What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-08-05 · 181 added, 174 removed, 293 unchanged (55% 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 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.

On October 15, 2021 we completed the acquisition of Select Bancorp, Inc.

("Select") which was headquartered in Dunn, North Carolina and which contributed total assets of $1.8 billion, total loans of $1.3 billion, and total deposits of $1.6 billion as of the acquisition date.

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

On June 21, 2022, we announced an agreement to acquire GrandSouth Bancorporation ("GrandSouth"), headquartered in Greenville, South Carolina, in an all-stock transaction.

The terms of the agreement provide that each share of GrandSouth common and preferred stock issued and outstanding immediately prior to the effective time of the acquisition will be converted into 0.91 shares of the Company's common stock.

We have received all regulatory approvals for the transaction.

Approval by GrandSouth's shareholders remains pending and is expected in the fourth quarter of 2022.

The acquisition is expected to close in early January 2023.

GrandSouth operates eight branches throughout South Carolina and currently has $1.3 billion in total assets, $995.1 million in loans, and $1.1 billion in deposits.

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

We earned net income of $37.9 million, or $1.06 diluted EPS, during the three months ended September 30, 2022 compared to net income of $27.6 million, or $0.97 diluted EPS, for the three months ended September 30, 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 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 $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 20.7% 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.

• Net interest income for the third quarter of 2022 was $85.3 million, a 45.7% increase from the $58.6 million recorded in the third quarter of 2021.

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

• Also contributing to the increase in net interest income was the higher net interest margin ("NIM") which increased in the third quarter of 2022 to 3.40% from 3.03% for the third quarter of 2021 related to the increase in market interest rates driving higher yields on loans, while our cost of funds has remained low and was essentially unchanged from the same period of the prior year.

• For the three months ended September 30, 2022, the Company recorded $5.1 million in provision for credit losses.

This is compared to a release of provisions of $1.4 million for the third quarter of 2021.

Fluctuations each period are based on loan growth during the period, changes in the levels of nonperforming loans, economic forecasts impacting loss drivers, and other assumptions and inputs to the CECL model.

• Noninterest income for the three months ended September 30, 2022 increased slightly, up $0.4 million, or 2.4%, from the comparable period of 2021 with higher service charges and other gains offset by lower loan sale gains, consulting income and other fees.

• Noninterest expense increased $7.9 million, or 19.3%, for the quarter ended September 30, 2022, as compared to the prior year period driven by higher operating expenses resulting from the Select acquisition.

Total assets at September 30, 2022 amounted to $10.5 billion, a 0.1% 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 $6.2 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.

• Total loans amounted to $6.5 billion at September 30, 2022, an increase of $443.6 million, a 9.7% annualized growth rate, from December 31, 2021 due to organic growth in all markets.

Organic growth for the third quarter of 2022 amounted to $282.1 million.

• Total investment securities decreased $261.8 million from December 31, 2021 to total $2.9 billion at September 30, 2022, as cash flows were utilized to fund loan growth.

Also contributing to the decline was the increase in unrealized losses on available for sale securities which totaled $464.6 million at September 30, 2022.

• Total deposits amounted to $9.2 billion at September 30, 2022, an increase of $104.6 million, or 1.1%, from December 31, 2021.

While deposits have continued to grow for the year to date period, the third quarter of 2022 realized a decline in total deposits of $130.5 million as market rates for deposits have become more competitive and customer behaviors may be shifting from activity experienced during the COVID-19 pandemic.

• We remain well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 12.76% and total risk-based capital ratio of 14.84%.

• 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.

• Accumulated other comprehensive loss increased $333.1 million related to higher unrealized losses on available for sale securities due to increased market rates experienced starting in March 2022.

Overview and Highlights for Nine Months Ended September 30, 2022

Total net income of $108.5 million, or $3.04 diluted EPS, was reported during the nine months ended September 30, 2022 compared to net income of $85.1 million, or $2.99 diluted EPS, for the nine months ended September 30, 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 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.

• Net interest income for the nine months ended September 30, 2022 was $240.5 million, a 39.4% increase from the $172.6 million recorded in the nine months ended September 30, 2021.

The increase in net interest income from the prior year period was due in large part to higher earning assets related to both organic growth and the Select acquisition completed in the fourth quarter of 2021.

Also contributing to the increase in net interest income was the higher NIM which increased 10 basis points in 2022 as compared to the prior year.

• For the nine months ended September 30, 2022, we recorded a provision for credit losses of $8.6 million based on loan growth for the period and CECL model assumptions including deterioration economic forecasts.

This is compared to a reversal of the provision for credit losses of $1.4 million for the comparable period of 2021.

• Noninterest income declined $5.1 million, or 8.8%, from the prior year period primarily due to a $7.0 million decrease in mortgage banking income related to lower levels of activity due to market rate increases.

Other decreases in SBA consulting and loan sale gains where more than offset by higher service changes and other income income related to higher level of accounts and transactions arising from the Select acquisition.

• Noninterest expense increased $27.7 million, or 22.7%, for the nine months ended September 30, 2022 as compared to the same period in the prior year.

Included in the current year period was $4.8 million in merger and acquisition expenses primarily related to computer system conversion costs resulting from the Select acquisition.

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 have and may continue to arise;

its ultimate duration and infection spikes that may occur;

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 allowance for credit losses ("ACL") represents management’s current estimate of credit losses for the remaining estimated life of financial instruments.

The allowance for credit losses 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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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 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.

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 September 30, 2022, we had core deposit and other intangibles of $13.9 million subject to amortization and $364.3 million of goodwill, which is not subject to amortization.

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 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.

Net interest income for the three months ended September 30, 2022 amounted to $85.3 million, an increase of $26.8 million, or 45.7%, from the $58.6 million recorded in the third quarter of 2021.

Net interest income on a tax-equivalent basis for the three months ended September 30, 2022 amounted to $86.0 million, an increase of $26.9 million, or 45.5%, from the $59.1 million recorded in the third 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 for the three months ended June 30, 2022 and 2021.

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

Average Balances and Net Interest Income Analysis

For the Three Months Ended June 30,

For the Three Months Ended September 30,

($ in thousands) Average

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

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $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.

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 $0.8 million, and $1.9 million for three months ended September 30, 2022 and 2021, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $2.6 million and $1.2 million for three months ended September 30, 2022 and 2021, respectively.

(3) Includes tax-equivalent adjustments of $0.7 million and $0.6 million for three months ended September 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 $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 $0.4 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 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.

Overall, as demonstrated in the table above, net interest income grew $26.8 million for the three months ended September 30, 2022 from the comparable period of the prior year.

Higher earning asset volumes, from both organic growth and the Select acquisition, combined with an expansion in NIM, drove the increase.

Rates on interest-bearing deposits remained stable year-over-year while rated on borrowings increased relative to higher market rates.

• Market interest rates increased 300 basis points between March and September 2022 to result in an average prime rate of 5.35% for three months ended September 30, 2022 compared to 3.25% for the prior year period.

• Average loan volumes for the three months ended September 30, 2022 were $1.6 billion higher than the same period in 2021.

In addition to higher volumes, interest rates on loans increased 40 basis points to 4.49% for the third quarter of 2022, to result in an increase in loan interest income of $21.3 million.

• Interest income on total investment securities increased $5.5 million for the three months ended September 30, 2022 when compared to the same period in 2021 related primary to the higher yields on the portfolio as reinvestment rates increased between the periods.

Average volumes increased $910.5 million between periods contributing to the increase in interest income.

• Higher average balances in interest-bearing deposits of $1.0 billion drove a $0.2 million increase in deposit interest expense for the three months ended September 30, 2022 compared to the same period in 2021.

Rates for the same periods remained essentially unchanged.

• The combination of higher rates on borrowings, up 154 basis points from the third quarter of 2021 as compared to the third quarter of 2022, related to increasing market rates, and the increase in volume of borrowings between periods drove the $0.7 million increase in interest expense for this category.

Starting in the third quarter of 2022, short-term borrowings were utilized as needed to fund loan growth and manage fluctuations in deposit balances.

• The increase in NIM was in large part the result of market rate increases and improved pricing on new loans.

Net interest income for the nine months ended September 30, 2022 amounted to $240.5 million, an increase of $67.9 million, or 39.4%, from the $172.6 million recorded in the nine months ended September 30, 2021.

Net interest income on a tax-equivalent basis for the nine months ended September 30, 2022 amounted to $242.5 million, an increase of $68.5 million, or 39.3%, from the $174.1 million recorded in the nine months ended September 30, 2021.

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

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

Average Balances and Net Interest Income Analysis

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

($ in thousands) Average

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

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $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.

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 $2.8 million, and $7.5 million for nine months ended September 30, 2022 and 2021, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $7.2 million and $6.2 million for nine months ended September 30, 2022 and 2021, respectively.

(3) Includes tax-equivalent adjustments of $2.1 million and $1.5 million for nine months ended September 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.

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 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.

Overall, as demonstrated in the table above, net interest income grew $67.9 million for the nine months ended September 30, 2022 from the comparable period of the prior year.

Higher earning asset volumes, from both organic growth and the Select acquisition, combined with an expansion in NIM, drove the increase.

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

Interest rates on loans remained fairly stable between periods as increases in market rates during 2022 were offset by a decline of $5.2 million in PPP loan fee accretion for 2022 as compared to 2021.

The combination of factors resulted in an increase in loan interest income of $47.2 million.

• Higher average volume of $1.2 billion on total securities resulted in an increase of $19.7 million in interest income for the nine months ended September 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.

• Lower interest rates paid on deposits drove a $0.8 million decrease in deposit interest expense for the nine months ended September 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 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.

• Starting in the third quarter of 2022, short-term borrowings were utilized as needed to fund loan growth and manage fluctuations in deposit balances.

In addition, higher market interest rates drove the increase in rates on borrowings, up 104 basis points for nine months ended September 30, 2022 as compared to the prior year period.

and resulted in an increase of $1.0 million increase in interest expense for this category.

• The increase in NIM was in large part the result of higher market rates and lower deposit pricing, partially offset by lower PPP loan fee accretion.

Our NIM for all periods benefited from net accretion income, primarily associated with purchase accounting premiums/discounts on loans, deposits and borrowings 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,

Three Months Ended September 30, Nine Months Ended September 30,

($ in thousands) 2022 2021 2022 2021

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Interest expense – reduced by premium amortization of deposits

168 11 402 27

Interest expense – increased by discount accretion of borrowings

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Total impact on net interest income $ 2,608 1,190 7,497 6,100

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.

The increase in loan discount accretion on purchased loans fo r both the three months and the nine months ended September 30, 2022 as compared to the same periods in the prior year is related to the Select acquisition.

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

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

At September 30, 2022 and 2021, unaccreted loan discount on purchased loans amounted to $12.5 million and $4.8 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 June 30, 2022 and 2021, unaccreted loan discount on SBA loans amounted to $5.4 million and $7.0 million, respectively.

At September 30, 2022 and 2021, unaccreted loan discount on SBA loans amounted to $4.6 million and $6.6 million, respectively.

Amortization of net deferred loan fees also impacts interest income.

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.

During the nine months ended September 30, 2022, we amortized net deferred PPP fees of $2.6 million as interest income compared to $7.8 million for the nine months ended September 30, 2021.

At September 30, 2022, there were no remaining deferred PPP origination fees.

Provision for Credit Losses and Provision for Unfunded Commitments

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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.

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.

A provision for credit losses of $5.1 million was recorded for the three months ended September 30, 2022 and $8.6 million was recorded for the nine months ended September 30, 2022 based on loan growth during each period, updated economic forecasts impacting loss drivers, and other assumptions and inputs to the CECL model.

Also based on the CECL model results and fluctuations in asset quality trends, a reversal provision of $1.4 million was required for the three and nine months ended September 30, 2021.

In addition, a $0.3 million provision for unfunded commitments was recorded for the three months ended September 30, 2022, and a reversal provision of $1.2 million was recorded for the nine months ended September 30, 2022, related primarily to the fluctuations in the levels and mix of outstanding loan commitments.

There was a $1.0 million and $3.0 million provision for unfunded commitments for the three and nine months ended September 30, 2021, respectively.

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 $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.

Our noninterest income amounted to $16.9 million and $16.5 million for the three months ended September 30, 2022 and 2021, respectively, and $53.4 million and $58.6 million for the nine months ended September 30, 2022 and 2021, respectively.

Included in noninterest income was nonrecurring amounts totaling $2.7 million and $50,000 in other gains for the three months ended September 30, 2022 and 2021, respectively, and $6.0 million and $1.5 million in other gains for the nine months ended September 30, 2022 and 2021, respectively.

The following table presents the primary components of noninterest income.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

($ in thousands) 2022 2021 2022 2021

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Noninterest income $ 16,912 16,511 53,427 58,554

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.

Service charges on deposit accounts increased $1.0 million, or 29.8%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, and increased $2.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 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 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 and fees - bankcard interchange income, net represents interchange income from debit and credit card transactions, net of associated interchange expense, and decreased $1.4 million, or 31.7%, for the three months ended September 30, 2022 as compared to the prior year period, and increased $0.2 million for the nine months ended September 30, 2022 compared to the prior year period.

The decrease is a result of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 limitation on debit card interchange fees.

Because the Company exceeded $10 billion in total assets at December 31, 2021, the interchange fee limitation became effective for us July 1, 2022.

Higher volumes of accounts and transactions have partially offset the rate limitation.

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 increase in this line item for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 of $1.2 million, or 60.4%, and the increase of $2.5 million for the nine months ended September 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 $0.4 million for the three months ended September 30, 2022, a decline of $1.7 million, or 82.1%, from the same time period in 2021, and a $7.0 million decrease for the nine months ended September 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.

Commissions from sales of insurance and financial products for the three months ended September 30, 2022 increased $0.2 million from the same period in 2021.

There was a decrease of $2.4 million for the nine months ended September 30, 2022 compared to the prior year period which was directly related 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 September 30, 2022, compared to the same period in 2021 by $0.6 million, or 57.5%, and decreased $4.1 million for the nine months ended September 30, 2022 compared to the prior year period.

The declines in fees were directly related to the wind-down of the PPP loan program and lower related revenues earned in the current year periods.

SBA loan sale gains decreased $1.2 million, or 71.1%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 and declined $2.4 million for the nine months ended September 30, 2022 compared to the prior year period.

The lower gains were related to the timing of sales and the volume of originated loans available to be sold in each period.

Other gains, net for the third quarter of 2022 consisted primarily of a settlement of a prior year cash letter processing differences.

Also included in other gains for the nine months ended September 30, 2022 were death benefits realized on BOLI policies.

Other gains for the nine months ended September 20, 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

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.

Noninterest expenses totaled $48.7 million and $40.8 million for the three months ended September 30, 2022 and 2021, respectively, and $149.6 million and $121.9 million for the nine months ended September 30, 2022 and 2021, respectively.

Included in noninterest expense was nonrecurring merger and acquisition costs totaling $0.5 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively.

Merger and acquisition costs totaled $4.8 million and $0.7 million for the nine months ended September 30, 2022 and 2021, respectively.

The following table presents the primary components of noninterest expense.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

($ in thousands) 2022 2021 2022 2021

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Amortization of intangible assets 889 695 2,859 2,437

Credit card rewards and other expenses 970 1,116 2,213 2,192

Credit card rewards and other bankcard expenses 805 1,161 3,018 3,353

Telephone and data lines 929 736 2,719 2,226

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Data processing expense 1,790 1,440 5,811 4,139

Professional fees 1,117 952 3,295 2,052

Advertising and marketing expense 856 742 2,651 1,972

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

Non-credit losses 828 321 1,918 782

Deposit related expenses 604 383 1,271 1,145

Foreclosed property losses (gains), net — 23 (372) 7

Other operating expenses 5,325 4,031 15,288 12,655

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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 $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.

Merger and acquisition expenses amounted to $4.8 million for the nine months ended September 30, 2022 and primarily related to March 2022 core system conversion costs incurred for the Select acquisition.

Total personnel expense increased $3.5 million, or 13.8%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Total personnel expense increased $12.6 million for the nine months ended September 30, 2022 compared to the prior year period.

The increase for each period was a direct result of the incremental 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 2022 compared to the prior year.

We recorded income tax expense of $10.2 million for the three months ended September 30, 2022 and $7.0 million for the three months ended September 30, 2021.

Our effective tax rates increased to 21.2% from 20.1% for the three months ended September 30, 2022 and 2021, respectively.

The increase in effective tax rate between quarterly periods was attributable to the utilization of additional federal disaster credits in the third quarter of 2021.

For the nine months ended September 30, 2022 and 2021, we recorded income tax expense of $28.4 million and $22.5 million, respectively.

Our effective tax rates remained stable at 20.8% for the nine months ended September 30, 2022 compared to 20.9% for the comparable period of the prior year.

FINANCIAL CONDITION

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

Total assets at September 30, 2022 amounted to $10.5 billion, a nominal increase from December 31, 2021 as growth in loans was funded by existing cash and investments shifting the balance sheet mix somewhat.

Total loans at September 30, 2022 amounted to $6.5 billion, a 7.3% increase from December 31, 2021, and total deposits amounted to $9.2 billion, a 1.1% increase from December 31, 2021.

For the nine months ended September 30, 2022, the net increase in loans was $443.6 million, or 7.3%, related primarily to core growth and loans amounted to 62.1% of total assets as compared to 57.9% of total assets at December 31, 2021 .

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

The mix of our loan portfolio remained substantially the same at September 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 loan.

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

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.

The composition of our investment portfolio remained substantially the same as at December 31, 2021, and continues to reflect our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income.

Total investment securities decreased $261.8 million from December 31, 2021 to total $2.9 billion at September 30, 2022.

as cash flows were utilized to fund loan growth.

Also contributing to the decline was the increase in unrealized losses on available for sale securities which totaled $464.6 million at September 30, 2022.

Note 3 to the consolidated financial statements presents additional detailed information regarding our mix of investments and the unrealized losses for each category.

We invest primarily in securities issued by GSEs including FHLMC, FNMA, GNMA, and SBA, each of which guarantees the repayment of the securities.

Nearly all of our mortgage-backed securities are issued by GSEs and are traded in liquid secondary markets.

The state and local government investments 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.

We have evaluated the unrealized losses on individual securities at September 30, 2022 and determined them to be of a temporary nature due primarily to interest rate factors and not credit quality concerns.

In arriving at this conclusion, we reviewed third-party credit ratings and considered the severity of the impairment.

For the nine months ended September 30, 2022, we continued to experience growth in our deposit base, with total deposits increasing by $104.6 million, or 1.1%, 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 the build up in liquidity during the pandemic.

Nonperforming Assets

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$ in thousands

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Nonperforming assets

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Allowance for credit losses to nonaccrual loans 302.02 % 227.08 %

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 .

Allowance for credit losses to nonperforming loans 216.34 % 158.96 %

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

At September 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 $11.5 million, or 40.1%, of total nonaccrual loans, followed by "Commercial, financial, and agricultural" at $11.4 million, or 39.6%, 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.

Included in those categories are nonaccrual SBA loans totaling $15.6 million at September 30, 2022, or 54.4%, of total nonaccrual loans, that have $5.8 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 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.

At September 30, 2022, total accruing TDRs amounted to $11.4 million, compared to $13.9 million at December 31, 2021, with the decrease being attributed to several large commercial TDR pay-offs or charge-offs during the period which more than offset the new TDRs added during the year to date period.

As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans declined 9.4% to $50.7 million at September 30, 2022 compared to $56.0 million at December 31, 2021.

Special mention loans decreased 23.3% from $43.1 million at December 31, 2021 to $33.1 million at September 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.

Total foreclosed real estate amounted to $0.7 million at September 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 six months ended June 30, 2022, we recorded sales of six foreclosed

properties partially offset by the addition of one foreclosed property.

During the nine months ended September 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 June 30, 2022

At December 31, 2021

Vacant land and farmland $ 103 104

1-4 family residential properties 555 1,231

Commercial real estate — 1,736

Total foreclosed real estate $ 658 3,071

Allowance for Credit Losses and Loan Loss Experience

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

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 nine months ended September 30, 2022 and 2021, we recorded a provision for credit losses of $8.6 million and a reversal of provision for credit losses totaling $1.4 million, respectively.

The increase in provision for 2022 as compared to the prior year period was primarily due to growth in the loan portfolio which accounted for approximately half of the higher provision in 2022.

Also contributing to the increase was the economic forecast inputs to our CECL model driving higher loss rate assumptions, primarily due to higher unemployment forecasts and deteriorating Commercial Real Estate Index forecasts given the developing uncertain economic environment.

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) Six Months Ended June 30, 2022 Twelve Months

($ in thousands) Nine Months Ended September 30, 2022 Twelve Months

Ended December 31,

2021 Six Months Ended June 30, 2021

2021 Nine Months Ended September 30, 2021

Loans outstanding at end of period $ 6,525,286 6,081,715 4,869,841

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Recoveries of loans previously charged-off as a percent of loans charged-off 79.99 % 64.75 % 65.15 %

Allowance for Unfunded Commitments

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

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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 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.

For the nine months ended September 30, 2022, we recorded a reversal of the provision for unfunded commitments of $1.2 million related to fluctuations in the levels and mix of outstanding loans commitments.

For the comparable period of 2021, a $3.0 million provision for unfunded commitments was required related to higher levels of unfunded commitments for the period.

The allowance for unfunded commitments of $12.3 million and $13.5 million at September 30, 2022 and December 31, 2021, respectively, is classified on the balance sheet within "Other liabilities".

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

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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.

1) an approximately $857 million line of credit with the FHLB (of which $160.9 million and $2.0 million were outstanding at September 30, 2022 and December 31, 2021, respectively);

2) federal funds lines with several correspondent banks totaling $265 million (of which none was outstanding at September 30, 2022 or December 31, 2021);

and 3) an approximately $161 million line of credit through the Federal Reserve's discount window (of which none was outstanding at September 30, 2022 or December 31, 2021).

Unused and available lines of credit amounted to $1.1 billion at September 30, 2022.

Our overall liquidity is essentially the same as at December 31, 2021 with our liquid assets (cash and unpledged securities) as a percentage of our unpledged deposits and borrowings at 26.7% at September 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.

The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2021, detail of w hich is presented in the Contractual Obligations and Other Commercial Commitments table of our 2021 Annual Report on Form 10-K.

The amount and timing of our contractual obligations and commercial commitments have not changed materially since December 31, 2021, the detail of w hich is presented in the Contractual Obligations and Other Commercial Commitments table of our 2021 Annual Report on Form 10-K.

In addition, we are not involved in any legal proceedings that, in our opinion, could have a material effect on our consolidated financial position.

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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 June 30, 2022, and have no current plans to do so.

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

Capital Resources

The Company is regulated by the FRB and is subject to the securities registration and public reporting regulations of the SEC.

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

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

The Company is regulated by the Federal Reserve and is subject to the securities registration and public reporting regulations of the SEC.

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

We must comply with regulatory capital requirements established by the Federal Reserve.

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.

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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.

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

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

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

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

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

At September 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.

June 30, 2022 December 31, 2021

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

At September 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