.

Approximately 88% of our loan portfolio is secured by real estate and is therefore susceptible to changes in real estate valuations.

Nonperforming Assets

NPAs include nonaccrual loans, TDRs, loans past due 90 or more days and still accruing interest, and foreclosed properties.

Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because management has determined that the collection of interest is doubtful.

Placing loans on nonaccrual status negatively impacts earnings because (i) interest accrued but unpaid as of the date a loan is placed on nonaccrual status is reversed and deducted from interest income, (ii) future accruals of interest income are not recognized until it becomes probable that both principal and interest will be paid, and (iii) principal charged-off, if appropriate, may necessitate additional provisions for loan losses that are charged against earnings.

In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms.

The following table summarizes our NPAs at the dates indicated.

Nonperforming Assets

As of December 31,

($ in thousands) 2021 2020 2019 2018 2017

Nonperforming assets

Nonaccrual loans $ 34,696 35,076 24,866 22,575 20,968

Restructured loans - accruing 13,866 9,497 9,053 13,418 19,834

Accruing loans >90 days past due 1,004 — — — —

Total nonperforming loans 49,566 44,573 33,919 35,993 40,802

Foreclosed properties 3,071 2,424 3,873 7,440 12,571

Total nonperforming assets $ 52,637 46,997 37,792 43,433 53,373

Allowance for credit losses $ 78,789 52,388 21,398 21,039 23,298

Total Loans $ 6,081,715 4,731,315 4,453,466 4,249,064 4,042,369

Asset Quality Ratios

Nonaccrual loans to total loans 0.57 % 0.74 % 0.56 % 0.53 % 0.52 %

Nonperforming loans to total loans 0.82 % 0.94 % 0.76 % 0.85 % 1.01 %

Nonperforming assets to total loans and foreclosed properties 0.87 % 0.99 % 0.85 % 1.02 % 1.32 %

Nonperforming assets to total assets 0.50 % 0.64 % 0.62 % 0.74 % 0.96 %

Allowance for credit losses to nonaccrual loans 227.08 % 149.36 % 86.05 % 93.20 % 111.11 %

As a matter of policy, we generally place all loans that are past due 90 or more days on nonaccrual basis.

The amount in this category at December 31, 2021 is related to two loans acquired from Select, one of which was renewed and the other of which was placed on nonaccrual in January 2022.

The increase in nonperforming loans in 2020 was driven by our SBA loan portfolio and the impact of the pandemic, as many of the delinquent SBA loans which did not qualify for the SBA's relief payment plan defaulted for both pandemic and other reasons and were transferred to nonaccrual status.

The $5.6 million increase in NPAs in 2021 was a direct result of the Select acquisition.

While the balance of NPAs increased, our asset quality ratios improved in 2021 overall relative to the increased loan portfolio, and we continue to see improving trends in asset quality.

Our total nonperforming loans to total loans declined 12 basis points to 0.82% at December 31, 2021, while our total NPA ratio decreased 14 basis points to 0.50% at December 31, 2021.

Additional discussion of the credit quality classification status of our loans is contained in Note 4 to our consolidated financial statements.

As of December 31, 2021, SBA loans accounted for approximately $16.8 million of our nonaccrual loans, or 9.8%, of the total non-PPP SBA portfolio, compared to $18.4 million, or 10.8%, of the non-PPP SBA portfolio at December 31, 2020.

We continue to closely monitor the SBA loan portfolio and give it appropriate consideration when evaluating the adequacy of the ACL as those loans are generally considered inherently more risky than other loans in out portfolio.

Refer to additional discussion of the ACL below.

As shown in Note 4 to the consolidated financial statements, our accruing past due loans (30 or more days) have declined $6.3 million to total $16.0 million at December 31, 2021, which is generally reflective of the improved economic conditions experienced during 2021.

We had no loans in COVID-19 payment-deferral status as of year end.

We classify loans as “special mention” when there is a defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that we could sustain some loss if the deficiency is not corrected.

Performing special mention loans, which are still accruing interest, totaled $43.1million and $61.3 million as of December 31, 2021 and 2020, respectively.

In addition, loans that are in the risk category of "classified" which are still accruing interest totaled $21.3 million at December 31, 2021 and $25.4 million at December 31, 2020.

These loans have a great risk of further deterioration and potential loss to the Bank.

Foreclosed properties includes primarily foreclosed real estate.

Total foreclosed real estate amounted to $3.1 million at December 31, 2021, up from $2.4 million in 2020.

The increase is related to two properties added with the Select acquisition.

We continue to see active real estate markets and steady activity for sales of foreclosed properties.

Allowance for Credit Losses and Loan Loss Experience

The total allowance for credit losses amounted to $78.8 million at December 31, 2021 compared to $52.4 million at December 31, 2020.

The increase was driven by (1) the initial $14.6 million ACL recorded at adoption of the CECL and (2) the initial "Day 2" provision for loan losses on Select acquired non-PCD loans of $14.1 million.

In addition, there was $4.9 million "Day 1" ACL which we reclassified from credit fair value mark to ACL on the Select's acquired PCD loans.

As previously discuss in "Critical Accounting Policies and Estimates", we adopted CECL effective January 1, 2021.

The ACL reflects our estimate of life of loan expected credit losses that will result from the inability of our borrowers to make required loan payments.

We established the incremental increase in the ACL at adoption date through equity and subsequently record amounts needed to adjust the ACL for our current estimate of expected credit losses through a provision for credit losses charged to earnings.

We record loans charged off against the ACL in the period in which such loans, in management's opinion, become uncollectible.

Subsequent recoveries, if any, increase the ACL when they are recognized.

We use systematic methodologies to determine the ACL for loans and the allowance for certain off-balance-sheet credit exposures.

The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loan portfolio.

The allowance for unfunded commitments represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances and is included in other liabilities in the the consolidated balance sheets.

We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio.

Our estimate of the ACL involves a high degree of judgment.

Therefore, the process for determining expected credit losses may result in a range of expected credit losses.

The ACL is calculated using collectively evaluated pools for loans with similar risk characteristics applying the DCF method.

When a loan no longer shares similar risk characteristics with its segment, the loan is evaluated on an individual basis applying a DCF or asset approach for collateral-dependent loans.

Refer to Note 1 of the consolidated financial statements for a discussion of our CECL methodology used to determine the ACL and allowance for unfunded commitments.

Our assessment of the ACL involves uncertainty and judgment and is subject to change in future periods.

The amount of any changes could be significant if the assessment of loan quality or collateral values changes substantially with respect to one or more loan relationships or portfolios or if there is a significant change in the reasonable and supportable forecast used to model our expected credit losses.

The allocation of the ACL is based on reasonable and supportable forecasts, historical data, subjective judgment, and estimates and therefore, may not be predictive of the specific amounts or loan categories in which charge-offs may ultimately occur.

bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.

We strive to maintain our loan portfolio in accordance with what management believes are conservative loan underwriting policies that result in loans specifically tailored to the needs of our market areas.

Every effort is made to identify and minimize the credit risks associated with such lending strategies.

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

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

Commercial loans are diversified among a variety of industries.

The majority of loans captioned in the tables discussed below as “real estate” loans are personal and commercial loans where real estate provides additional security for the loan.

The majority of loans captioned in the Loan Portfolio Composition table in the above "Loans" section as “real estate” loans are personal and commercial loans where cash flow from the borrower’s occupation or business is the primary repayment source, with the real estate pledged providing a secondary repayment source.

Collateral for the majority of these loans is located within our principal market area.

The total allowance for loan losses amounted to $52.4 million at December 31, 2020 compared to $21.4 million at December 31, 2019 and $21.0 million at December 31, 2018.

Table 13 sets forth the allocation of the allowance for loan losses at the dates indicated.

The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated.

However, the allowance for loan losses is available to absorb losses in all categories.

Our allowance for loan losses is primarily based on mathematical model with the primary factors impacting this model being loan growth, net charge-off history, and asset quality trends, as well as specific reserves we set aside on certain individual loans exhibiting signs of deterioration.

Our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the current allowance for loan losses that is necessary.

Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on.

In recent years, the new periods have had generally lower levels of net charge-offs (and net recoveries in some periods) than the older periods rolling out of the model, and thus mostly offset upward adjustments to the allowance that would normally be required to reflect new loan growth and the net charge-offs experienced.

Thus, the low level of net charge-offs (or net recoveries) experienced in recent years had been the primary reason for the low (or negative) provisions for loan losses that have been necessary until 2020 to appropriately adjust the level or our allowance for loan losses.

In March 2020, the COVID-19 pandemic began to impact our nation.

The subsequent closures of, or restrictions on, many businesses and job losses continue to result in widespread negative economic impacts.

Government has taken steps to lessen the negative impacts, including stimulus payments and the SBA's payment relief program.

Under the SBA's payment relief program, the SBA made principal and interest payments on most of our SBA loans for six months in 2020.

This program resumed in February 2021 with additional payments being made by the SBA for either three months or eight months, depending on the nature of the business.

Additionally, as previously discussed, we implemented a loan deferral program.

At December 31, 2020, we held approximately $175 million in hotel loans and $82 million in restaurant loans, which we believe are the highest risk loans.

Based on that analysis, we assigned elevated loan loss reserve percentages for certain of those loan types that brought the total reserve percentages to a level consistent with what we believe are the probable loss rates incurred in a stressed economic scenario.

The higher loss rates were generally determined based on our historical high one year loss rates for those loan types.

As a result of the analysis, approximately $24.8 million of COVID-19 related qualitative reserves are included in the Company's December 31, 2020 allowance for loan loss amount of $52.3 million.

Also, as discussed previously,our SBA loan portfolio accounted for a significant portion of our net-charge offs in 2020 and nonaccrual loans at December 31, 2020.

Accordingly, our level of allowance for loans losses at December 31, 2020 reflects heightened reserves for our SBA loan portfolio compared to prior periods, primarily in the "Commercial, financial, and agricultural' and "Real estate - mortgage - commercial and other" categories, as reflected in Table 13.

For the years indicated, Table 14 summarizes our balances of loans outstanding, average loans outstanding, and a detailed rollforward of the allowance for loan losses.

Net loan charge-offs (recoveries) of total loans amounted to $4.0 million in 2020, $1.9 million in 2019, and ($1.3 million) in 2018.

In 2020, we recorded $3.2 million of net charge-offs within our SBA loan portfolio, which was concentrated in the "commercial, financial, and agricultural" category.

In 2019, the increases in the categories of "Commercial, financial, and agricultural" and "Real estate - mortgage - commercial and other" were driven by $2.1 million in net charge-offs within our SBA loan portfolio.

In 2018, we received full payoffs on four loans that had been previously charged-down by approximately $3.3 million and are included in the table as recoveries, contributing significantly to the net recovery position for the year.

The ratio of our allowance to total loans was 1.11%, 0.48%, and 0.50%, at December 31, 2020, 2019, and 2018, respectively.

As discussed above, the higher level of allowance for loan losses at December 31, 2020 was primarily driven by estimated probable losses arising from the economic impact of COVID-19.

Our relatively low level of allowance to total loans in 2019 and 2018 was also significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank, which had over $1 billion in total loans.

Applicable accounting guidance did not allow us to record an allowance for loan losses upon the acquisition of loans – instead the acquired loans were recorded at their discounted fair value, which included the consideration of any expected losses.

No allowance for loan losses is recorded for the acquired loans unless the expected credit losses exceed the remaining unamortized discounts – based on an individual basis for purchased credit impaired loans and on a pooled basis for performing acquired loans.

See Critical Accounting Policies above for further discussion.

Unaccreted discount on acquired loans, which is available to absorb loan losses on those acquired loans, amounted to $8.9 million, $12.7 million, and $17.3 million, at December 31, 2020, December 31, 2019, and December 31, 2018, respectively.

Management considers the allowance for loan losses adequate to cover probable loan losses on the loans outstanding as of each reporting date.

It must be emphasized, however, that the determination of the allowance 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 amount 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.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and losses on foreclosed real estate.

Such agencies may require us to recognize additions to the allowance based on the examiners’ judgments about information available to them at the time of their examinations.

The way that we reserve for loan losses will experience a significant change in 2021, as a result of new guidance issued by the FASB.

The Company was initially expecting to adopt this new guidance on January 1, 2020, but due to the COVID-19 pandemic and the related CARES Act and subsequent legislation, we elected to defer the implementation of CECL, and now expect to adopt it as of January 1, 2021.

CECL requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit losses" and record an allowance that, when deducted from the amortized cost basis of the financial assets, presents the net amount expected to be collected on the financial assets.

The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts.

We will initially apply the impact of the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, which we now expect to be January 1, 2021.

At this time, we expect our allowance for credit losses will increase by approximately $12-14 million and that our reserve for unfunded commitments will increase by $6-$7 million.

The CECL standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses.

Providing for losses over the life of our loan portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred.

This change may require us to increase our allowance for loan losses rapidly in future periods, and greatly increases the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses.

It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.

Deposits are a critical part of our business, as they provide the primary funding source for our loans and investments.

Accordingly, as discussed below, we have implemented various strategies and developed competitive products to promote growth of our deposit balances.

At December 31, 2020, deposits outstanding amounted to $6.274 billion, an increase of 27.2%, or $1.342 billion, from the $4.931 billion at December 31, 2019, all of which was organic growth.

Within our retail deposits (non-brokered), we experienced growth of $1.456 billion, or 29.5%, in checking, money market and savings accounts, and experienced a decline of $114 million, or 2.3%, in our retail time deposits.

As a result of the strong retail deposit growth in 2020, we were able to reduce our level of brokered deposits during the year by $65.9 million, a decrease of 76.5%.

In addition to deposits arising from PPP loans, our high deposit growth in 2020 is believed to be due to a combination of stimulus funds, changes in customer behaviors during the pandemic, a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives.

During 2019, we experienced an increase in total deposits of $272.0 million, or 5.8%, which was substantially all retail deposit growth.

Within our retail deposits, we experienced growth of $321.9 million, or 8.7%, in checking, money market and savings accounts, and had growth of $106.6 million, or 15.0%, in our retail time deposits.

The nature of our deposit growth is illustrated in the table on page 45.

The following table reflects the mix of our deposits at each of the past three year ends:

Allocation of the Allowance for Credit Losses

As of December 31,

($ in thousands) 2021 % of

Loan Category 2020 % of

Loan Category 2019 % of

Loan Category 2018 % of

Loan Category 2017 % of

Loan Category

Commercial, financial, and agricultural

$ 16,249 2.50 % 11,316 1.45 % 4,553 0.90 % 2,889 0.63 % 3,111 0.82 %

Noninterest-bearing checking accounts

Real estate – construction, land development

16,519 1.99 % 5,355 0.94 % 1,976 0.37 % 2,243 0.43 % 2,816 0.52 %

Interest-bearing checking accounts

Real estate – residential (1-4 family) first mortgages 8,686 0.85 % 8,048 0.83 % 3,832 0.35 % 5,197 0.49 % 6,147 0.63 %

Real estate – mortgage - home equity lines of credit 4,337 1.31 % 2,375 0.78 % 1,127 0.33 % 1,665 0.46 % 1,827 0.48 %

Real estate – mortgage - commercial and other 30,342 0.95 % 23,603 1.15 % 8,938 0.47 % 7,983 0.45 % 6,475 0.38 %

Consumer loans 2,656 4.64 % 1,478 2.74 % 972 1.73 % 952 1.33 % 950 1.28 %

Total allocated

78,789 52,175 21,398 20,929 21,326

Money market deposits

— n/a 213 n/a — n/a 110 n/a 1,972 n/a

$ 78,789 1.30 % 52,388 1.11 % 21,398 0.48 % 21,039 0.50 % 23,298 0.58 %

Savings deposits

Time deposits - Brokered

Time deposits > $100,000 – retail

"% of Loan Category" represents the ACL as a percent of the respective total loan categories presented previously in the Loan Portfolio Composition table.

n/a - not applicable

For the years indicated, the following table summarized our net loss experience by loan category and key ratios demonstrating the asset quality trends over the most recent five years.

Loan Ratios, Loss and Recovery Experience

As of December 31,

($ in thousands) 2021 2020 2019 2018 2017

Loans outstanding at end of year $ 6,081,715 4,731,315 4,453,466 4,249,064 4,042,369

Average amount of loans outstanding 5,018,391 4,702,743 4,346,331 4,161,838 3,420,939

Allowance for credit losses, at end of year 78,789 52,388 21,398 21,039 23,298

Net loan (charge-offs) recoveries

Commercial, financial, and agricultural $ (1,978) (4,863) (1,493) (933) (311)

Real estate – construction, land development & other land loans 703 1,501 722 3,939 1,990

Real estate – mortgage – residential (1-4 family) first mortgages 488 276 48 (901) (1,565)

Real estate – mortgage – home equity loans / lines of credit 178 (37) 322 (347) (645)

Real estate – mortgage – commercial and other (1,762) (347) (981) 44 (155)

Consumer loans (309) (579) (522) (472) (520)

Total (charge-offs) recoveries $ (2,680) (4,049) (1,904) 1,330 (1,206)

Average loans:

Commercial, financial, and agricultural $ 700,557 707,976 482,654 430,449 367,793

Real estate – construction, land development & other land loans 619,928 615,717 503,183 555,354 466,272

Real estate – mortgage – residential (1-4 family) first mortgages 951,573 1,028,334 1,074,938 1,015,360 779,307

Real estate – mortgage – home equity loans / lines of credit 300,291 316,593 346,331 366,416 333,397

Real estate – mortgage – commercial and other 2,391,845 1,981,763 1,872,666 1,723,117 1,412,511

Consumer loans 54,197 52,360 66,559 71,142 61,659

Total average loans $ 5,018,391 4,702,743 4,346,331 4,161,838 3,420,939

Allowance for credit losses as a percent of loans at end of year 1.30 % 1.11 % 0.48 % 0.50 % 0.58 %

Allowance for credit losses as a multiple of net charge-offs 29.40x 12.94x 11.24x n/m 19.32x

Provision for loan losses as a percent of net charge-offs 358.62% 865.37% 118.86% n/m 59.95 %

Recoveries of loans previously charged-off as a percent of loans charged-off 64.75 % 52.38 % 69.79 % 119.08 % 84.56 %

Total net charge-offs (recoveries) as a percent of average loans 0.05 % 0.09 % 0.04 % (0.03 %) 0.04 %

Net charge-offs (recoveries) by loan category as a percent of average loans:

Commercial, financial, and agricultural 0.28 % 0.69 % 0.31 % 0.22 % 0.08 %

Real estate – construction, land development & other land loans (0.11 %) (0.24 %) (0.14 %) (0.71 %) (0.43 %)

Real estate – mortgage – residential (1-4 family) first mortgages (0.05 %) (0.03 %) — % 0.09 % 0.20 %

Real estate – mortgage – home equity loans / lines of credit (0.06 %) 0.01 % (0.09 %) 0.09 % 0.19 %

Real estate – mortgage – commercial and other 0.07 % 0.02 % 0.05 % — % 0.01 %

Consumer loans 0.57 % 1.11 % 0.78 % 0.66 % 0.84 %

n/m – not meaningful

Net loan charge-offs amounted to $2.7 million in 2021, a decline from $4.0 million in 2020 which is indicative of the improving economic environment.

In 2021, we recorded $2.5 million of charge-offs within our SBA loan portfolio, which were in the "commercial, financial, and agricultural" and "real estate - mortgage - commercial" categories and which accounted for 93% of our total net charge-offs for the year.

The SBA loan portfolio recorded net charge-offs in 2020 of $3.2 million, or nearly 80% of total net charge-offs for that year.

The ACL to total loans ratio increased to 1.30% in 2021 from 1.11% as of the prior year end related to the implementation of CECL and the initial provision for the Select acquisition as previously discussed.

Our securities portfolio totaled $3.1 billion at December 31, 2021, compared to $1.6 billion at December 31, 2020.

AFS securities were $2.6 billion at December 31, 2021, compared to $1.5 billion at December 31, 2020.

HTM securities were $513.8 million at December 31, 2021, compared to $167.6 million at December 31, 2020.

The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income.

All of our mortgage-backed securities, which include both securities AFS and HTM securities, are issued by GSEs or GNMA, and are traded in liquid secondary markets.

These securities are recorded on the balance sheet at fair value for the AFS portfolio and at cost for the HTM portfolio.

Securities Portfolio Composition

As of December 31,

($ in thousands) 2021 2020 2019

Securities available for sale:

Government-sponsored enterprise securities

$ 69,179 70,206 20,009

Time deposits < $100,000 – retail

Mortgage-backed securities

2,514,805 1,337,706 767,285

Corporate bonds

46,430 45,220 34,651

Total securities available for sale

2,630,414 1,453,132 821,945

Securities held to maturity:

Mortgage-backed securities

20,260 29,959 41,423

State and local governments

493,565 137,592 26,509

Total securities held to maturity

513,825 167,551 67,932

Total securities $ 3,144,239 1,620,683 889,877

Average total securities during year $ 2,367,591 1,002,008 751,635

The increase in securities in each year presented was directly related to the significant increase in deposits generating liquidity in excess of levels needed to fund new loan originations.

The excess cash balances were deployed into fixed rate securities so that we could realize higher yields.

The table below presents the composition, tax equivalent yields, and remaining maturities of our securities as of December 31, 2021.

For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 3 to the consolidated financial statements.

Securities Portfolio Maturity Schedule

($ in thousands) Government-sponsored enterprise securities Mortgage-backed securities (1)

Corporate debt securities Total Weighted Average Yield (2)

Securities available for sale

Remaining maturity:

One year or less $ — 3,339 1,020 4,359 2.66 %

After one through five years — 912,054 28,453 940,507 1.52 %

After five through ten years 69,179 1,374,008 16,012 1,459,199 1.56 %

After ten years 225,404 945 226,349 1.79 %

Fair Value $ 69,179 2,514,805 46,430 2,630,414

Amortized cost 71,951 2,545,151 45,380 2,662,482 1.57 %

Weighted-average yield 1.17 % 1.54 % 3.69 % 1.57 %

Weighted average maturity 8.0 years 6.2 years 2.3 years 6.2 years

Mortgage-backed securities (1)

State and local governments Total Weighted Average Yield (2)

Securities held to maturity

Remaining maturity:

One year or less $ — 1,246 1,246 3.65 %

After one through five years 20,260 — 20,260 2.11 %

After five through ten years — 16,058 16,058 2.07 %

After ten years — 476,261 476,261 2.01 %

Amortized cost $ 20,260 493,565 513,825

Fair value 20,845 490,853 511,698 2.02 %

Weighted-average yield 2.11 % 2.02 % 2.02 %

Weighted average maturity 2.5 years 10.1 years 9.8 years

(1) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment speeds.

(2) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 23% tax rate.

The majority of our GSE securities carry one maturity date, often with an issuer call feature.

At December 31, 2021, of the $69.2 million in AFS GSE securities, $38.8 million were issued by the FFCS, $28.5 million were issued by the FHLMC, and the remaining $1.9 million were issued by the FHLB.

Nearly all of our $2.5 billion in AFS mortgage-backed securities at December 31, 2021 were issued by the FHLMC, FNMA, GNMA, or the SBA, each of which is a government agency or government-sponsored corporation and guarantees the repayment of the securities.

Included in this total are commercial mortgage-backed securities of $937.6 million.

Mortgage-backed securities vary in their repayment in correlation with the underlying pools of mortgage loans.

At December 31, 2021, we held $513.8 million in securities classified as HTM, which are carried at amortized cost.

These securities had fair values that were lower than their carrying values by $2.1 million at December 31, 2021.

Approximately $20.2 million of the securities held to maturity are mortgage-backed securities that have been issued by either the FHLMC or FNMA.

The remaining $493.6 million in securities HTM are comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation.

We have no significant concentration of bond holdings from one state or local government entity, with the single largest exposure to any one entity being $9.5 million.

We have evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations.

Deposits represent the primary funding source for our loans and investments.

Total deposits amounted to $9.1 billion at December 31, 2021, an increase of $2.9 billion, or 45.4%, from December 31, 2020.

Deposit growth for the year was as follows:

($ in thousands)

Deposits at December 31, 2020 $ 6,273,596

Organic net growth 1,346,060

Growth from acquisitions, net 1,504,973

Deposits at December 31, 2021 $ 9,124,629

Organic deposit growth percentage 21.5 %

Total deposit growth percentage 45.4 %

Our high core deposit growth in 2021, which has continued from 2020, is believed to be due to a combination of stimulus funds and deposits arising from PPP loans, changes in customer behaviors during the pandemic, a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives.

The following table presents summary of the deposit balances and mix at each of the past five year ends.

Deposit Composition

As of December 31,

2021 2020 2019 2018 2017

($ in thousands) Amount % of

Total Amount % of

Noninterest-bearing checking accounts $ 3,348,622 37 % 2,210,012 35 % 1,515,977 31 % 1,320,697 28 % 1,196,651 27 %

Interest-bearing checking accounts 1,593,231 17 % 1,172,022 19 % 912,784 18 % 916,374 20 % 884,254 20 %

Money market accounts 2,562,283 28 % 1,581,364 25 % 1,173,107 24 % 1,035,523 22 % 984,945 23 %

Savings accounts 708,054 8 % 519,266 8 % 424,415 9 % 432,390 9 % 454,860 10 %

Time deposits >$100,000 605,999 7 % 544,143 9 % 563,806 11 % 451,047 10 % 353,464 8 %

Other time deposits 299,025 3 % 226,567 4 % 255,125 5 % 264,000 6 % 293,612 7 %

Total customer deposits 9,117,214 100 % 6,253,374 100 % 4,845,214 98 % 4,420,031 95 % 4,167,786 95 %

Brokered Deposits 7,415 — % 20,222 — % 86,141 2 % 239,875 5 % 239,659 5 %

Total deposits $ 9,124,629 100 % 6,273,596 100 % 4,931,355 100 % 4,659,906 100 % 4,407,445 100 %

Our deposit mix continues a trend of being more heavily concentrated in transaction and non-time deposit accounts, with time deposits declining from 21% of total deposits at December 31, 2018, to 18% at December 31, 2019, to 13% at December 31, 2020.

This is beneficial for us, as non-time deposit accounts generally carry lower interest rates compared to time deposits.

Prior to the very low interest rate environment that we have been in for the past decade, the time deposit concentration was closer to 50%.

We believe the lower mix of time deposits has been due to the relatively small gap between the interest rates that we pay on transaction accounts versus the rates we pay on time deposits.

Table 15 presents the average amounts of our deposits and the average yield paid for those deposits for the years ended December 31, 2020, 2019, and 2018.

As of December 31, 2020, we held approximately $564.4 million in time deposits of $100,000 or more, of which $375.7 million are in denominations of $250,000 or more.

Table 16 is a maturity schedule of time deposits of $100,000 or more and time deposits of $250,000 or more as of December 31, 2020.

This table shows that 88% of our time deposits greater than $100,000 and 90.0% of our time deposits greater than $250,000 mature within one year.

As of December 31, 2020, we held approximately $2.3 billion in uninsured deposits, including $283.0 million in time deposits.

At each of the past three year ends, we have no deposits issued through foreign offices, nor do we believe that we held any deposits by foreign depositors.

This is beneficial for us, as non-time deposit accounts generally carry lower interest rates compared to time deposits and allows us to reprice these deposit categories at any time.

We believe that the shift in mix from time deposits has been due in part to the relatively small gap between the interest rates that we pay on transaction accounts versus the rates we pay on time deposits.

As demonstrated in the table below, the majority of our time deposits greater than $100,000 mature within one year, with 50% maturing within the next six months.

As a result of the strong retail deposit growth in 2020, we were able to reduce our level of brokered deposits during the year by $65.9 million, a decrease of 76.5%.

Broker deposits were reduced a further $12.8 million in 2021.

As of December 31, 2021, we held approximately $3.4 billion in uninsured deposits, including $224.6 million of uninsured time deposits.

The table below presents maturities of time deposits of $100,000 or more, and maturities of uninsured time deposits of more than $250,000 as of December 31, 2021.

Maturities of Time Deposits

As of December 31, 2021

($ in thousands) 3 Months

or Less Over 3 to 6

Months Over 6 to 12

Months Over 12

Time deposits of $100,000 or more $ 166,902 137,720 193,292 115,500 613,414

Uninsured time deposits of more than $250,000 included above $ 68,261 62,279 59,390 34,643 224,573

At each of the past three year ends, we had no deposits issued through foreign offices, nor do we believe that we held any deposits by foreign depositors.

We typically utilize borrowings to provide balance sheet liquidity and to fund imbalances in our loan growth compared to our deposit growth.

Our borrowings outstanding totaled $61.8 million at December 31, 2020, $300.7 million at December 31, 2019, and $406.6 million at December 31, 2018.

Table 2 shows that average borrowings were $186.4 million in 2020, $332.6 million in 2019, and $406.9 million in 2018.

In both 2019 and 2020, we used a portion of the excess cash generated from deposit growth that exceeded loan growth to pay down borrowings of $106 million and $239 million, respectively.

At December 31, 2020, the Company had three sources of readily available borrowing capacity – 1) an approximately $ 1.02 billion line of credit with the FHLB, of which $ 8 million was outstanding at December 31, 2020 and $ 247 million was outstanding at December 31, 2019, 2) a $ 100 million federal funds line of credit with a correspondent bank, of which none was outstanding at December 31, 2020 or 2019, and 3) an approximately $ 134 million line of credit through the Federal Reserve Bank of Richmond’s (FRB) discount window, of which none was outstanding at December 31, 2020 or 2019.

Our line of credit with the FHLB can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by our FHLB stock and a blanket lien on most of our real estate loan portfolio.

For the year ended December 31, 2020, the average amount of FHLB borrowings outstanding was approximately $132.4 million with a weighted average interest rate for the year of 1.13%.

The maximum amount of short-term FHLB borrowings outstanding at any month-end during 2020 was $348.2 million.

For the year ended December 31, 2019, the average amount of FHLB borrowings outstanding was approximately $278.4 million with a weighted average interest rate for the year of 2.22%.

The maximum amount of short-term FHLB borrowings outstanding at any month-end during 2019 was $352.3 million.

Our correspondent bank relationship allows us to purchase up to $100 million in federal funds on an overnight, unsecured basis (federal funds purchased).

We had no borrowings under this line at December 31, 2020 or 2019.

There were no federal funds purchased outstanding at any month-end during 2020 or 2019.

We also have a line of credit with the FRB discount window.

This line is secured by a blanket lien on a portion of our commercial and consumer loan portfolio (excluding real estate loans).

Based on the collateral that we owned as of December 31, 2020, the available line of credit was approximately $134 million.

At December 31, 2020 and 2019, we had no borrowings outstanding under this line.

In addition to the lines of credit described above, we also have of $56.7 million of trust preferred security debt outstanding at December 31, 2020 and 2019.

Each of our three issuances have 30 year final maturities and were structured in a manner that allows them to qualify as Tier 1 capital for regulatory capital adequacy requirements.

We may call these debt securities at par on any quarterly interest payment, but do not expect to do so.

The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.70% for $20.6 million, three-month LIBOR plus 1.39% on $25.8 million, and LIBOR + 2.00% for $10.3 million that was assumed in the Carolina Bank acquisition.

Total borrowings at December 31, 2021 increased $5.6 million since the prior year end.

Select had $12.4 million of borrowings as of the acquisition date.

During 2021, FHLB advances decreased $5.7 million through scheduled payments and the early repayment of one advance.

Our borrowings outstanding are as follows:

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

FHLB advances - long-term $ 1,974 7,705

Trust preferred capital issuances 69,076 56,704

71,050 64,409

Unamortized discounts on acquired borrowings (3,664) (2,580)

$ 67,386 61,829

As noted in the table above, at December 31, 2021, we had $69.1 million of borrowings structured as trust preferred capital securities which qualify as capital for regulatory capital adequacy requirements.

The Company issued $46.4 million of these securities, $10.3 million was assumed from our acquisition of Carolina Bank, and $12.4 million was assumed from our acquisition of Select.

At December 31, 2021, the Company had three sources of readily available borrowing capacity:

• A line of credit with the FHLB of approximately $866 million which can structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by our FHLB stock and a blanket lien on most of our real estate loan portfolio.

• A $100 million federal funds line of credit with a correspondent bank which provides for overnight unsecured federal funds purchased.

• A line of credit with the Federal Reserve of approximately $138 million which is secured by a blanket lien on a portion of our commercial and consumer loan portfolio (excluding real estate loans).

Refer to Note 9 to the consolidated financial statements for additional discussion of our borrowings.

Liquidity, Commitments, and Contingencies

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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.

As noted above, in addition to internally generated liquidity sources, at December 31, 2020, we had the ability to obtain borrowings from the following three sources – 1) an approximately $1.02 billion line of credit with the FHLB, 2) a $100 million federal funds line with a correspondent bank, and 3) an approximately $134 million line of credit through the FRB’s discount window.

Our overall liquidity increased at December 31, 2020 compared to December 31, 2019 due to significant deposit growth that outpaced our loan growth.

Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings amounted to 31.4% at December 31, 2020 compared to 21.4% at December 31, 2019.

Our securities

portfolio is comprised almost entirely of readily marketable securities which could also be sold to provide cash.

In addition, we have available lines of credit from the FHLB and Federal Reserve.

Our overall liquidity started increasing in 2020 and continued into 2021 due to significant and continued deposit growth that outpaced our loan growth.

Our liquid assets (cash and AFS securities) as a percentage of our total deposits and borrowings amounted to 33.6% at December 31, 2021.

We continue to 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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In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows.

Table 18 reflects our contractual obligations and other commercial commitments outstanding as of December 31, 2020.

Any of our $8 million in outstanding borrowings with the FHLB may be accelerated immediately by the FHLB in certain circumstances, including material adverse changes in our condition or if our qualifying collateral is less than the amount required under the terms of the borrowing agreement.

In the normal course of business there are various outstanding commitments and contingent liabilities such as commitments to extend credit, which are not reflected in the financial statements.

The following table presents a summary of our outstanding loan commitments as of December 31, 2020:

($ in millions)

Type of Commitment Fixed Rate Variable Rate Total

Loan commitments

Unused lines of credit

Presented below is a summary of our contractual obligations and other commercial commitments outstanding as of December 31, 2021.

Contractual Obligations and Other Commercial Commitments

Payments Due Per Period ($ in thousands)

Contractual Obligations

As of December 31, 2021 Less

than 1 Year 1-3 Years 4-5 Years After 5 Years Total

Borrowings $ 134 1,037 98 69,781 71,050

Operating leases 2,383 4,624 3,392 22,499 32,898

Time deposits 735,619 125,695 41,113 10,012 912,439

Non-qualified postretirement plan liabilities 269 695 742 8,413 10,119

Committed investment obligations 13,700 13,700 — — 27,400

Estimated interest expense on borrowings and time deposits (1)

3,802 4,698 3,479 12,012 23,991

Total contractual cash obligations $ 755,907 150,449 48,824 122,717 1,077,897

(1) Represents forecasted interest expense on borrowings and time deposits based on interest rates and balances at December 31, 2021.

Forecasts are based on the contractual maturity of each liability.

Amount of Commitment Expiration Per Period ($ in thousands)

Other Commercial

As of December 31, 2021 Less

than 1 Year 1-3 Years 4-5 Years After 5 Years Total

$ 30,852 61,704 61,704 — 154,260

At December 31, 2020 and 2019, we also had $14.1 million and $12.0 million, respectively, in standby letters of credit outstanding.

We had no carrying amount for these standby letters of credit at either of those dates.

The nature of the standby letters of credit is that of a stand-alone obligation made on behalf of our customers to suppliers of the

customers to guarantee payments owed to the supplier by the customer.

Lines of credit and loan commitments

472,548 479,674 90,944 873,349 1,916,515

Standby letters of credit

20,062 1,057 171 — 21,290

Total commercial commitments

$ 523,462 542,435 152,819 873,349 2,092,065

In the normal course of business there are various outstanding commitments and contingent liabilities such as commitments to extend credit, which are not reflected in the financial statements.

As presented in the table above, at December 31, 2021, we had $21.3 million in standby letters of credit outstanding.

We had no carrying amount for these standby letters of credit.

The nature of standby letters of credit is that of a stand-alone obligation made on behalf of our customers to suppliers of the customers to guarantee payments owed to the supplier by the customer.

The standby letters of credit are generally for terms of one year, at which time they may be renewed for another year if both parties agree.

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In the event that we are required to honor a standby letter of credit, a note, already executed by the customer, becomes effective providing repayment terms and any collateral.

Over the past two years, we have had to honor only a few standby letters of credit, none of which resulted in any loss to the Company.

Over the past several years, we have had to honor only a few standby letters of

credit, none of which resulted in any loss to the Company.

We expect any draws under existing commitments to be funded through normal operations.

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Based on that assumption, management believes that it can meet its contractual cash obligations and existing commitments from normal operations.

We are not involved in any legal proceedings that, in management’s opinion, are likely to have a material effect on the consolidated financial position of the Company.

Capital Resources and Shareholders’ Equity

Shareholders’ equity at December 31, 2020 amounted to $893.4 million compared to $852.4 million at December 31, 2019 and $764.2 million at December 31, 2018.

Shareholders’ equity at December 31, 2021 amounted to $1.2 billion compared to $893.4 million at December 31, 2020.

The two basic components that typically have the largest impact on our shareholders’ equity are net income, which increases shareholders’ equity, and dividends declared, which decrease shareholders’ equity.

Additionally, any stock issuances can significantly increase shareholders’ equity, including those associated with acquisitions, and any stock repurchases reduce shareholders’ equity.

In 2020, the most significant factors that impacted our equity were 1) the $81.5 million net income reported for 2020, which increased equity, 2) common stock dividends declared of $20.8 million, which reduced equity, 3) other comprehensive income of $9.2 million (primarily driven by increases in unrealized gains on available securities for sale), which increased equity, and 4) stock repurchases of $31.9 million, which decreased equity.

See the Consolidated Statements of Shareholders’ Equity within the consolidated financial statements for disclosure of other less significant items affecting shareholders’ equity.

In 2019, the most significant factors that impacted our equity were 1) the $92.0 million net income reported for 2019, which increased equity, 2) common stock dividends declared of $16.0 million, which reduced equity, 3) other comprehensive income of $17.1 million (primarily driven by increases in unrealized gains on available securities for sale), which increased equity, 4) stock repurchases of $10.0 million, which decreased equity, and 5) the issuance of $3.1 million in stock related to the conclusion of an earn-out period related to a 2016 acquisition, which increased equity.

See the Consolidated Statements of Shareholders’ Equity within the consolidated financial statements for disclosure of other less significant items affecting shareholders’ equity.

In 2018, the most significant factors that impacted our equity were 1) the $89.3 million net income reported for 2018, which increased equity, and 2) common stock dividends declared of $11.9 million, which reduced equity.

In 2021, the most significant factors that impacted our shareholders' equity were (1) the issuance of stock totaling $324.4 million in the Select acquisition which increased equity;

(2) $95.6 million net income reported for 2021, which increased equity, (3) common stock dividends declared of $24.2 million, which reduced equity, and (4) other comprehensive loss of $39.3 million driven by unrealized losses on AFS securities which decreased equity.

See the consolidated statements of shareholders’ equity within the consolidated financial statements for disclosure of other less significant items affecting shareholders’ equity.

With the acquisition of Carolina Bank in March 2017, we assumed a deferred compensation plan for certain members of Carolina Bank’s board of directors that is fully funded by Company stock, which was valued at $7.7 million on the date of acquisition.

Subsequent to the acquisition in 2017, approximately $5.5 million of the deferred compensation has been paid to the plan participants.

The balances of the related asset and liability were each $2.2 million at December 31, 2020, both of which are presented as components of shareholders’ equity.

As discussed in “Borrowings” above, we also currently have $56.7 million in trust preferred securities outstanding, all of which qualify as Tier I capital under both current and forthcoming regulatory standards.

As discussed in “Borrowings” above, we also currently have $69.1 million in trust preferred securities outstanding, all of which qualify as Tier I capital under regulatory standards.

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.

The Company and the Bank must comply with regulatory capital requirements established by the Federal Reserve and the Commissioner.

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 the Company’s financial statements.

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.

The primary source of funds for the payment of dividends by the Company is dividends received from its subsidiary, the Bank.

The Bank, as a North Carolina banking corporation, may declare dividends so long as such dividends do not reduce its capital below its applicable required capital (typically, the level of capital required to be deemed “adequately capitalized.”) As of December 31, 2020, approximately $ 590,672,000 of the Company’s investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.

Table 20 presents our regulatory capital ratios as of December 31, 2020, 2019, and 2018.

All of our capital ratios have significantly exceeded the minimum regulatory thresholds for all periods covered by this report.

In this economic environment, our goal is to maintain our capital ratios at levels at least 200 basis points higher than the “well capitalized” thresholds set for banks.

At December 31, 2020, our tier 1 leverage ratio was 9.88% compared to the regulatory well capitalized bank-level threshold of 5.00% and our total risk-based capital ratio was 15.37% compared to the 10.50% regulatory well capitalized threshold.

In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible assets (“TCE Ratio”).

Our TCE Ratio was 9.08% at December 31, 2020 compared to 10.20% at December 31, 2019, with the decline in 2020 being due to the high asset growth that was a result of high deposit growth.

See “Supervision and Regulation” under “Business” above and Note 15 to the consolidated financial statements for discussion of other matters that may affect our capital resources.

As of December 31, 2021, approximately $894.4 million of the Company’s investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.

Our regulatory capital ratios as of December 31, 2021, 2020, and 2019 are presented in the table below.

All of our capital ratios significantly exceeded the minimum regulatory thresholds for all periods presented.

Risk-Based and Leverage Capital Ratios

As of December 31,

($ in thousands) 2021 2020 2019

Risk-Based and Leverage Capital

Common Equity Tier I capital:

Shareholders’ equity

$ 1,230,575 893,421 852,401

Intangible assets, net of deferred tax liability

(366,609) (239,702) (236,636)

Accumulated other comprehensive income adjustments

24,970 (14,350) (5,123)

Total Common Equity Tier I capital

888,936 639,369 610,642

Tier I capital:

Trust preferred securities eligible for Tier I capital treatment 63,336 52,496 52,345

Deductions from Tier I capital — — —

Total Tier I leverage capital

952,272 691,865 662,987

Tier II capital:

Allowable allowance for credit losses and unfunded commitments 88,692 52,388 21,398

Other Tier II Capital — 582 546

Tier II capital additions

88,692 52,970 21,944

Total capital $ 1,040,964 744,835 684,931

Total risk weighted assets $ 7,094,787 4,846,322 4,599,799

Adjusted fourth quarter average assets $ 10,144,760 7,001,834 5,924,020

Risk-based capital ratios:

Common equity Tier I capital to Tier I risk adjusted assets 12.53 % 13.19 % 13.28 %

Minimum under Basel III 7.00 % 7.00 % 7.00 %

Tier I capital to Tier I risk adjusted assets 13.42 % 14.28 % 14.41 %

Minimum under Basel III 8.50 % 8.50 % 8.50 %

Total risk-based capital to Tier II risk-adjusted assets 14.67 % 15.37 % 14.89 %

Minimum under Basel III 10.50 % 10.50 % 10.50 %

Leverage capital ratios:

Tier I leverage capital to adjusted fourth quarter average assets 9.39 % 9.88 % 11.19 %

Minimum under Basel III 4.00 % 4.00 % 4.00 %

Our goal is to maintain our capital ratios at levels at least 200 basis points higher than the regulatory “well capitalized” thresholds set for banks.

At December 31, 2021, our leverage ratio was 9.39% compared to the regulatory well capitalized bank-level threshold of 4.00% and our total risk-based capital ratio was 14.67% compared to the 10.50% regulatory well capitalized threshold.

The reduction in our capital ratios in 2021 from the prior year end is directly related to the Select acquisition and the high balance sheet growth rate experienced in 2021.

In addition to regulatory capital ratios, we also closely monitor our ratio of TCE to tangible assets.

This ratio was 8.38% at December 31, 2021 compared to 9.08% at December 31, 2020, with the decline of 70 basis points related to the significant asset growth that was a result of high deposit growth and the Select acquisition.

See “Supervision and Regulation” under “Business” in Item 1.

and Note 15 to the consolidated financial statements for discussion of other matters that may affect our capital resources.

Off-Balance Sheet Arrangements and Derivative Financial Instruments

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Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk – Item 7A.)

Net interest income is our most significant component of earnings.

Notwithstanding changes in volumes of loans and deposits, our level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to our various categories of earning assets and interest-bearing liabilities.

Net interest income is our most significant component of earnings and we consider interest rate risk to be our most significant market risk.

In addition to changes in volumes of loans and deposits, our level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to our various categories of earning assets and interest-bearing liabilities.

It is our policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations.

Our exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of “shock” interest rates.

Over the years, we have been able to maintain a fairly consistent yield on average earning assets (net interest margin), even during periods of changing interest rates.

Over the past five calendar years, our net interest margin has ranged from a low of 3.56% (realized in 2020) to a high of 4.09% (realized in 2018).

The consistency of the net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain.

At December 31, 2020, approximately 68% of our interest-earning assets are subject to repricing within five years (because they are either adjustable rate assets or they are fixed rate assets that mature) and substantially all of our interest-bearing liabilities reprice within five years.

Table 17 sets forth our interest rate sensitivity analysis as of December 31, 2020, using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call).

As illustrated by Table 17, at December 31, 2020, we had $2.0 billion more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets.

Our exposure to interest rate risk is analyzed on a regular basis by management using standard "gap" reports (which measure the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period), maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of “shock” interest rates.

Over the years, we have been able to maintain a fairly consistent yield on average earning assets (NIM), even during periods of changing interest rates.

Over the past five years, our NIM has ranged from a low of 3.16% (realized in 2021) to a high of 4.09% (realized in 2018).

The 93 basis point reduction in NIM between the high and low point during this period was a direct result of the Federal Reserve monetary policy enacted at the beginning of the COVID-19 pandemic resulting in a reduction in short-term market interest rates totaling 150 basis points in March 2020.

The following table sets forth our interest rate sensitivity analysis based on a gap analysis as of December 31, 2021, using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call).

Interest Rate Sensitivity Analysis

Repricing schedule for interest-earning assets and interest-bearing

liabilities held as of December 31, 2021

($ in thousands) 3 Months

or Less Over 3 to 12

Months Total Within

12 Months Over 12

Earning assets:

$ 1,324,740 369,777 1,694,517 4,387,198 6,081,715

Securities available for sale (2)

115,894 319,122 435,016 2,195,398 2,630,414

Securities held to maturity (2)

3,571 8,720 12,291 501,534 513,825

Other earning assets, primarily short-term investments, loans held for sale, and investments in FRB and FHLB stock 413,194 — 413,194 22,346 435,540

Total earning assets

$ 1,857,399 697,619 2,555,018 7,106,476 9,661,494

Percent of total earning assets 19.2 % 7.2 % 26.4 % 73.6 % 100.0 %

Cumulative percent of total earning assets 19.2 % 26.4 % 26.4 % 100.0 % 100.0 %

Interest-bearing liabilities:

Interest-bearing checking accounts

$ 1,593,231 — 1,593,231 — 1,593,231

Money market accounts

2,562,283 — 2,562,283 — 2,562,283

Savings accounts

708,054 — 708,054 — 708,054

Time deposits of $100,000 or more

166,902 137,720 304,622 308,792 613,414

Other time deposits

66,413 64,797 131,210 167,815 299,025

65,412 — 65,412 1,974 67,386

Total interest-bearing liabilities

$ 5,162,295 202,517 5,364,812 478,581 5,843,393

Percent of total interest-bearing liabilities 88.3 % 3.5 % 91.8 % 8.2 % 100.0 %

Cumulative percent of total interest-bearing liabilities 88.3 % 91.8 % 91.8 % 100.0 % 100.0 %

Interest sensitivity gap $ (3,304,896) 495,102 (2,809,794) 6,627,895 3,818,101

Cumulative interest sensitivity gap $ (3,304,896) (2,809,794) (2,809,794) 3,818,101 3,818,101

Cumulative interest sensitivity gap as a percent of total earning assets

(34.2 %) (29.1 %) (29.1 %) 39.5 % 39.5 %

Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities

36.0 % 47.6 % 47.6 % 165.3 % 165.3 %

As illustrated above, at December 31, 2021, we had $2.8 billion more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets.

This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment.

However, this method of analyzing interest sensitivity only

measures the magnitude of the timing differences and does not address earnings, market value, or management actions.

However, this method of analyzing interest rate sensitivity only measures the magnitude of the timing differences and does not address earnings, market value, or management actions.

Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.

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These types of deposits historically have not repriced with, or in the same proportion, as general market indicators.

Overall, we believe that in the near term (twelve months), net interest income will not likely experience significant downward pressure from rising interest rates.

Similarly, we would not expect a significant increase in near term net interest income from falling interest rates.

Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change.

In the short-term (less than twelve months), this generally results in us being asset-sensitive, meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates, which is what we experienced following the March 2020 interest rate cuts.

However, in the twelve-month and longer horizon, the impact of having a higher level of interest-sensitive liabilities generally lessens the short-term effects of changes in interest rates.

The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less applicable in periods in which there is a “flat” interest rate curve.

In the short-term (less than 12 months), this generally results in the Bank being asset-sensitive, meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates, which is what we experienced following

the March 2020 interest rate cuts.

The acquisition of Select did not change our interest-rate sensitivity position or outlook as Select's and our balance sheets were similarly structured.

Because of the static nature and limitations as discussed above of the gap report, we also employ an earnings simulation model to analyze the sensitivity of net interest income to movements in interest rates.

The model is based on actual cash flows and repricing characteristics for on- and off-balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities.

Earnings-simulation analysis captures not only the potential of these interest sensitive assets and liabilities to mature or reprice, but also the probability that they will do so.

Moreover, earnings-simulation analysis considers the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time.

The following table presents the Company-estimated net interest income sensitivity as of December 31, 2021.

These results assume a static balance sheet and an immediate, sustained 100 or 200 basis point upward and downward shock to the yield curve.

While it is unlikely market rates would immediately move 100 or 200 basis points upward or downward on a sustained basis, this is another tool used by management and the Board of Directors to gauge interest rate risk.

Change in Interest Rates (basis points) Percent change in Net Interest Income

The general discussion above applies most directly in a “normal” interest rate environment in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less applicable in periods in which there is a “flat” interest rate curve.

A “flat yield curve” means that short-term interest rates are substantially the same as long-term interest rates.

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When these rates converge, the profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin.

While there have been periods in the last few years that the yield curve has steepened slightly, it currently remains very flat.

This flat yield curve and the intense competition for high-quality loans in our market areas have resulted in lower interest rates on loans.

In an effort to address concerns about the national and global economy the Federal Reserve cut interest rates by 75 basis points in the second half of 2019.

And in March 2020, the Federal Reserve cut interest rates by an additional 150 basis points in response to the COVID-19 pandemic.

Our interest-bearing cash balances and most of our variable rate loans, generally reset to lower rates soon after these interest rate cuts.

We reduced our offering rates on most deposit products in March 2020 and our borrowing costs were also reduced by lower rates and repaying a significant portion of our outstanding borrowings.

Overall however, the impact of the interest rate cuts negatively impacted our net interest margin and our earnings in 2020.

Assuming no significant changes in interest rates in the next twelve months, we expect continued pressure on our net interest margin (excluding the impact of PPP - see below) as a result of the flat yield curve and the expectation of lower interest rates on the redeployment of cash received on maturing loans and investments that will likely not be fully offset by lower funding costs.

In addition, further stimulus payments made by the government may result in additional low yielding liquidity that would likely result in incremental interest income, but negatively impact the net interest margin.

In April and early May 2020, we approved approximately $245 million in PPP loans.

These loans all have an interest rate of 1.00%.

In addition to the interest rate, the SBA compensated us with an origination fee for each loan of between 1% to 5% of the loan amount, depending on the size of each loan.

We received approximately $10.6 million in these fees related to these loans, which were netted against the cost to originate each loan of approximately $0.6 million and are initially being amortized over the two year maturities of the loans using the effective interest method of recognition.

Early repayments, including the loan forgiveness provisions contained in the PPP, will result in accelerated amortization.

In 2020, we amortized $4.1 million of the PPP loan fees.

Remaining deferred fees at December 31, 2020 amounted to $6.0 million, which we expect to substantially realize .

in the first half of 2021, thus favorably impacting our net interest margin.

As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by certain purchase accounting adjustments related to the acquired banks.

The purchase accounting adjustments related to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable.

The accretion of the loan discount on acquired loans amounted to $3.8 million, $4.6 million, and $7.0 million in 2020, 2019, and 2018, respectively, is less predictable and could be materially different among periods.

This is because of the magnitude of the discounts that are initially recorded and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs.

If the credit quality of the loans declines, some, or all, of the remaining discount will cease to be accreted into income.

If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis.

In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff.

Each of these factors is difficult to predict and susceptible to volatility.

The remaining loan discount on acquired loans amounted to $8.9 million at December 31, 2020 compared to $12.7 million at December 31, 2019.

As indicated in the table above, assuming some increase in interest rates in the next 12 months, we may see some benefit to our NIM from raising rates if we are able to maintain stable funding costs.

Our experience historically has been that our demand deposit accounts have lagged the timing and amount of general market increases.

However, we expect continued pressure on NIM from market competition for quality loans and the investment of liquidity in lower earning assets until loan demand increases sufficiently to deploy excess liquidity from short-term investments and securities.

We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign currency positions.

Table 19 presents the expected maturities of our other than trading market risk sensitive financial instruments.

Table 19 also presents the estimated fair values of market risk sensitive instruments as estimated in accordance with relevant accounting guidance.

Our assets and liabilities have estimated fair values that do not materially differ from their carrying amounts.

See additional discussion regarding net interest income, as well as discussion of the changes in the annual net interest margin, in the section entitled “Net Interest Income” above.

Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation.

Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation as discussed above under Interest Rate Risk.

Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.

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See Note 1 to our consolidated financial statements for a discussion of recent rule proposals and changes.

Selected Consolidated Financial Data

The following tables present certain selected consolidated financial data and quarterly financial data for additional information and trend analysis.

Selected Consolidated Financial Data

Year Ended December 31,

($ in thousands, except per share data) 2021 2020 2019 2018 2017

Income Statement Data

Interest income $ 255,918 237,684 250,107 231,207 177,382

Interest expense 9,523 19,562 33,903 23,777 12,671

Net interest income 246,395 218,122 216,204 207,430 164,711

Provision (reversal) for loan losses 9,611 35,039 2,263 (3,589) 723

Provision for unfunded commitments 5,420 — — — —

Net interest income after provision 231,364 183,083 213,941 211,019 163,988

Noninterest income 73,611 81,346 59,529 58,942 49,232

Noninterest expense 184,656 161,298 157,194 156,483 145,481

Income before income taxes 120,319 103,131 116,276 113,478 67,739

Income tax expense 24,675 21,654 24,230 24,189 21,767

Net income 95,644 81,477 92,046 89,289 45,972

Per Common Share Data

Earnings per common share – basic $ 3.19 2.81 3.10 3.02 1.82

Earnings per common share – diluted 3.19 2.81 3.10 3.01 1.82

Cash dividends declared 0.80 0.72 0.54 0.40 0.32

High 50.92 40.00 41.34 43.14 41.76

Low 32.47 17.32 31.22 30.50 26.47

Close 45.72 33.83 39.91 32.66 35.31

Stated book value – common 34.54 31.26 28.80 25.71 23.38

Selected Balance Sheet Data (at year end)

Total assets $ 10,508,901 7,289,751 6,143,639 5,864,116 5,547,037

Loans 6,081,715 4,731,315 4,453,466 4,249,064 4,042,369

Allowance for credit losses 78,789 52,388 21,398 21,039 23,298

Intangible assets 382,090 254,638 251,585 255,480 257,507

Deposits 9,124,629 6,273,596 4,931,355 4,659,339 4,406,955

Borrowings 67,386 61,829 300,671 406,609 407,543

Total shareholders’ equity 1,230,575 893,421 852,401 764,230 692,979

Selected Average Balances

Total assets $ 8,495,645 6,765,998 6,027,047 5,693,760 4,590,786

Loans 5,018,391 4,702,743 4,346,331 4,161,838 3,420,939

Earning assets 7,871,319 6,160,100 5,448,400 5,112,436 4,101,949

Deposits 7,401,910 5,644,290 4,824,216 4,516,811 3,696,730

Interest-bearing liabilities 4,736,343 3,897,912 3,720,536 3,663,077 3,025,401

Total shareholders’ equity 969,775 874,532 812,823 727,920 533,205

Return on average assets 1.13 % 1.20 % 1.53 % 1.57 % 1.00 %

Return on average common equity 9.86 % 9.32 % 11.32 % 12.27 % 8.62 %

Net interest margin (taxable-equivalent basis) 3.16 % 3.56 % 4.00 % 4.09 % 4.08 %

Loans to deposits at year end 66.65 % 75.42 % 90.31 % 91.19 % 91.73 %

Allowance for loan losses to total loans 1.30 % 1.11 % 0.48 % 0.50 % 0.58 %

Nonperforming assets to total assets at year end 0.50 % 0.64 % 0.62 % 0.74 % 0.96 %

Net charge-offs (recoveries) to average total loans 0.05 % 0.09 % 0.04 % (0.03 %) 0.04 %

Note - During 2021, the Company completed a significant whole-bank acquisition.

See additional discussion under "Mergers and Acquisitions" in Item 1.

Quarterly Financial Summary (Unaudited)

($ in thousands except

per share data) Fourth

Quarter Third

Quarter Second

Quarter First

Quarter Fourth

Quarter Third

Quarter Second

Quarter First

Income Statement Data

Interest income, taxable equivalent

$ 76,923 61,130 61,656 58,452 59,780 59,035 57,970 62,367

Interest expense

2,371 2,001 2,380 2,771 3,317 3,955 5,016 7,274

Net interest income, taxable equivalent

74,552 59,129 59,276 55,681 56,463 55,080 52,954 55,093

Taxable equivalent, adjustment

707 576 517 443 457 347 330 334

Net interest income

73,845 58,553 58,759 55,238 56,006 54,733 52,624 54,759

Provision (reversal) for loan losses

11,011 (1,400) — — 4,031 6,120 19,298 5,590

Provision for unfunded commitments 2,432 1,049 1,939 — — — — —

Net interest income after provision 60,402 58,904 56,820 55,238 51,975 48,613 33,326 49,169

Noninterest income (1)

15,057 16,511 21,374 20,669 19,996 21,452 26,193 13,705

Noninterest expense (2)

62,789 40,817 40,985 40,065 41,882 40,439 38,901 40,076

Income before income taxes

12,670 34,598 37,209 35,842 30,089 29,626 20,618 22,798

Income tax expense 2,148 6,955 7,924 7,648 6,441 6,329 4,266 4,618

10,522 27,643 29,285 28,194 23,648 23,297 16,352 18,180

Per Common Share Data

Earnings per common share – basic

$ 0.30 0.97 1.03 0.99 0.83 0.81 0.56 0.62

Earnings per common share – diluted

0.30 0.97 1.03 0.99 0.83 0.81 0.56 0.62

Cash dividends declared

0.20 0.20 0.20 0.20 0.18 0.18 0.18 0.18

50.92 44.17 45.87 48.83 34.78 25.20 29.65 40.00

41.84 37.60 39.32 32.47 20.44 19.60 19.26 17.32

45.72 43.01 40.91 43.50 33.83 20.93 25.08 23.08

Stated book value - common

34.54 32.59 31.75 30.78 31.26 30.70 29.95 29.69

Selected Average Balances

Total assets $ 10,191,402 8,319,327 7,965,781 7,477,826 7,240,685 6,904,112 6,727,762 6,183,098

5,879,373 4,820,007 4,679,119 4,684,143 4,771,446 4,785,848 4,738,702 4,512,893

Earning assets

9,438,263 7,735,613 7,386,607 6,898,406 6,640,732 6,294,556 6,102,012 5,595,734

8,878,141 7,280,275 6,951,524 6,474,115 6,232,692 5,882,792 5,502,356 4,950,199

Interest-bearing liabilities

5,641,358 4,612,282 4,443,875 4,233,740 4,085,619 3,878,783 3,885,903 3,739,467

Total shareholders’ equity 1,177,374 918,986 893,978 885,190 889,481 878,325 871,495 858,592

Ratios (annualized where applicable)

Return on average assets

0.41 % 1.32 % 1.47 % 1.53 % 1.30 % 1.34 % 0.98 % 1.18 %

Return on average common equity

3.55 % 11.93 % 13.14 % 12.92 % 10.58 % 10.55 % 7.55 % 8.52 %

Equity to assets at end of period

11.71 % 10.95 % 11.03 % 11.33 % 12.26 % 12.47 % 12.60 % 13.52 %

Average loans to average deposits

66.22 % 66.21 % 67.31 % 72.35 % 76.56 % 81.35 % 86.12 % 91.17 %

Average earning assets to interest-bearing liabilities

167.30 % 167.72 % 166.22 % 162.94 % 162.54 % 162.28 % 157.03 % 149.64 %

Net interest margin

3.13 % 3.03 % 3.22 % 3.27 % 3.38 % 3.48 % 3.49 % 3.96 %

Allowance for loan losses to gross loans

1.30 % 1.31 % 1.41 % 1.42 % 1.11 % 1.02 % 0.89 % 0.54 %

Nonperforming loans as a percent of total loans

0.82 % 0.80 % 0.86 % 1.04 % 0.94 % 0.86 % 0.94 % 0.76 %

Nonperforming assets as a percent of total assets

0.50 % 0.48 % 0.51 % 0.65 % 0.64 % 0.63 % 0.69 % 0.60 %

Net charge-offs (recoveries) as a percent of average total loans

0.05 % 0.00 % 0.07 % 0.10 % 0.07 % (0.06) % 0.12 % 0.22 %

(1) - Noninterest income includes the following items:

• In the fourth quarter of 2021, the Company recorded ($1.2) million in losses on the sale of available for sale securities.

• In the second quarter of 2021, the Company recorded a $1.7million gain on the sales of assets of First Bank Insurance.

• In the second quarter of 2020, the Company recorded $8.0 million in gains on the sale of available for sale securities.

(2) - Noninterest expense for the fourth quarter of 2021 includes $16.8 million of merger expense.

Quantitative and Qualitative Disclosures About Market Risk.

The information responsive to this Item is found in Item 7 under the caption “Interest Rate Risk".

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-K

Item 7. Management’s Discussion and Analysis