What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-10 · 224 added, 138 removed, 243 unchanged (60% of the section changed)

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

Overview and Highlights at and for Three Months Ended March 31, 2022

The Company earned net income of $34.0 million, or $0.95 diluted EPS, during the three months ended March 31, 2022 compared to net income of $28.2 million, or $0.99 diluted EPS, for the three months ended March 31, 2021.

The main drivers to the increase in net income are presented below.

Refer also to additional discussion in the Results of Operations section following.

Overview and Highlights at and for Three Months Ended June 30, 2022

We earned net income of $36.6 million, or $1.03 diluted EPS, during the three months ended June 30, 2022 compared to net income of $29.3 million, or $1.03 diluted EPS, for the three months ended June 30, 2021.

On October 15, 2021 we acquired Select Bancorp, Inc.

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As such, comparisons for the financial periods presented are impacted by our acquisition of Select.

• Net interest income for the first quarter of 2022 was $76.9 million, a 39.2% increase from the $55.2 million recorded in the first quarter of 2021.

The main drivers to the increase in net income are presented below.

Refer also to additional discussion in the Results of Operations section following.

• Net interest income for the second quarter of 2022 was $78.3 million, a 33.2% increase from the $58.8 million recorded in the second quarter of 2021.

The increase in net interest income from the prior year period was driven by higher earning assets related to both the Select acquisition and organic growth, offset somewhat by a reduction in net interest margin ("NIM").

• For the three months ended March 31, 2022, the Company recorded a provision for credit losses of $3.5 million based on changes in the loan portfolio and economic forecasts, and a reversal of the provision for unfunded commitments of $1.5 million related to fluctuations in the levels and mix of outstanding loans commitments.

No provision for credit losses or unfunded commitments was required in the comparable period of 2021, which was the first quarter we adopted CECL.

• Noninterest income declined $1.4 million, or 6.9%, from the prior year period primarily due to a $3.4 million decrease in mortgage banking income related to lower levels of activity, a $2.0 million decrease in SBA consulting fees due to lower PPP-related revenues, and a $1.2 million decrease in commissions on sales of financial and insurance products due to the sale of substantially all of the assets of our property and casualty insurance agency subsidiary in June 2021.

• For the three months ended June 30, 2022, we did not record any provision for credit losses based primarily on updated economic forecasts, improving trends, and CECL model assumptions.

• Noninterest income declined $4.1 million, or 19.2%, for the three months ended June 30, 2022 from the prior year period primarily due to a $2.2 million decrease in gains on SBA loan sales, a $1.8 million decrease in mortgage banking income related to lower levels of activity, a $1.5 million decrease in SBA consulting fees due to lower PPP-related revenues, and a $1.3 million decrease in commissions on sales of financial and insurance products due to the sale of substantially all of the assets of our property and casualty insurance agency subsidiary in June 2021.

Reductions in noninterest income were substantially offset by higher levels of transactions and number of accounts generating service charge income and bankcard revenue.

• Noninterest expense increased $11.4 million, or 28.5% for the quarter ended March 31, 2022 as compared to the prior year.

Included in the March 31, 2022 quarter was $3.5 million in merger and acquisition expenses primarily related to computer system conversion costs.

The balance of the increase in noninterest expenses was driven by higher operating expenses resulting from the Select acquisition.

• Noninterest expense increased $8.4 million, or 20.5%, for the quarter ended June 30, 2022, as compared to the prior year period driven by higher operating expenses resulting from the Select acquisition.

• Income tax expense increased $1.6 million relative to the higher pre-tax income.

The effective tax rates were 20.4% and 21.3% for the first quarter of 2022 and 2021, respectively.

The lower effective tax rate in the first quarter of 2022 was related to higher tax exempt income in that quarter relative to taxable income.

Total assets at March 31, 2022 amounted to $10.7 billion, a 1.4% increase from December 31, 2021.

The effective tax rates were 20.7% and 21.3% for the second quarter of 2022 and 2021, respectively.

The lower effective tax rate in the second quarter of 2022 was related to higher tax exempt income in that quarter relative to taxable income.

Total assets at June 30, 2022 amounted to $10.6 billion, a 0.5% increase from December 31, 2021.

The primary balance sheet changes are presented below.

Refer also to additional discussion in the Financial Condition section following.

• Total loans amounted to $6.1 billion at March 31, 2022, a decrease of $17.0 million, or 0.28% from year end due primarily to reductions in PPP loans through forgiveness which more than offset organic growth during the first quarter of 2022.

• Total investment securities increased $86.9 million from December 31, 2021 to a total of $3.2 billion at March 31, 2022, as the Company deployed excess liquidity during the period.

• Total deposits amounted to $9.4 billion at March 31, 2022, an increase of $260.5 million, or 2.9%, from December 31, 2021.

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 our ongoing growth and retention initiatives.

• Total loans amounted to $6.2 billion at June 30, 2022, an increase of $161.5 million, or 2.7%, from year end, due primarily to organic growth partially offset by reductions in PPP loans during the second quarter of 2022.

• Total investment securities decreased $65.2 million from December 31, 2021 to a total of $3.1 billion at June 30, 2022, as cash flows were utilized to fund loan growth.

• Total deposits amounted to $9.4 billion at June 30, 2022, an increase of $235.1 million, or 2.6%, from December 31, 2021.

The high core deposit growth experienced since the onset of the pandemic has started to slow in 2022 and the current growth is primarily attributable to our ongoing growth and retention initiatives.

• We remain well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 12.90% and total risk-based capital ratio of 15.01%.

• Accumulated other comprehensive loss increased $140.0 million related to higher unrealized losses on available for sale securities due to increased market rates experienced in the first quarter of 2022.

• Accumulated other comprehensive loss increased $224.4 million related to higher unrealized losses on available for sale securities due to increased market rates experienced in the second quarter of 2022.

Overview and Highlights for Six Months Ended June 30, 2022

Total net income of $70.6 million, or $1.98 diluted EPS, was reported during the six months ended June 30, 2022 compared to net income of $57.5 million, or $2.02 diluted EPS, for the six months ended June 30, 2021.

As noted above, the acquisition of Select was completed in the fourth quarter of 2021 impacting the comparisons with the prior year period.

The main drivers to the increase in net income are presented below.

Refer also to additional discussion in the Results of Operations section following.

• Net interest income for the six months ended June 30, 2022 was $155.1 million, a 36.1% increase from the $114.0 million recorded in the six months ended June 30, 2021.

The increase in net interest income from the prior year period was driven by higher earning assets related to both the Select acquisition and organic growth, offset somewhat by a reduction in NIM.

• For the six months ended June 30, 2022, we recorded a provision for credit losses of $3.5 million based on CECL model assumption updates including updated loss driver analyses normally performed in the first quarter of the year.

A reversal of the provision for unfunded commitments of $1.5 million was recorded related to fluctuations in the levels and mix of outstanding loans commitments.

No provision for credit losses and a $1.9 million provision for unfunded commitments was required in the comparable period of 2021.

• Noninterest income declined $5.5 million, or 13.1%, from the prior year period primarily due to a $5.2 million decrease in mortgage banking income related to lower levels of activity, a $3.5 million decrease in SBA consulting fees due to lower PPP-related revenues, and a $2.6 million decrease in commissions on sales of financial and insurance products due to the sale of substantially all of the assets of our property and casualty insurance agency subsidiary in June 2021.

Reductions in noninterest income were substantially offset by higher levels of transactions and number of accounts generating service charge income and bankcard revenue.

• Noninterest expense increased $19.8 million, or 24.4%, for the six months ended June 30, 2022 as compared to the same period in the prior year.

Included in the six months ended June 30, 2022 was $4.2 million in merger and acquisition expenses primarily related to computer system conversion costs.

The balance of the increase in noninterest expenses was driven by higher operating expenses resulting from the Select acquisition.

• Income tax expense increased $2.7 million relative to the higher pre-tax income.

The effective tax rates were 20.6% and 21.3% for the six months ended June 30, 2022 and 2021, respectively.

The lower effective tax rate for the six months ended June 30, 2022 was related to higher tax exempt income in that quarter relative to taxable income.

Impact of COVID-19

Our market areas and local economies continue to show signs of recovery from the impact of the COVID-19 pandemic, However, 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.

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 supply chain issues, and the decline in the value of assets held by us.

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.

The ongoing impact on the Company of the continuing pandemic 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.

its impact on our customers, employees and vendors;

its impact on the financial services and banking industry;

actions that may be taken by governmental authorities and other third parties in response to the COVID-19 pandemic;

and its ongoing impact on the economy as a whole.

We have not realized significant negative impact on our loan portfolio or asset quality and all COVID-19 deferral status loans returned to regular payment schedules in 2021.

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 shopping centers, hotels/lodging, restaurants, entertainment, and commercial real estate.

Critical Accounting Policies and Estimates

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Allowance for Credit Losses on Loans and Unfunded Commitments

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

The allowance for credit losses ("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.

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Purchased credit deteriorated ("PCD") loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination as of the acquisition date.

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

At acquisition, an allowance 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.

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Actual losses incurred may differ materially from our estimates.

We estimate expected credit losses on commitments to extend credit over the contractual period in which we are exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable.

We estimate expected credit losses on unfunded commitments to extend credit over the contractual period in which we are exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable.

The allowance for off-balance sheet credit exposures, which is included in "Other liabilities" on the Consolidated Balance Sheets, is adjusted for as an increase or decrease to the provision for unfunded commitments.

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Accounting Standards Codification 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 goodwill.

At March 31, 2022, we had core deposit and other intangibles of $16.9 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.

At June 30, 2022, we had core deposit and other intangibles of $15.4 million subject to amortization and $364.3 million of goodwill, which is not subject to amortization.

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.

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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 for the three months ended March 31, 2022 amounted to $76.9 million, an increase of $21.6 million, or 39.2%, from the $55.2 million recorded in the first quarter of 2021.

Net interest income on a tax-equivalent basis for the three month period ended March 31, 2022 amounted to $77.6 million, an increase of $21.9 million, or 39.3%, from the $55.7 million recorded in the first quarter of 2021.

Net interest income for the three months ended June 30, 2022 amounted to $78.3 million, an increase of $19.5 million, or 33.2%, from the $58.8 million recorded in the second quarter of 2021.

Net interest income on a tax-equivalent basis for the three months ended June 30, 2022 amounted to $78.9 million, an increase of $19.7 million, or 33.2%, from the $59.3 million recorded in the second quarter of 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 table presents an analysis of net interest income.

The following table presents an analysis of net interest income for the three months ended June 30, 2022 and 2021.

Average Balances and Net Interest Income Analysis

For the Three Months Ended March 31,

For the Three Months Ended June 30,

($ in thousands) Average

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

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $1.4 million, and $3.4 million for three months ended March 31, 2022 and 2021, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $2.3 million and $1.3 million for three months ended March 31, 2022 and 2021, respectively.

(3) Includes tax-equivalent adjustments of $697,000 and $443,000 for three months ended March 31, 2022 and 2021, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $1.3 million, and $2.2 million for three months ended June 30, 2022 and 2021, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $2.3 million and $3.6 million for three months ended June 30, 2022 and 2021, respectively.

(3) Includes tax-equivalent adjustments of $669,000 and $517,000 for three months ended June 30, 2022 and 2021, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status.

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

Overall, as demonstrated in the table above, net interest income grew $21.6 million for the three months ended March 31, 2022 from the comparable period of the prior year.

Higher earning asset volumes, from both organic growth and the Select acquisition, and lower rates on interest-bearing liabilities, which were partially offset by lower yields on interest-earning assets, drove the increase.

• Average loan volumes for the three months ended March 31, 2022 were $1.4 billion higher than the same period in 2021.

Higher volumes were partially offset by lower interest rates on loans related to the general low market rate environment, resulting in an increase in loan interest income of $13.1 million.

• Higher average volume of $1.6 billion on total securities resulted in an increase of $8.0 million in interest income for the three months ended March 31, 2022 when compared to the same period in 2021.

Overall, as demonstrated in the table above, net interest income grew $19.5 million for the three months ended June 30, 2022 from the comparable period of the prior year.

Higher earning asset volumes, from both organic growth and the Select acquisition, drove the increase.

Lower rates on interest-bearing liabilities contributed to higher net interest income while lower yields on interest-earning assets partially offset the increases.

• Average loan volumes for the three months ended June 30, 2022 were $1.5 billion higher than the same period in 2021.

Higher volumes were partially offset by lower interest rates on loans related to loans originated during the low market rate environment during 2021, resulting in an increase in loan interest income of $12.8 million.

• Higher average volume of $1.1 billion on total securities resulted in an increase of $6.2 million in interest income for the three months ended June 30, 2022 when compared to the same period in 2021.

Also contributing to the increase in interest income was the higher yields on the portfolio as reinvestment rates increased between the periods.

• Lower interest rates paid on deposits drove a $0.6 million decrease in deposit interest expense for the three months ended March 31, 2022 compared to the same period in 2021.

• Lower interest rates paid on deposits drove a $0.4 million decrease in deposit interest expense for the three months ended June 30, 2022 compared to the same period in 2021.

Reductions in rates on deposits more than offset the $1.3 billion increase in average volume for total interest-bearing deposits.

• The reduction in NIM was in large part a result of general low market rate environment through most of 2021 and the shift of earning asset mix to lower yielding investment securities from loans as excess liquidity was deployed to securities.

Our NIM for all periods benefited 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.

Three Months Ended March 31,

• The reduction in NIM was in large part the result of general low market rate environment through most of 2021 and the shift of earning asset mix to lower yielding investment securities from loans as excess liquidity was deployed to securities.

Net interest income for the six months ended June 30, 2022 amounted to $155.1 million, an increase of $41.2 million, or 36.1%, from the $114.0 million recorded in the six months ended June 30, 2021.

Net interest income on a tax-equivalent basis for the six months ended June 30, 2022 amounted to $156.5 million, an increase of $41.6 million, or 36.2%, from the $115.0 million recorded in the six months ended June 30, 2021.

The following table presents an analysis of net interest income for the six months ended June 30, 2022 and 2021.

Average Balances and Net Interest Income Analysis

For the Six Months Ended June 30,

($ in thousands) Average

Volume Average

Rate Interest

or Paid Average

Volume Average

Rate Interest

Loans (1) (2) $ 6,100,246 4.27 % $ 129,279 $ 4,681,604 4.45 % $ 103,368

Taxable securities 3,066,772 1.75 % 26,595 1,906,549 1.45 % 13,702

Non-taxable securities 294,257 1.47 % 2,152 99,622 1.62 % 797

Short-term investments, primarily interest-bearing cash 420,671 0.73 % 1,530 456,066 0.57 % 1,281

Total interest-earning assets 9,881,946 3.26 % $ 159,556 7,143,841 3.36 % 119,148

Cash and due from banks 120,691 83,486

Premises and equipment 135,768 122,485

Other assets 401,660 373,472

Total assets $ 10,540,065 $ 7,723,284

Interest bearing checking $ 1,558,950 0.06 % $ 434 $ 1,241,662 0.08 % $ 491

Money market deposits 2,586,527 0.12 % 1,584 1,713,714 0.20 % 1,717

Savings deposits 733,769 0.06 % 214 560,550 0.09 % 242

Time deposits >$100,000 553,346 0.29 % 808 540,865 0.57 % 1,539

Other time deposits 295,981 0.22 % 316 221,239 0.36 % 398

Total interest-bearing deposits 5,728,573 0.12 % 3,356 4,278,030 0.21 % 4,387

Borrowings 67,400 3.15 % 1,052 61,356 2.51 % 764

Total interest-bearing liabilities 5,795,973 0.15 % 4,408 4,339,386 0.24 % 5,151

Noninterest bearing checking 3,550,741 2,436,138

Other liabilities 43,098 57,895

Shareholders’ equity 1,150,253 889,865

Total liabilities and

shareholders’ equity $ 10,540,065 $ 7,723,284

Net yield on interest-earning assets and net interest income 3.17 % $ 155,148 3.22 % $ 113,997

Net yield on interest-earning assets and net interest income – tax-equivalent (3) 3.19 % $ 156,514 3.24 % $ 114,956

Interest rate spread 3.11 % 3.12 %

Average prime rate 3.62 % 3.25 %

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

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $2.6 million, and $5.6 million for six months ended June 30, 2022 and 2021, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $4.6 million and $5.0 million for six months ended June 30, 2022 and 2021, respectively.

(3) Includes tax-equivalent adjustments of $1.4 million and $1.0 million for six months ended June 30, 2022 and 2021, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status.

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

Overall, as demonstrated in the table above, net interest income grew $41.2 million for the six months ended June 30, 2022 from the comparable period of the prior year.

• Average loan volumes for the six months ended June 30, 2022 were $1.4 billion higher than the same period in 2021.

Higher volumes were partially offset by lower interest rates on loans related to the low market rate environment experienced during 2021, resulting in an increase in loan interest income of $25.9 million.

• Higher average volume of $1.4 billion on total securities resulted in an increase of $14.2 million in interest income for the six months ended June 30, 2022 when compared to the same period in 2021.

Also contributing to the increase in interest income was the higher yields on the taxable portfolio as reinvestment rates increased between the periods.

• Lower interest rates paid on deposits drove a $1.0 million decrease in deposit interest expense for the six months ended June 30, 2022 compared to the same period in 2021.

Reductions in rates on deposits more than offset the $1.5 billion increase in average volume for total interest-bearing deposits.

• The reduction in NIM was in large part a result of a general low market rate environment through most of 2021 and the shift of earning asset mix to lower yielding investment securities from loans as excess liquidity was deployed to securities.

Our NIM for all periods benefited from 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 time period presented.

Three Months Ended June 30, Six Months Ended June 30,

($ in thousands) 2022 2021 2022 2021

Interest income – increased by accretion of loan discount on acquired loans

$ 1,545 2,913 3,216 3,665

Interest income - increased by accretion of loan discount on retained SBA loans

730 718 1,397 1,307

Total interest income impact 2,275 3,631 4,613 4,972

Interest expense – reduced by premium amortization of deposits

168 11 402 27

Interest expense – increased by discount accretion of borrowings

(53) (44) (126) (88)

Total net interest expense impact 115 (33) 276 (61)

Total impact on net interest income $ 2,390 3,598 4,889 4,911

The increase in loan discount accretion on purchased loans for the first quarter of 2022 as compared to the prior year was driven by the loans acquired from Select in the fourth quarter of 2021.

The decrease in loan discount accretion on purchased loans fo r both the three months and the six months ended June 30, 2022 as compared to the same periods in the prior year is related to accelerated accretion recorded in 2021 on the payoffs of five former failed-bank loans.

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

At March 31, 2022 and 2021, unaccreted loan discount on purchased loans amounted to $15.6 million and $12.7 million, respectively.

At June 30, 2022 and 2021, unaccreted loan discount on purchased loans amounted to $14.0 million and $5.3 million, respectively.

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 vary relative to fluctuations in the SBA loan portfolio.

At March 31, 2022 and 2021, unaccreted loan discount on SBA loans amounted to $5.9 million and $7.1 million, respectively.

At June 30, 2022 and 2021, unaccreted loan discount on SBA loans amounted to $5.4 million and $7.0 million, respectively.

Amortization of net deferred loan fees also impacts interest income.

During the first quarter of 2022, we amortized net deferred PPP fees of $1.3 million as interest income compared to $3.0 million for the first quarter of 2021.

At March 31, 2022, we had $1.3 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 second quarter of 2022 a s a result of the loan forgiveness process.

During the six months ended June 30, 2022, we amortized net deferred PPP fees of $2.3 million as interest income compared to $5.7 million for the six months ended June 30, 2021.

At June 30, 2022, we had $284,000 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.

Provision for Credit Losses and Provision for Unfunded Commitments

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The allowance for unfunded commitments is included in "Other liabilities" in the Consolidated Balance Sheets.

The provision for credit losses of $3.5 million for the three months ended March 31, 2022 was based on changes in the loan portfolio and updated economic forecasts, and is compared to no provision for the three months ended March 31, 2021.

The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined under CECL.

We recorded a reversal of provision for unfunded commitments for the three months ended March 31, 2022 totaling $1.5 million related primarily to the fluctuations in the levels and mix of outstanding loan commitments.

There was no provision for unfunded commitments for the three months ended March 31, 2021.

No provision for credit losses was recorded for the three months ended June 30, 2022 based on improving trends, and $3.5 million was recorded for the six months ended June 30, 2022 based on updated economic forecasts and updated loss driver analyses normally performed in the first quarter of the year.

Also based on the CECL model results and improving asset quality trends, no provision was required for the three and six months ended June 30, 2021.

No provision for unfunded commitments was recorded for the three months ended June 30, 2022, and a reversal provision of $1.5 million was recorded for the six months ended June 30, 2022, related primarily to the fluctuations in the levels and mix of outstanding loan commitments.

There was $1.9 million provision for unfunded commitments for the three and six months ended June 30, 2021.

Additional discussion of 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 $19.3 million and $20.7 million for the three months ended March 31, 2022 and 2021, respectively.

Included in noninterest income was nonrecurring amounts totaling $1.6 million in other gains and $34,000 in other losses for the three months ended March 31, 2022 and 2021, respectively.

Our noninterest income amounted to $17.3 million and $21.4 million for the three months ended June 30, 2022 and 2021, respectively, and $36.5 million and $42.0 million for the six months ended June 30, 2022 and 2021, respectively.

Included in noninterest income was nonrecurring amounts totaling $1.6 million and $1.5 million in other gains for the three months ended June 30, 2022 and 2021, respectively, and $3.2 million and $ 1.5 million in other gains for the six months ended June 30, 2022 and 2021, respectively.

The following table presents the primary components of noninterest income.

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

($ in thousands) 2022 2021 2022 2021

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$ 3,700 2,824 7,241 5,557

Other service charges, commissions and fees - net bankcard interchange 4,711 3,523

Other service charges, commissions, and fees - other 2,294 1,999

Other service charges and fees - bankcard interchange income, net 4,812 4,409 9,523 7,933

Other service charges and fees - other 3,070 2,087 5,364 4,085

Fees from presold mortgage loans

454 2,274 1,575 6,818

Commissions from sales of insurance and financial products

1,151 2,466 2,096 4,656

SBA consulting fees

704 2,187 1,484 4,951

SBA loan sale gains

841 2,996 4,102 5,326

Bank-owned life insurance ("BOLI") income 942 614 1,918 1,234

Other gains (losses), net

Other gains, net 1,590 1,517 3,212 1,483

Noninterest income $ 17,264 21,374 36,515 42,043

Service charges on deposit accounts increased $0.8 million, or 30%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Service charges on deposit accounts increased $0.9 million, or 31%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, and increased $1.7 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The increase was driven by the higher number of new customers and transaction accounts generating fees from both organic growth and the Select acquisition.

Other service charges, commissions and fees - net bankcard interchange represents interchange income from debit and credit card transactions, net of associated interchange expense, and totaled $4.7 million for the three months ended March 31, 2022, a 34% increase from the $3.5 million for the three months ended March 31, 2021.

Other service charges and fees - bankcard interchange income, net represents interchange income from debit and credit card transactions, net of associated interchange expense, and increased $0.4 million, or 9%, for the three months ended June 30, 2022 as compared to the prior year period, and increased $1.6 million for the six months ended June 30, 2022 compared to the prior year period.

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.

Because the Company exceeded $10 billion in total assets at December 31, 2021, it is expected that bankcard revenue will be adversely impacted by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 limit on debit card interchange fees beginning July 1, 2022.

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 increase in this line item for the three months ended March 31, 2022 compared to the three months ended

March 31, 2021 of $0.3 million, or 15%, was primar ily 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 $1.1 million for the three months ended March 31, 2022, a decline of $3.4 million, or 75%, from the same time period in 2021.

The decrease was due to the general decline in home mortgage refinancings and new originations during 2022 as compared to the prior year.

Commissions from sales of insurance and financial products amounted to $0.9 million for the three months ended March 31, 2022, down $1.2 million from the same period in 2021.

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

The reduction in SBA consulting services for the three months ended March 31, 2022, compared to the same period in 2021 of $2.0 million, or 72%, is directly related to the wind-down of the PPP loan program and lower related revenues earned in the current period.

SBA loan sale gains were up $0.9 million, or 40%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 relating to the timing of sales and the volume of originated loans available to be sold in each period.

The increase in BOLI income for the three months ended March 31, 2022, compared to the same period in 2021, of $0.4 million was related to the acquisition of Select which contributed $31.0 million in BOLI as of the date of acquisition.

Other gains (losses), net amounted to a net gain of $1.6 million for the three months ended March 31, 2022 due primarily to death benefits realized on BOLI policies.

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

The increase in this line item for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 of $1.0 million, or 47%, and the increase of $1.3 million for the six months ended June 30, 2022 compared to the prior year period, was primar ily due to growth in the number of accounts and related transaction activity, as well as the Bank's deposit base increases.

Fees from presold mortgage loans amounted to $0.5 million for the three months ended June 30, 2022, a decline of $1.8 million, or 80%, from the same time period in 2021, and a $5.2 million decrease for the six months ended June 30, 2022 compared to the prior year period.

The decrease was due to the general increase in market interest rates and related decline in home mortgage refinancings and new originations during 2022 as compared to the prior year.

Commissions from sales of insurance and financial products for the three months ended June 30, 2022 decreased $1.3 million from the same period in 2021, and decreased $2.6 million for the six months ended June 30, 2022 compared to the prior year period.

The decreases were due to the sale of the majority of the assets of our property and casualty insurance subsidiary in June 2021.

SBA consulting fees decreased for the three months ended June 30, 2022, compared to the same period in 2021 by $1.5 million, or 68%, which was directly related to the wind-down of the PPP loan program and lower related revenues earned in the current period.

SBA consulting services decreased $3.5 million for the six months ended June 30, 2022 compared to the prior year period.

SBA loan sale gains decreased $2.2 million, or 72%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 relating to the timing of sales and the volume of originated loans available to be sold in each period.

SBA loan sale gains decreased $1.2 million for the six months ended June 30, 2022 compared to the prior year period.

Other gains, net for the three months and six months ended June 30, 2022 are primarily related to death benefits realized on BOLI policies.

Other gains, net for the comparable periods of 2021 are primarily related to the sale of the the majority of the assets of our property and casualty insurance subsidiary in June 2021.

Noninterest Expenses

Total noninterest expenses totaled $51.5 million and $40.1 million for the three months ended March 31, 2022 and 2021, respectively.

Included in noninterest expense was nonrecurring merger and acquisition costs totaling $3.5 million for the three months ended March 31, 2022.

There were no merger costs for the comparable period of 2021.

Noninterest expenses totaled $49.4 million and $41.0 million for the three months ended June 30, 2022 and 2021, respectively, and $100.9 million and $81.1 million for the six months ended June 30, 2022 and 2021, respectively.

Included in noninterest expense was nonrecurring merger and acquisition costs totaling $0.7 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively.

Merger and acquisition costs totaled $4.2 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively.

The following table presents the primary components of noninterest expense.

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

($ in thousands) 2022 2021 2022 2021

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Advertising and marketing expense 884 620 1,795 1,230

Foreclosed property (gains) losses, net (80) 157

Foreclosed property gains, net (292) (173) (372) (16)

Non-credit losses 488 276 1,090 461

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In general, the increase in noninterest expenses was driven by higher operating expenses from personnel, locations, number of accounts, and higher level of activity resulting from the Select acquisition completed in the fourth quarter of 2021.

Merger and acquisition expenses amounted to $3.5 million for the three months ended March 31, 2022 primarily related to computer system conve rsion costs.

Total personnel expense increased from $24.7 million for the three months ended March 31, 2021 to $29.0 million for the three months ended March 31, 2022, an increase of $4.3 million, or 18%.

Within personnel expense, total compensation increased $3.3 million, or 16.5% primarily related to the incremental number of associates from the Select acquisition, combined with regular annual salary increases.

Employee benefits expense increased $1.0 million, or 22% relative to the higher salaries and other compensation expense combined with higher insurance claims in the first quarter of 2022 compared to the prior year.

We recorded income tax expense of $8.7 million for the three months ended March 31, 2022 and $7.6 million for the three months ended March 31, 2021.

Our effective tax rates declined to 20.4% from 21.3% for the three months ended March 31, 2022 and 2021, respectively.

The lower effective tax rate in the first quarter of 2022 was related to higher tax-exempt income in that quarter relative to taxable income.

Merger and acquisition expenses amounted to $4.2 million for the six months ended June 30, 2022 and primarily related to core system conversion costs incurred in the Select acquisition.

Total personnel expense increased $4.8 million, or 19%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Total personnel expense increased $9.2 million for the six months ended June 30, 2022 compared to the prior year period.

The increase for each period was a direct result of the incremental increase in the number of associates from the Select acquisition, combined with regular annual salary increases.

Also contributing to the increases were higher insurance claims and costs in the 2022 compared to the prior year.

We recorded income tax expense of $9.6 million for the three months ended June 30, 2022 and $7.9 million for the three months ended June 30, 2021.

Our effective tax rates declined to 20.7% from 21.3% for the three months ended June 30, 2022 and 2021, respectively.

The lower effective tax rate in the second quarter of 2022 was related to higher tax-exempt income in that quarter relative to taxable income.

We recorded income tax expense of $18.2 million and $15.6 million for the six months ended June 30, 2022 and 2021, respectively.

Our effective tax rates declined to 20.6% from 21.3% for the six months ended June 30, 2022 and 2021, respectively.

The lower effective tax rate for the six months ended June 30, 2022 was related to higher tax-exempt income in the time period relative to taxable income.

FINANCIAL CONDITION

Total assets at March 31, 2022 amounted to $10.7 billion, a 1.4% increase from December 31, 2021.

Total loans at March 31, 2022 amounted to $6.1 billion, a 0.3% decrease from December 31, 2021, and total deposits amounted to $9.4 billion, a 2.9% increase from December 31, 2021.

For the first three months of 2022, loans declined $17.0 million, or 0.3%, related primarily to forgiveness of PPP loans offsetting core growth, which is historically slower in the first quarter of the year.

We did experience growth in our commercial real estate and 1-4 family first mortgage categories and expect to experience continued organic growth during the remainder of 2022.

The mix of our loan portfolio remained substantially the same at March 31, 2022 compared to December 31, 2021.

The majority of our real estate loans were personal and commercial loans where real estate provides additional security for the loan.

Total assets at June 30, 2022 amounted to $10.6 billion, a 0.5% increase from December 31, 2021.

Total loans at June 30, 2022 amounted to $6.2 billion, a 2.7% increase from December 31, 2021, and total deposits amounted to $9.4 billion, a 2.6% increase from December 31, 2021.

For the six months ended June 30, 2022, loans increased $161.5 million, or 2.7%, related primarily to core growth partially offs et by forgiveness of PPP loans.

We experienced organic growth in most of our loan categories, with commercial real estate a nd 1-4 family first mortgage categories experiencing the largest growth.

The mix of our loan portfolio remained substantially the same at June 30, 2022 compared to December 31, 2021.

The majority of our real estate loans were personal and commercial loans where real estate provides additional security for the

Note 4 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

For the three month period ended March 31, 2022, we continued to experience growth in our deposit base, with total deposits increasing by $260.5 million, or 2.9% from December 31, 2021.

Deposit growth was primarily in transaction accounts (checking, money market and savings), which we believe to be related to our ongoing deposit growth initiatives, as well as stimulus funds and changes in customer behaviors remaining from the pandemic.

For the six months ended June 30, 2022, we continued to experience growth in our deposit base, with total deposits increasing by $235.1 million, or 2.6%, from December 31, 2021.

Deposit growth was primarily in transaction accounts (checking and money market products), which we believe to be related to our ongoing deposit growth initiatives, as well as stimulus funds and changes in customer behaviors remaining from the pandemic.

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.

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$ in thousands

As of/for the quarter ended March 31, 2022 As of/for the quarter ended December 31, 2021

June 30, 2022 December 31, 2021

Nonperforming assets

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Allowance for credit losses to nonaccrual loans 202.99 % 158.96 %

As shown in the table above, nonperforming assets decreased from December 31, 2021 to March 31, 2022, which was primarily driven b y the decrease in TDRs, decrease in accruing loans past due 90 days or more which were directly related to the Select acquisition, and the reduction in foreclosed properties.

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

At March 31, 2022, total nonaccrual loans amounted to $33.5 million, compared to $34.7 million at December 31, 2021.

"Real estate-mortgage-commercial and other" is the largest category of nonaccruals loans, at $15.2 million, or 45% of total nonaccrual loans, followed by "Commercial, financial, and agricultural" at $12.6 million, or 38% of total nonaccrual loans.

Included in those categories are nonaccrual SBA loans totaling $18.0 million at March 31, 2022, or 54% of total nonaccrual loans, that have $7.4 million in guarantees from the SBA.

As shown in the table above, nonperforming assets decreased from December 31, 2021 to June 30, 2022, with improvements noted in all categories.

At June 30, 2022, total nonaccrual loans amounted to $28.7 million, compared to $34.7 million at December 31, 2021 .

"Real estate-mortgage-comm ercial and other" is the largest category of nonaccrual loans, at $11.9 million, or 42%, of total nonaccrual loans, followed by "Commercial, financial, and agricultural" at $11.4 million, or 40%, of total nonaccrual loans.

Included in those categories are nonaccrual SBA loans totaling $15.8 million at June 30, 2022, or 55%, of total nonaccrual loans, that have $6.2 million in guarantees from the SBA.

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

At March 31, 2022, total accruing TDRs amounted to $12.7 million, compared to $13.9 million at December 31, 2021, with the decrease being attributed to one large commercial TDR paying off during the period.

As reflected in Note 4 to the financial statements, total classified loans were relatively flat at $55.8 million at March 31, 2022 compared to $56.0 million at December 31, 2021.

Special mention loans decreased from $43.1 million at December 31, 2021 to $38.2 million at March 31, 2022.

Total foreclosed real estate amounted to $2.8 million at March 31, 2022 and $3.1 million at December 31, 2021.

At June 30, 2022, total accruing TDRs amounted to $11.8 million, compared to $13.9 million at December 31, 2021, with the decrease being attributed to thre e large commercial TDRs paying off d uring the period.

As reflected in Note 4 to the financial statements, total classified loans declined 11.1% to $49.8 million at June 30, 2022 compared to $56.0 million at December 31, 2021.

Special mention loans decreased from $43.1 million at December 31, 2021 to $36.2 million at June 30, 2022.

The majority of the improvements were in the commercial real estate and 1-4 family mortgage categories.

Total foreclosed real estate amounted to $0.7 million at June 30, 2022 and $3.1 million at December 31, 2021.

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

During the first quarter of 2022, we recorded sales of three foreclosed properties partially offset by the addition of one foreclosed property.

During the six months ended June 30, 2022, we recorded sales of six foreclosed

properties partially offset by the addition of one foreclosed property.

We believe that the fair values of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented.

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

($ in thousands) At March 31, 2022 At December 31, 2021

($ in thousands) At June 30, 2022

At December 31, 2021

Vacant land and farmland $ 103 104

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Our ACL is based on the total amount of loan losses that are expected over the remaining life of the loan portfolio.

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

We recorded $3.5 million provision for credit losses on loans in the first quarter of 2022 compared to no provision in the first quarter of 2021, which was the first quarter of our adoption of CECL.

The higher provision in 2022 was primarily related to changes in the loan portfolio and updated economic forecasts.

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

Our estimate of credit losses on loans 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 credit losses.

The ACL is measured on a collective pool basis when similar risk characteristics exist based primarily on discounted cash flows computed for each loan in a pool based on its individual characteristics.

When we determine that foreclosure is probable or when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

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

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

Commercial loans are diversified among a variety of industries.

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Collateral for virtually all of these loans is located within our principal market area.

For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, allowance for credit losses, charge-offs and recoveries, and key ratios .

For the six months ended June 30, 2022, we recorded a provision for credit losses of $3.5 million based on our CECL model assumption updates and the recalibration of the model to include the historical loss rates from the Select acquired portfolio.

A reversal of the provision for unfunded commitments of $1.5 million was recorded for that period related to fluctuations in the levels and mix of outstanding loans commitments.

For the comparable period of 2021, based on our loan portfolio mix and economic forecast updates, no provision for credit losses and a $1.9 million provision for unfunded commitments were required.

For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, ACL, charge-offs and recoveries, and key ratios .

Loan Ratios, Loss and Recovery Experience

($ in thousands) Three Months

March 31, 2022 Twelve Months

($ in thousands) Six Months Ended June 30, 2022 Twelve Months

Ended December 31,

2021 Three Months

March 31, 2021

2021 Six Months Ended June 30, 2021

Loans outstanding at end of period $ 6,243,170 6,081,715 4,782,064

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Recoveries of loans previously charged-off as a percent of loans charged-off 96.15 % 64.75 % 56.36 %

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

In addition to the ACL on loans, we maintain an allowance for lending-related commitments such as unfunded loan commitments.

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

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

The allowance for unfunded commitments of $12.0 million and $13.5 million at March 31, 2022 and December 31, 2021, respectively, is classified on the balance sheet within "Other liabilities".

We recorded a reversal provision for credit losses on unfunded commitments of $1.5 million during the first quarter of 2022 primarily relating to the fluctuations in the levels and mix of outstanding loan commitments.

The allowance for unfunded commitments of $12.0 million and $13.5 million at June 30, 2022 and December 31, 2021, respectively, is classified on the balance sheet within "Other liabilities".

We recorded a reversal provision for credit losses on unfunded commitments of $1.5 million during the six months ended June 30, 2022 primarily relating to the fluctuations in the levels and mix of outstanding loan commitments.

We believe the ACL is adequate at each period end presented.

It must be emphasized, however, that the determination of the allowances using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans.

No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for credit losses or future charges to earnings.

See “Critical Accounting Policies – Allowance for Credit Losses on Loans and Unfunded Commitments” in Note 1 to the 2021 Annual Report on Form 10-K filed with the SEC for more information.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses and value of other real estate.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our ACL and value of other real estate.

Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations.

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Since the beginning of the COVID-19 pandemic in early 2020, we have seen our liquidity levels increase, with increases in deposits account balances leading to higher cash and investment securities levels.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources:

1) an approximately $876 million line of credit with the FHLB (of which $1.9 million and $2.0 million were outstanding at March 31, 2022 and December 31, 2021, respectively);

2) a $100 million federal funds line with a correspondent bank (of which none was outstanding at March 31, 2022 or December 31, 2021);

and 3) an approximately $138 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at March 31, 2022 or December 31, 2021).

Unused and available lines of credit amounted to $1.1 billion at March 31, 2022.

Our overall liquidity is essentially the same as at December 31, 2021 with our liquid assets (cash and securities) as a percentage of our total deposits and borrowings at 33.9% at March 31, 2022.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings under:

1) an approximately $858 million line of credit with the FHLB (of which $1.9 million and $2.0 million were outstanding at June 30, 2022 and December 31, 2021, respectively);

2) a $150 million federal funds line with a correspondent bank

(of which none was outstanding at June 30, 2022 or December 31, 2021);

and 3) an approximately $169 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at June 30, 2022 or December 31, 2021).

Unused and available lines of credit amounted to $1.2 billion at June 30, 2022.

Our overall liquidity is essentially the same as at December 31, 2021 with our liquid assets (cash and securities) as a percentage of our total deposits and borrowings at 30.5% at June 30, 2022.

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

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

We have not engaged in significant derivative activities through March 31, 2022, and have no current plans to do so.

We have not engaged in significant derivative activities through June 30, 2022, and have no current plans to do so.

Capital Resources

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We must comply with regulatory capital requirements established by the FRB.

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.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.

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Tier 1 capital is comprised of Common Equity Tier 1 capital plus Additional Tier 1 Capital, which includes non-cumulative perpetual preferred stock and trust preferred securities.

Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is o ur allowance for credit losses.

Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is o ur ACL.

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

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

At March 31, 2022, our capital ratios exceeded the regulatory minimum ratios discussed above.

At June 30, 2022, our capital ratios exceeded the regulatory minimum ratios discussed above.

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Risk-based capital ratios:

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

At March 31, 2022, First Bank exceeded the minimum ratios established by the regulatory authorities.

At June 30, 2022, First Bank exceeded the minimum ratios established by the regulatory authorities.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis