FIRST BANCORP Critical Accounting Policies The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted inthe United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for credit losses on loans and unfunded commitments and intangible assets are policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements. Allowance for Credit Losses on Loans and Unfunded Commitments The allowance for credit losses on loans, which is presented as a reduction of loans outstanding, and the allowance for unfunded commitments, which is recorded within Other Liabilities require high degrees of judgement. Each of these allowances reflects management's estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its allowance for credit losses on loans and off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company's estimate of these items involves a high degree of judgment; therefore, management's process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company's allowances for credit losses on loans and unfunded commitments reflect management's best estimates within the range of expected credit losses. The Company recognizes in net income the amount needed to adjust either of these items for management's current estimate of expected credit losses. See Note 2 - Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 6 - Loans, Allowance for Credit Losses and Asset Quality Information - in this Quarterly Report on Form 10-Q, and "Allowance for Credit Losses and Provision for Credit Losses" below. Intangible Assets Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements. When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill. The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency or a consulting firm, as we did in 2016 and 2017, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis (as discussed in Notes 7 and 15 to the consolidated financial statements, we sold the operations of our insurance agency onJune 30, 2021 and derecognized the carrying amounts of the related intangible assets). For SBA Complete, the consulting firm we acquired in 2016, the identifiable intangible asset related to the customer list was determined to have a life of approximately seven years, with amortization occurring on a straight-line basis. Page 46 --------------------------------------------------------------------------------
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AtJune 30, 2021 , we had two reporting units - 1)First Bank with$227.6 million in goodwill, and 2) SBA activities, including SBA Complete and our SBA Lending Division, with$4.3 million in goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions. Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, we test goodwill for impairment annually onOctober 31 or on an interim basis if an event triggering impairment may have occurred, by comparing the fair value of our reporting units to their related carrying value, including goodwill. The conclusion of our last review was that none of our goodwill was impaired. We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset's carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above. Current Accounting Matters See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted. Recent Developments: COVID-19 The impact of the COVID-19 pandemic has lessened in 2021, as vaccinations have significantly reduced COVID-19 cases in our market area and the economy has made steady progress in its recovery. Most of our employees that had worked remotely during the pandemic returned to work in the office inJune 2021 . After experiencing lower loan demand during the pandemic period fromMarch 2020 toMarch 2021 (excluding PPP loans), we experienced high growth in the second quarter of 2021, with non-PPP loans increasing by a total$244 million , which represents annualized loan growth of 22.3%. The high deposit growth that we experienced beginning at the onset of the pandemic continued during the first two quarters of 2021, with total deposits increasing$460 million in the first quarter of 2021 and another$438 million in the second quarter of 2021, with both increases representing annualized growth in excess of 25%. The high deposit growth was likely due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality toFDIC -insured banks, as well as our ongoing deposit growth initiatives. Low interest rates have also resulted in high levels of mortgage loan refinancings, which increased our mortgage loan sales income, but reduced our level of mortgage loans outstanding. Thus far our asset quality ratios have remained favorable, with continued low levels of nonperforming assets and low loan charge-offs. Recently, there has been an emergence of new, more virulent strains of COVID-19 that are now spreading at higher transmission rates than prior strains. We are uncertain what impact this will have on the Company and its market areas.
Also see Note 1 to the Consolidated Financial Statements for additional information.
FINANCIAL OVERVIEW
Net income amounted to$29.3 million , or$1.03 per diluted common share, for the three months endedJune 30, 2021 , an increase of 83.9% on a per share basis, compared to$16.4 million , or$0.56 per diluted common share, recorded in the second quarter of 2020. For the six months endedJune 30, 2021 , net income amounted to$57.5 million , or$2.02 per diluted common share, compared to$34.5 million , or$1.18 per diluted common share, for the six months endedJune 30, 2020 , an increase of 71.2%. The higher earnings for both periods in 2021 were primarily driven by lower credit costs compared to 2020.
Net Interest Income and Net Interest Margin
Net interest income for the second quarter of 2021 was
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6.2% increase from the$107.4 million recorded in the comparable period of 2020. The increases in net interest income were primarily due to higher levels of interest-earning assets, the recognition of PPP loan fees, and higher discount accretion, the effects of which were partially offset by lower net interest margins. See additional discussion below. Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) for the second quarter of 2021 was 3.22%, which was 27 basis points lower than the 3.49% realized in the second quarter of 2020. For the six months endedJune 30, 2021 , our net interest margin was 3.24% compared to 3.71% for the same period of 2020. The declines in 2021 were primarily due to the impact of lower interest rates and the lower incremental reinvestment rates realized from funds provided by high deposit growth.
Allowance for Credit Losses, Provisions for Loan Losses and Unfunded Commitments, and Asset Quality
OnJanuary 1, 2021 , the Company adopted CECL, which resulted in an adoption-date increase of$14.6 million in our allowance for loan losses and an increase of$7.5 million in our allowance for unfunded commitments. The tax-effected impact of those two items amounted to$17.1 million and was recorded as an adjustment to our retained earnings as ofJanuary 1, 2021 . We recorded no provision for loan losses for the three or six months endedJune 30, 2021 compared to$19.3 million and$24.9 million in the comparable periods of 2020. The high provisions in 2020 were primarily related to estimated incurred losses associated with the pandemic that was emerging at the time. Under the CECL methodology for providing for loan losses, we determined that no provisions for loan losses were required during the first six months of 2021. See additional discussion below in the section "Allowance for Credit Losses and Provision for Credit Losses." During the second quarter of 2021, using the CECL methodology, we recorded a$1.9 million in provision for unfunded commitments. The provision was recorded primarily due to an increase in construction and land development loan commitments during the second quarter of 2021 that had not been funded as of quarter end. Our allowance for unfunded commitments atJune 30, 2021 amounted to$10.0 million and is recorded within the line item "Other liabilities". Annualized net loan charge-offs to average loans amounted to 0.07% and 0.08% for the three and six months endedJune 30, 2021 compared to 0.12% and 0.17% for the same periods of 2020, respectively. Total nonperforming assets amounted to$42 million atJune 30, 2021 , or 0.51% of total assets, compared to$50 million , or 0.65% of total assets, atDecember 31, 2020 . During the second quarter of 2021, we sold a nonaccrual relationship totaling$5.6 million that was primarily responsible for the decline in nonaccrual loans during the period.
Noninterest Income
Total noninterest income for the second quarter of 2021 was$21.4 million , an 18.4% decrease from the$26.2 million recorded for the second quarter of 2020, with the 2021 decrease being primarily due to the absence of securities gains compared to$8.0 million recorded in the second quarter of 2020. The 2021 decrease was partially offset by higher bankcard fees and other gains (losses) of$1.5 million , which is primarily due to the gain recognized on the sale of the operating assets ofFirst Bank Insurance Services inJune 2021 . For the six months endedJune 30, 2021 and 2020, total noninterest income was$42.0 million and$39.9 million , respectively. The increase in noninterest income in 2021 was primarily due to higher bankcard fees, the gain from theFirst Bank Insurance Sale, higher presold mortgage fees as a result of high mortgage loan activity, and increased SBA loan sale gains. See additional discussion below.
Noninterest Expenses
Noninterest expenses amounted to$41.0 million and$38.9 million in the second quarters of 2021 and 2020, respectively, and$81.1 million and$79.0 million for the first six months of 2021 and 2020, respectively. The 2021 periods include noninterest expenses related to the Company's business financing subsidiary, which was acquired onSeptember 1, 2020 and has a current annual expense base of approximately$1.4 million . See additional discussion below. Page 48 --------------------------------------------------------------------------------
Index Income Taxes Our effective tax rate was 21.3% and 20.7% for the three months endedJune 30, 2021 and 2020, respectively, and 21.3% and 20.5% for the six months endedJune 30, 2021 and 2020, respectively. The 2021 increases were due to higher proportions of fully-taxable income.
Balance Sheet and Capital
Total assets at
Loan growth for the first six months of 2021, exclusive of$86 million of net PPP loan decreases related to forgiveness, amounted to$136 million , an annualized growth rate of 6.1%. Total loans amounted to$4.8 billion atJune 30, 2021 , an increase of$51 million , or 1.1% fromDecember 31, 2020 . Excluding PPP loans, our level of outstanding loans has been impacted by high mortgage loan refinancing activity, commercial loan payoffs, and until the second quarter of 2021, lower demand resulting from the pandemic. Deposit growth during the first six months of 2021 totaled$898 million , an annualized growth rate of 28.9%. Total deposits amounted to$7.2 billion atJune 30, 2021 , compared to of$6.3 billion atDecember 31, 2020 . We believe the high deposit growth was likely due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality toFDIC -insured banks, as well as our ongoing deposit growth initiatives. We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio atJune 30, 2021 of 15.05%, a decrease from the 15.37% reported atDecember 31, 2020 . Other Business Matters OnJune 1, 2021 , we announced that we have reached an agreement to acquire Select Bancorp, Inc., headquartered inDunn, North Carolina , which currently operates 22 branches and has$1.8 billion in assets. This transaction is subject to regulatory and shareholder approval by both companies, and is expected to be completed during the fourth quarter of 2021. The acquisition would increase the Company's market share in several existing markets, including the Triad, Triangle andCharlotte markets ofNorth Carolina , as well as provide entry into several new markets, includingDunn ,Goldsboro andElizabeth City, North Carolina . OnJune 30, 2021 , we completed the sale of the operations and substantially all of the operating assets of our property and casualty insurance agency subsidiary,First Bank Insurance Services , toBankers Insurance, LLC for an initial purchase price valued at$13.0 million and a future earn-out payment of up to$1.0 million . We recorded a gain of$1.7 million related to the sale. Approximately$10.2 million of intangible assets were derecognized from our balance sheet as a result of this transaction, including$7.4 million in goodwill and$2.8 million in other intangibles. Components of Earnings Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods. Net interest income for the second quarter of 2021 was$58.8 million , an increase of$6.2 million , or 11.7%, from the$52.6 million recorded in the second quarter of 2020. Net interest income on a tax-equivalent basis for the three month period endedJune 30, 2021 amounted to$59.3 million , an increase of$6.3 million , or 11.9%, from the$53.0 million recorded in the second quarter of 2020. Net interest income for the first six months of 2021 was$114.0 million , an increase of$6.6 million , or 6.2%, from the$107.4 million recorded in the comparable period of 2020. Net interest income on a tax-equivalent basis for the six Page 49
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month period endedJune 30, 2021 amounted to$115.0 million , an increase of$7.0 million , or 6.4%, from the$108.0 million recorded in the first six months of 2020. ($ in thousands) Three Months Ended June 30 Six Months Ended June 30, 2021 2020 2021 2020 Net interest income, as reported$ 58,759 52,624$ 113,997 107,383 Tax-equivalent adjustment 517 330 959 664 Net interest income, tax-equivalent$ 59,276 52,954$ 114,956 108,047 There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets). For the three and six months endedJune 30, 2021 , the higher net interest income were primarily due to higher levels of interest-earning assets, the recognition of PPP loan fees, and higher discount accretion, the effects of which were partially offset by lower net interest margins The following table presents an analysis of net interest income. Page 50 -------------------------------------------------------------------------------- Index For the Three Months Ended June 30, 2021 2020 ($ in thousands) Interest Interest Average Average Earned Average Average Earned Volume Rate or Paid Volume Rate or Paid Assets Loans (1) (2)$ 4,679,119 4.48 %$ 52,295 $ 4,738,702 4.41 %$ 51,964 Taxable securities 2,157,475 1.45 % 7,789 770,441 2.49 % 4,771 Non-taxable securities 131,692 1.45 % 474 17,795 2.64 % 117 Short-term investments, primarily 418,321 0.56 % 581 575,074 0.55 % 788 interest-bearing cash Total interest-earning assets 7,386,607 3.32 % 61,139 6,102,012 3.80 % 57,640
Cash and due from banks 85,742 88,727 Premises and equipment 123,172 114,911 Other assets 370,260 422,112 Total assets$ 7,965,781 $ 6,727,762
Liabilities
Interest bearing checking$ 1,278,969 0.07 %$ 225 $ 972,580 0.11 %$ 267 Money market deposits 1,776,344 0.18 % 799 1,294,462 0.29 % 920 Savings deposits 582,081 0.08 % 112 454,791 0.13 % 147 Time deposits >$100,000 526,706 0.52 % 681 632,319 1.48 % 2,324 Other time deposits 218,463 0.33 % 182 242,754 0.69 % 416 Total interest-bearing deposits 4,382,563 0.18 % 1,999 3,596,906 0.46 % 4,074 Borrowings 61,312 2.49 % 381 288,997 1.31 % 942 Total interest-bearing liabilities 4,443,875 0.21 % 2,380 3,885,903 0.52 % 5,016 Noninterest bearing checking 2,568,960 1,905,449 Other liabilities 58,968 64,915 Shareholders' equity 893,978 871,495 Total liabilities and shareholders' equity$ 7,965,781 $ 6,727,762 Net yield on interest-earning assets and net interest income 3.19 %$ 58,759 3.47 %$ 52,624 Net yield on interest-earning assets and net interest income - tax-equivalent (3) 3.22 %$ 59,276 3.49 %$ 52,954 Interest rate spread 3.11 % 3.28 % Average prime rate 3.25 % 3.25 % (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of$2,180 , and$1,233 for the three months endedJune 30, 2021 and 2020, respectively. (2) Includes accretion of discount on acquired and SBA loans of$3,631 and$1,393 for the three months endedJune 30, 2021 and 2020, respectively. (3) Includes tax-equivalent adjustments of$517 and$330 in 2021 and 2020, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense. Page 51
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For the Six Months Ended June 30,
2021 2020
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
Assets
Loans (1) $ 4,681,604 4.45 % $ 103,368 $ 4,625,798 4.66 % $ 107,261
Taxable securities 1,906,549 1.45 % 13,702 802,485 2.57 % 10,245
Non-taxable securities 99,622 1.62 % 797 19,757 2.86 % 281
Short-term investments, primarily 456,066 0.57 % 1,281 400,934 0.95 % 1,886
interest-bearing cash
Total interest-earning assets 7,143,841 3.36 % $ 119,148 5,848,974 4.11 % 119,673Cash and due from banks 83,486 75,984 Premises and equipment 122,485 114,624 Other assets 373,472 416,009 Total assets$ 7,723,284 $ 6,455,591
Liabilities
Interest bearing checking$ 1,241,662 0.08 %$ 491 $ 935,792 0.14 %$ 674 Money market deposits 1,713,714 0.20 % 1,717 1,248,796 0.42 % 2,602 Savings deposits 560,550 0.09 % 242 440,508 0.19 % 416 Time deposits >$100,000 540,865 0.57 % 1,539 638,216 1.65 % 5,247 Other time deposits 221,239 0.36 % 398 246,807 0.74 % 908 Total interest-bearing deposits 4,278,030 0.21 % 4,387 3,510,119 0.56 % 9,847 Borrowings 61,356 2.51 % 764 302,566 1.62 % 2,443 Total interest-bearing liabilities 4,339,386 0.24 % 5,151 3,812,685 0.65 % 12,290 Noninterest bearing checking 2,436,138 1,716,212 Other liabilities 57,895 61,570 Shareholders' equity 889,865 865,124 Total liabilities and shareholders' equity$ 7,723,284 $ 6,455,591 Net yield on interest-earning assets and net interest income 3.22 %$ 113,997 3.69 %$ 107,383 Net yield on interest-earning assets and net interest income - tax-equivalent (2) 3.24 %$ 114,956 3.71 %$ 108,047 Interest rate spread 3.12 % 3.46 % Average prime rate 3.25 % 3.84 % (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of$5,575 and$1,578 for the six months endedJune 30, 2021 and 2020, respectively. (2) Includes accretion of discount on acquired and SBA loans of$4,972 and$3,234 for the six months endedJune 30, 2021 and 2020, respectively. (3) Includes tax-equivalent adjustments of$959 and$664 in 2021 and 2020, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense. Average loans outstanding for the second quarter of 2021 were$4.679 billion , which was$60 million , or 1.3%, lower than the average loans outstanding for the second quarter of 2020 ($4.739 billion ). Excluding PPP loan balances, our level of outstanding loans trended downward from the onset of the pandemic inMarch 2020 throughMarch 2021 , due to the negative impact of high mortgage loan refinancing activity, commercial loan payoffs, and soft demand arising from the pandemic. As discussed below, we experienced strong loan growth in the second quarter of 2021. Page 52
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Average loans outstanding for the six months endedJune 30, 2021 were$4.682 billion , which was$56 million , or 1.2%, higher than the average loans outstanding for the comparable period of 2020 ($4.626 billion ). The higher amount of average loans outstanding in 2021 was primarily due to the origination of PPP loans sinceMarch 31, 2020 . The average balance of PPP loans outstanding for the six months endedJune 30, 2021 and 2020 were$219 million and$89 million , respectively. As derived from the tables above, our average balance of total securities grew by$1.501 billion , or 190.4%, when comparing the second quarter of 2021 to the second quarter of 2020, and$1.184 billion , or 144.0% when comparing the first six months of 2021 to the first six months of 2020. These increases were due to higher levels of investment purchases arising from the cash provided by the high deposit growth experienced in recent periods, as discussed in the following paragraph. Average total deposits outstanding for the second quarter of 2021 were$6.952 billion , which was$1.450 billion , or 26.4%, higher than the average deposits outstanding for the second quarter of 2020 ($5.502 billion ). Average total deposits outstanding for the first six months of 2021 were$6.714 billion , which was$1.488 billion , or 28.5%, higher than the average deposits outstanding for the first six months of 2020 ($5.226 billion ). The majority of the growth has occurred in our transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts). We believe the high deposit growth was likely due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality toFDIC -insured banks, as well as our ongoing deposit growth initiatives. We also utilized funds provided by our high deposit growth to pay down a substantial portion of our borrowings since the prior year. Average borrowings decreased$228 million , or 78.8%, when comparing the second quarter of 2021 to the second quarter of 2020, and$241 million , or 79.7%, when comparing the first six months of 2021 to the first six months of 2020. The net result of the balance sheet growth discussed above was that our average interest-earning assets for the three and six months endedJune 30, 2021 were 21.1% and 22.1% higher than for the comparable periods in 2020, respectively. As it relates to the net interest income we recorded, the impact from the higher average interest-earning assets more than offset the impact of the decline in our net interest margin, which is discussed below. See additional information regarding changes in our loans and deposits in the section below entitled "Financial Condition." Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) for the second quarter of 2021 was 3.22%, which was 27 basis points lower than the 3.49% realized in the second quarter of 2020. For the six months endedJune 30, 2021 , our net interest margin was 3.24% compared to 3.71% for the same period of 2020. The declines in 2021 were primarily due to the impact of lower interest rates and the lower incremental reinvestment rates realized from funds provided by high deposit growth. FromAugust 2019 toMarch 2020 , theFederal Reserve cut interest rates by 225 basis points, which played a significant role in our asset yields declining by more than our cost of funds since those interest rate cuts. In comparing the first six months of 2021 to the first six months of 2020, our yield on interest-earning assets declined by 75 basis points compared to a 41 basis point decline in the cost of our interest-bearing liabilities. See additional discussion in Item 3 - Quantitative and Qualitative Disclosures About Market Risk. Another factor negatively impacting our net interest margin has been our high deposit growth, which, due to lower loan growth, has resulted in a higher percentage of our earning assets being comprised of short-term investments and securities, each of which generally yield less than loans. Average short-term investments and securities comprised 35% of average interest-earning assets for the first six months of 2021 compared to 21% in the first six months of 2020. In the first six months of 2021, we processed$198 million in PPP loan forgiveness payments related to 2020 originations and also originated approximately$112 million in new PPP loans, which resulted in a remaining balance of total PPP loans of$156 million atJune 30, 2021 . Including accelerated amortization of deferred PPP loan fees, we recorded a total of$2.7 million and$5.7 million in PPP fee-related interest income during the three and six months endedJune 30, 2021 , respectively, compared to$1.3 million in fees recorded in the second quarter of 2020, with no such fees recorded in the first quarter of 2020. When these fees are combined with the note rate of 1.00%, the total yield on PPP loans was 6.35% for the second quarter of 2021 and 6.25% for the first half of 2021 Page 53
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compared to 3.97% for each of the three and six month periods ended
We recorded loan discount accretion of$3.6 million in the second quarter of 2021, compared to$1.4 million in the second quarter of 2020. For the six months endedJune 30, 2021 and 2020, loan discount accretion amounted to$5.0 million and$3.2 million , respectively. In the second quarter of 2021, we accreted approximately$2.3 million of remaining discount accretion on five former failed-bank loans that paid off during the quarter. Loan discount accretion had a 20 basis point impact on the net interest margin in the second quarter of 2021 compared to a 9 basis point impact in the second quarter of 2020. For the first six months of 2021 and 2020, loan discount accretion had a 14 basis point impact and a 11 basis point impact, respectively, on the net interest margin. See additional information regarding net interest income in the section entitled "Interest Rate Risk." We recorded no provision for loan losses for the three or six months endedJune 30, 2021 compared to$19.3 million and$24.9 million in the comparable periods of 2020. The higher provisions in 2020 were primarily related to estimated incurred losses associated with the pandemic that was emerging at the time. Under the CECL methodology for providing for loan losses, we determined that no provisions for loan losses were required during the first six months of 2021. See additional discussion below in the section "Allowance for Credit Losses and Provision for Credit Losses." During the second quarter of 2021, using the CECL methodology, we recorded a$1.9 million in provision for unfunded commitments. The provision was recorded primarily due to an increase in construction and land development loan commitments during the second quarter of 2021 that had not been funded as of quarter end. Our allowance for unfunded commitments atJune 30, 2021 amounted to$10.0 million and is recorded within the line item "Other liabilities". Total noninterest income for the second quarter of 2021 was$21.4 million , an 18.4% decrease from the$26.2 million recorded for the second quarter of 2020, with the 2021 decrease being due to the absence of securities gains compared to$8.0 million recorded in the second quarter of 2020. For the six months endedJune 30, 2021 and 2020, total noninterest income was$42.0 million and$39.9 million , respectively. The increases in noninterest income in 2021 were primarily due to bankcard fees, fees earned as a result of high mortgage loan activity, SBA consulting fees related to client assistance with PPP originations, and increased SBA loan sale gains. Service charges on deposit accounts amounted to$2.8 million for the second quarter of 2021, a 23.4% increase over the$2.3 million for the second quarter of 2020, with the second quarter of 2020 having declined significantly from historical levels at the onset of the pandemic. For each of the six months endedJune 30, 2021 and 2020, service charges on deposit accounts amounted to$5.6 million . Other service charges, commissions and fees amounted to$6.5 million for the second quarter of 2021, an increase of 40.5% from the$4.6 million for the second quarter of 2020. For the six months endedJune 30, 2021 and 2020, other service charges, commissions and fees amounted to$12.0 million and$8.7 million , respectively. The increase was primarily due to increases of$1.5 million and$2.3 million in bankcard revenue for the three and six months endedJune 30, 2021 compared to the same periods in 2020, respectively. Also affecting comparability is that a$0.5 million charge related to impairment of the Company's SBA servicing asset was recorded in the first quarter of 2020 due to market conditions that existed at the time. Fees from presold mortgages amounted to$2.3 million for the second quarter of 2021, a decrease of 24.7%, compared to$3.0 million in the second quarter of 2020. For the first six months of 2021 and 2020, fees from presold mortgages amounted to$6.8 million and$4.9 million , respectively. Mortgage loan volumes increased significantly beginning in the second quarter of 2020 at the onset of the pandemic primarily due to declines in interest rates. In the second quarter of 2021, mortgage loan volumes declined due to increases in mortgage interest rates. Commissions from sales of insurance and financial products amounted to approximately$2.5 million and$2.1 million for the second quarters of 2021 and 2020, respectively, and$4.7 million and$4.2 million for the first six months of 2021 and 2020, respectively. This line item includes commissions earned from our wealth management division and commissions earned from the sales of property and casualty insurance byFirst Bank Insurance Services . The increases in 2021 were primarily due to higher commissions from our wealth management division Page 54 --------------------------------------------------------------------------------
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due to increases in investment assets under management. In the second quarter of 2021, we completed the sale of the operations and substantially all of the operating assets ofFirst Bank Insurance Services toBankers Insurance, LLC . Commissions earned byFirst Bank Insurance Services amounted to$1.4 million and$2.7 million for the three and six months endedJune 30, 2021 and$5.4 million for calendar year 2020. In the future, we are eligible to receive referral fees fromBankers Insurance , but expect the portion of this line item related toFirst Bank Insurance Services to be minimal for the near future. Our wealth management division was not included in, and is not impacted, by the sale. SBA consulting fees amounted to$2.2 million for the second quarter of 2021, a decrease of 41.5%, compared to$3.7 million for the second quarter of 2020. In the second quarter of 2020, the Company's SBA subsidiary, SBA Complete, earned significant fees related to assisting client banks with PPP loan originations, with a lower level of such assistance provided in the second quarter of 2021. For the six months endedJune 30, 2021 and 2020, SBA consulting fees amounted to$5.0 million and$4.8 million , respectively. Including origination fees, on-going servicing fees and fees associated with forgiveness services, SBA Complete's PPP fees amounted to$0.8 million in the second quarter of 2021 compared to$3.0 million for the second quarter of 2020, and$2.4 million for the first half of 2021 compared to$3.0 million for the first half of 2020. AtJune 30, 2021 , SBA Complete had$0.4 million in remaining deferred PPP revenue that will be recorded as income upon completing the forgiveness process for its client banks. SBA loan sale gains amounted to$3.0 million for the second quarter of 2021 compared to$2.0 million in the second quarter of 2020. For the first six months of 2021 and 2020, SBA loan sale gains amounted to$5.3 million and$2.6 million , respectively. The first quarter of 2020 was significantly impacted by temporary pandemic-related market conditions. The periods in 2021 were favorably impacted by the SBA increasing the marketable, guaranteed percentage on most loans from 75% to 90% as part of the economic relief package.
During the second quarter of 2020, we sold approximately
Other gains (losses) amounted to a gain of$1.5 million in the second quarter of 2021, primarily due to a$1.7 million gain related to the aforementioned sale of the operations and substantially all of the assets ofFirst Bank Insurance Services . Noninterest expenses amounted to$41.0 million and$38.9 million in the second quarters of 2021 and 2020, respectively, and$81.1 million and$79.0 million for the first six months of 2021 and 2020, respectively. The 2021 periods include noninterest expenses related to the Company's business financing subsidiary, which was acquired onSeptember 1, 2020 and has a current annual expense base of approximately$1.4 million . As previously discussed, we sold the operations ofFirst Bank Insurance Services during the second quarter of 2021, which had annual noninterest expenses of approximately$4.7 million . Personnel expense, which includes salaries expense and employee benefit expense, increased 3.4% to$25.3 million in the second quarter of 2021 from$24.5 million in the second quarter of 2020. For the six months endedJune 30, 2021 and 2020, personnel expense amounted to$50.0 million and$49.1 million , respectively, an increase of 1.8%. The combined amount of occupancy and equipment expense did not vary significantly among the periods presented, amounting to$3.7 million for each of the three month periods endingJune 30, 2021 and 2020, and$7.7 million and$7.8 million for the six month periods endingJune 30, 2021 and 2020, respectively. Merger expenses amounted to$0.4 million for the three and six months endedJune 30, 2021 , compared to none in 2020. As discussed previously at Note 16 to the Consolidated Financial Statements, onJune 1, 2021 , the Company announced an acquisition agreement with Select Bancorp, Inc. Intangibles amortization expense decreased from$1.0 million in the second quarter of 2020 to$0.8 million in the second quarter of 2021, and decreased from$2.0 million in the first six months of 2020 to$1.7 million in the first six months of 2021. The declines were primarily a result of the amortization of intangible assets associated with acquisitions that typically have amortization schedules that decline over time. Other operating expenses amounted to$10.9 million for the second quarter of 2021 compared to$9.7 million in the second quarter of 2020, an increase of 12.6%, and$21.3 million in the first six months of 2021 compared to$20.0 Page 55 --------------------------------------------------------------------------------
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million in the first six months of 2020, an increase of 7.5%. The increases in 2021 were primarily a result of higher bankcard and technology expenses. For the three months endedJune 30, 2021 and 2020, the provision for income taxes was$7.9 million , an effective tax rate of 21.3%, and$4.3 million , an effective tax rate of 20.7%, respectively. For the six months endedJune 30, 2021 and 2020, the provision for income taxes was$15.6 million , an effective tax rate of 21.3%, and$8.9 million , an effective tax rate of 20.5%, respectively. The increase in the effective tax rate in 2021 was primarily due to a higher proportion of fully-taxable income. The consolidated statements of comprehensive income reflect other comprehensive income of$3.5 million during the second quarter of 2021 compared to other comprehensive loss of$3.9 million during the second quarter of 2020. For the first six months of 2021, the consolidated statements of comprehensive income reflect other comprehensive loss of$15.1 million compared to other comprehensive income of$12.2 million for the comparable period of 2020. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains (losses) of our available for sale securities. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. The variances in unrealized gains/losses for the periods presented were consistent with the changes in market interest rates. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment. FINANCIAL CONDITION Total assets atJune 30, 2021 amounted to$8.2 billion , a 12.5% increase fromDecember 31, 2020 . Total loans atJune 30, 2021 amounted to$4.8 billion , a 1.1% increase fromDecember 31, 2020 , and total deposits amounted to$7.2 billion , a 14.3% increase fromDecember 31, 2020 . The following table presents information regarding the nature of changes in our levels of loans and deposits for the first six months of 2021. $ in thousands Balance at Internal Balance at Total beginning Growth, end of percentage January 1, 2021 to June 30, 2021 of period net Growth from Acquisitions period growth Total loans$ 4,731,315 50,749 - 4,782,064 1.1 % Deposits - Noninterest bearing checking 2,210,012 441,131 - 2,651,143 20.0 % Deposits - Interest bearing checking 1,172,022 206,843 - 1,378,865 17.6 % Deposits - Money market 1,581,364 239,111 - 1,820,475 15.1 % Deposits - Savings 519,266 74,363 - 593,629 14.3 % Deposits - Brokered 20,222 (10,752) - 9,470 (53.2) % Deposits - Internet time 249 (249) - - (100.0) % Deposits - Time>$100,000 543,894 (42,642) - 501,252 (7.8) % Deposits - Time<$100,000 226,567 (10,043) - 216,524 (4.4) % Total deposits$ 6,273,596 897,762 - 7,171,358 14.3 % As derived from the table above, for the first six months of 2021, loans increased$50.7 million , or 1.1%. Loan growth for the period, excluding PPP loans, was$136 million , or 6.1% annualized. Our level of outstanding loans has been negatively impacted by high mortgage loan refinancing activity, commercial loan payoffs, and the generally soft demand during the pandemic throughMarch 2021 . However, in the second quarter of 2021, we experienced strong, non-PPP, loan growth of$244 million , an annualized growth rate of 22.3%. We believe the growth was as a result of our local economies recovering from the pandemic, as well as our increased willingness to meet competitor loan terms, including interest rate and loan structure. PPP loans amounted to$156 million and$241 million atJune 30, 2021 andDecember 31, 2020 , respectively, with$112 million in new PPP loans originated in 2021, that was offset by$198 million in PPP forgiveness payments received in 2021. Page 56
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The mix of our loan portfolio remains substantially the same atJune 30, 2021 compared toDecember 31, 2020 . Also, the majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Note 6 to the consolidated financial statements presents additional detailed information regarding our mix of loans. After experiencing 27.2% deposit growth for calendar year 2020, we have continued to experience high growth during 2021. For the six month period endedJune 30, 2021 , total deposits increased by$898 million , or 14.3% (28.9% annualized). Deposit growth in our transaction accounts (checking, money market and savings), was especially strong, ranging from 14-20% growth for the six month period. We believe this high deposit growth has likely been due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality toFDIC -insured banks, as well as our ongoing deposit growth initiatives. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services. Due primarily to our deposit growth exceeding our loan growth, our liquidity levels have increased. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% atDecember 31, 2020 to 39.9% atJune 30, 2021 . Nonperforming Assets Nonperforming assets include nonaccrual loans, TDRs, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows: As of/for the quarter As of/for the quarter ASSET QUALITY DATA ($ in thousands) ended June 30, 2021 ended December 31, 2020 Nonperforming assets Nonaccrual loans $ 32,993 35,076 TDRs - accruing 8,026 9,497 Accruing loans >90 days past due - - Total nonperforming loans 41,019 44,573 Foreclosed real estate 826 2,424 Total nonperforming assets $ 41,845 46,997 Asset Quality Ratios - All Assets Net charge-offs to average loans - annualized 0.07 % 0.07 % Nonperforming loans to total loans 0.86 % 0.94 % Nonperforming assets to total assets 0.51 % 0.64 % Allowance for loan losses to total loans 1.36 % 1.11 % Allowance for loan losses to nonperforming loans 158.52 % 117.53 % As shown in the table above, nonperforming assets decreased fromDecember 31, 2020 toJune 30, 2021 , which was primarily driven by the sale of one nonaccrual relationship amounting to$5.6 million . Due primarily to the continued impact of government stimulus and relief programs, the nonperforming asset level atJune 30, 2021 may not reflect the full impact of COVID-19. We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the allowance for loan losses discussed below. AtJune 30, 2021 , total nonaccrual loans amounted to$33.0 million , compared to$35.1 million atDecember 31, 2021 . As noted above, the decrease was primarily driven by the sale of one borrower relationship. Page 57 --------------------------------------------------------------------------------
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The following is the composition, by loan type, of all of our nonaccrual loans at each period end. ($ in thousands) At June 30, 2021 At December 31, 2020 Commercial, financial, and agricultural $ 9,476 9,681
Real estate - construction, land development, and other land loans
393 643
Real estate - mortgage - residential (1-4 family) first mortgages
5,765 6,048
Real estate - mortgage - home equity loans/lines of credit 1,345 1,333
Real estate - mortgage - commercial and other 15,886 17,191
Consumer loans 128 180
Total nonaccrual loans $ 32,993 35,076
In the table above, nonaccrual loans arising from our SBA division totaled $17.3
million and $18.4 million at June 30, 2021 and December 31, 2020 , respectively.
The unguaranteed portions of those SBA loans totaled $11.8 million and $12.1
million as of the same periods, respectively. As of June 30, 2021 , SBA loans
accounted for approximately $9.1 million of our nonaccrual loans in the
"Commercial, financial and agricultural" category and $8.2 million of our
nonaccrual loans in the "Real estate - mortgage - commercial and other"
category. As of December 31, 2020 , SBA loans accounted for approximately $9.3
million of our nonaccrual loans in the "Commercial, financial and agricultural"
category and $9.1 million of our nonaccrual loans in the "Real estate - mortgage
- commercial and other" category. Our SBA loans have been the category of loans
most impacted by the effects of the pandemic.
TDRs are accruing loans for which we have granted concessions to the borrower as
a result of the borrower's financial difficulties. At June 30, 2021 , total
accruing TDRs amounted to $8.0 million , compared to $9.5 million at December 31,
2020 , with the decrease being attributed to several TDRs paying off during the
period. COVID-19 related deferrals, which amounted to $2.1 million at June 30,
2021 , are excluded from TDR consideration at June 30, 2021 .
The following table presents geographic information regarding our nonperforming
loans (nonaccrual loans and TDRs) at June 30, 2021 .
As of June 30, 2021
($ in thousands) Total Nonperforming Total
Nonperforming Loans to Total Foreclosed
Loans Total Loans Loans Real Estate
Region (1)
Eastern Region (NC) $ 5,932 1,128,429 0.53 % $ 120
Central Region (NC) 6,016 863,229 0.70 % 305
Triad Region (NC) 4,790 614,504 0.78 % -
Western Region (NC) 2,847 612,668 0.46 % 124
Triangle Region (NC) 266 424,370 0.06 % -
Charlotte Region (NC) 962 385,990 0.25 % -
Southern Piedmont Region (NC) 2,012 159,518 1.26 % 65
South Carolina Region 742 204,208 0.36 % 40
SBA loans 17,307 158,695 10.91 % 135
SBA - PPP loans - 155,514 - % -
Other 145 74,939 0.19 % 37
Total $ 41,019 4,782,064 0.86 % $ 826
(1)The counties comprising each region are as follows:
Eastern North Carolina Region - New Hanover , Brunswick , Duplin , Dare , Beaufort ,
Pitt , Onslow , Carteret
Central North Carolina Region - Randolph , Chatham , Montgomery , Stanley , Moore ,
Richmond , Lee , Harnett , Cumberland
Triad North Carolina Region - Davidson , Rockingham , Guilford ,, Forsyth , Alamance
Western North Carolina Region - Buncombe , Henderson , McDowell , Madison ,
Transylvania
Triangle North Carolina Region - Wake
Charlotte North Carolina Region - Iredell , Cabarrus , Rowan , Mecklenburg
Southern Piedmont North Carolina Region - Scotland , Robeson , Bladen
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South Carolina Region - Chesterfield, Dillon, Florence SBA loans - loans originated on a national basis through the Company's SBA Lending Division SBA - PPP loans - loans originated through the SBA's Paycheck Protection Program Other includes loans originated through the Company's Credit Card Division and our formerVirginia region As reflected in Note 6 to the financial statements, total classified loans were$56.2 million atJune 30, 2021 compared to$60.5 million atDecember 31, 2020 . Loans graded special mention were$39.6 million atJune 30, 2021 compared to$61.3 million atDecember 31, 2020 . Thus far, except for SBA loans, which is a relatively small portion of total loans, our loan portfolio has not shown significant signs of stress related to the pandemic. Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to$0.8 million atJune 30, 2021 and$2.4 million atDecember 31, 2020 . Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and favorable overall asset quality. We believe that the fair values of the items of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. The following table presents the detail of all of our foreclosed real estate at each period end: ($ in thousands) At June 30, 2021 At December 31,
2020
Vacant land and farmland $ 517 753
1-4 family residential properties 113 517
Commercial real estate 196 1,154
Total foreclosed real estate $ 826 2,424
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Allowance for Credit Losses and Provision for Credit Losses OnJanuary 1, 2021 , we adopted CECL for estimating credit losses, which resulted in an increase of$14.6 million in our allowance for loan losses and an increase of$7.5 million in our allowance for unfunded commitments, which is recorded within Other Liabilities. The tax-effected impact of those two items amounted to$17.1 million and was recorded as an adjustment to our retained earnings as ofJanuary 1, 2021 . The allowance for loan loss accounting in effect atDecember 31, 2020 and all prior periods was based on our estimate of probable incurred loan losses as of the reporting date ("Incurred Loss" methodology). Under the CECL methodology, our allowance for credit losses on loans is based on the total amount of loan losses that are expected over the remaining life of the loan portfolio. Our estimate of credit losses on loans under CECL is determined using a complex model, based primarily on the utilization of discounted cash flows, that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the allowance for loan losses and resulting provision for credit losses. We recorded no provision for credit losses on loans in the first and second quarters of 2021 compared to$5.6 million and$19.3 million in the first and second quarters of 2020, respectively. The higher provisions in 2020 was primarily related to our estimate of probable incurred losses associated with the pandemic that was emerging at the time. Under the CECL methodology for providing for loan losses, we determined that no provisions for loan losses were required during the first six months of 2021, as discussed in the following paragraph. We based our adoption date allowance for credit loss adjustment primarily on a baseline forecast of economic scenarios, which reflected ongoing threats to the economy, primarily arising from the pandemic. In reviewing forecasts during 2021, management noted high degrees of volatility in the monthly forecasts. Given the uncertainty that the volatility is indicative of and the inherent imprecision of a forecast accurately projecting economic statistics during these unprecedented times, management elected to base both itsMarch 31, 2021 andJune 30, 2021 computations of the allowance for credit losses primarily on an alternative, more negative forecast, that management judged to more appropriately reflect the inherent risks to its loan portfolio. These more negative forecast's projections atMarch 31, 2021 were materially consistent with the adoption-date forecast's projections under the baseline scenario, and resulted in no provision for loan losses. In the second quarter of 2021, the same forecast improved fromMarch 31, 2021 , which would tend to decrease the amount of required allowance for loan losses necessary. The impact of the improved forecast was substantially offset by the high non-PPP loan growth we experienced during the quarter, as discussed previously. We also increased certain qualitative factors in our model to recognize the higher risk associated with our second quarter 2021 decision to match less conservative loan structures being offered in the marketplace in order to grow loan balances. The result of the above factors resulted in management concluding that no adjustment to the allowance for loan losses was required for the second quarter of 2021. We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area. Page 60 --------------------------------------------------------------------------------
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For the periods indicated, the following table summarizes our balances of loans
outstanding, average loans outstanding, changes in the allowance for loan losses
arising from charge-offs and recoveries, and additions to the allowance for loan
losses that have been charged to expense.
($ in thousands) Six Months Twelve Months Six Months
Ended Ended December 31, Ended
June 30, 2021 2020 June 30, 2020
Loans outstanding at end of period $ 4,782,064 4,731,315 4,770,063
Average amount of loans outstanding $ 4,681,604 4,702,743 4,625,798
Allowance for loan losses, at beginning of year
21,398 21,398
Adoption of CECL 14,575 - -
Provision (reversal) for loan losses - 35,039 24,888
66,963 56,437 46,286
Loans charged off:
Commercial, financial, and agricultural (1,988) (5,608) (3,931)
Real estate - construction, land development & other land loans
(66) (51) (45)
Real estate - mortgage - residential (1-4 family) first mortgages
(114) (478) (474)
Real estate - mortgage - home equity loans / lines of credit
(139) (524) (381)
Real estate - mortgage - commercial and other (1,834) (968) (545)
Consumer loans (307) (873) (397)
Total charge-offs (4,448) (8,502) (5,773)
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural 667 745 477
Real estate - construction, land development & other land loans
686 1,552 643
Real estate - mortgage - residential (1-4 family) first mortgages
323 754 315
Real estate - mortgage - home equity loans / lines of credit
229 487 166
Real estate - mortgage - commercial and other 340 621 102
Consumer loans 262 294 126
Total recoveries 2,507 4,453 1,829
Net (charge-offs) recoveries (1,941) (4,049) (3,944)
Allowance for credit losses on loans, at end of period
52,388 42,342
Ratios:
Net charge-offs (recoveries) as a percent of average loans (annualized)
0.08 % 0.09 % 0.17 %
Allowance for loan losses as a percent of loans at end
of period 1.36 % 1.11 % 0.89 %
As previously discussed, as of June 30, 2021 , we have granted approximately $2.1
million in loan deferrals under the CARES act provisions, which is reduction
from the highest level of $774 million in loan deferrals at June 30, 2020 .
The ratio of our allowance to total loans was 1.36% and 1.11% at June 30, 2021
and December 31, 2020 , respectively. The increase in this ratio was a result of
the adoption of CECL on January 1, 2021 .
In addition to the allowance for credit losses on loans, we maintain an
allowance for unfunded commitments such as unfunded loan commitments and letters
of credit. Under CECL, we estimate expected credit losses associated with these
commitments over the contractual period in which we are exposed to credit risk
via a contractual obligation to extend credit, unless that obligation is
unconditionally cancellable by the Company. The allowance for unfunded
commitments on off-balance sheet credit exposures is adjusted as a provision for
credit loss expense. The estimate includes consideration of the likelihood that
funding will occur and an estimate of expected credit losses on commitments
expected to be funded over its estimated life. This methodology is based on a
loss rate approach that starts with the probability of funding based on
historical experience. Similar to the allowance for credit losses on
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loans methodology discussed above, adjustments are made to the historical losses for current conditions and reasonable and supportable forecast. The allowance for unfunded commitments amounted to$0.6 million atDecember 31, 2020 under pre-CECL methodology. At ourJanuary 1, 2021 adoption of CECL, an upward adjustment of$7.5 million was recorded. In the second quarter of 2021, we recorded$1.9 million of provision for credit losses on unfunded commitments primarily due to an increase in construction and land development loan commitments during the second quarter of 2021. The resulting allowance for unfunded commitments atJune 30, 2021 amounted to$10.0 million and is reflected in the line item "Other Liabilities." We believe our allowance levels are adequate at each period end, based on the respective methodologies utilized, as described above. It must be emphasized, however, that the determination of the allowances using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. See "Critical Accounting Policies - Allowance for Credit Losses on Loans and Unfunded Commitments" above. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and value of other real estate. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations. Liquidity, Commitments, and Contingencies Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash. Thus far in the COVID-19 pandemic, we have seen our liquidity levels increase, with increases in deposits account balances leading to higher cash levels. In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately$927 million line of credit with the FHLB (of which$7 million and$8 million were outstanding atJune 30, 2021 andDecember 31, 2020 , respectively), 2) a$100 million federal funds line with a correspondent bank (of which none was outstanding atJune 30, 2021 orDecember 31, 2020 ), and 3) an approximately$135 million line of credit through theFederal Reserve's discount window (of which none was outstanding atJune 30, 2021 orDecember 31, 2020 ). Unused and available lines of credit amounted to$1.2 billion atJune 30, 2021 . Our overall liquidity has increased sinceDecember 31, 2020 due primarily to the strong deposit growth which has exceeded loan growth. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% atDecember 31, 2020 to 39.9% atJune 30, 2021 . We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate. The amount and timing of our contractual obligations and commercial commitments has not changed materially sinceDecember 31, 2020 , detail of which is presented in Table 18 on page 74 of our 2020 Annual Report on Form 10-K. We are not involved in any other legal proceedings that, in our opinion, could have a material effect on our consolidated financial position. Off-Balance Sheet Arrangements and Derivative Financial Instruments Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance Page 62 --------------------------------------------------------------------------------
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sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities. Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities throughJune 30, 2021 , and have no current plans to do so. Capital Resources The Company is regulated by theBoard of Governors of theFederal Reserve Board ("FRB") and is subject to the securities registration and public reporting regulations of theSecurities and Exchange Commission . Our banking subsidiary,First Bank , is also regulated by the FRB and theNorth Carolina Office of the Commissioner of Banks . We must comply with regulatory capital requirements established by the FRB. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations. Under Basel III standards and capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The capital standards require us to maintain minimum ratios of "Common Equity Tier 1" capital to total risk-weighted assets, "Tier 1" capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively. Common Equity Tier 1 capital is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier 1 capital is comprised of Common Equity Tier 1 capital plus Additional Tier 1 Capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FRB andFDIC regulations. The capital conservation buffer requirement began to be phased in onJanuary 1, 2016 , at 0.625% of risk weighted assets, and increased each year until fully implemented at 2.5% onJanuary 1, 2019 . In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution's composite ratings as determined by its regulators. The FRB has not advised us of any requirement specifically applicable to us. Page 63 --------------------------------------------------------------------------------
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At
June 30, 2021 December 31, 2020
Risk-based capital ratios:
Common equity Tier 1 to Tier 1 risk weighted assets 12.81 % 13.19 %
Minimum required Common Equity Tier 1 capital 7.00 % 7.00 %
Tier I capital to Tier 1 risk weighted assets 13.80 % 14.28 %
Minimum required Tier 1 capital 8.50 % 8.50 %
Total risk-based capital to Tier II risk weighted assets 15.05 % 15.37 %
Minimum required total risk-based capital 10.50 % 10.50 %
Leverage capital ratios:
Tier 1 capital to quarterly average total assets 9.43 % 9.88 %
Minimum required Tier 1 leverage capital 4.00 % 4.00 %
First Bank is also subject to capital requirements that do not vary materially
from the Company's capital ratios presented above. At June 30, 2021 , First Bank
significantly exceeded the minimum ratios established by the regulatory
authorities. The reduction in our leverage ratio reflected in the table above
was due to the significant balance sheet growth experienced in the first six
months of 2021, resulting primarily from a strong increase in deposits. The
decline in the risk based capital ratios from December 31, 2020 to June 30, 2021
was due to increases in securities and loans balances.
BUSINESS DEVELOPMENT AND OTHER SHAREHOLDER MATTERS
The following is a list of business development and other miscellaneous matters
affecting the Company and First Bank , our bank subsidiary.
•On June 15, 2021 , the Company announced a quarterly cash dividend of $0.20 per
share payable on July 25, 2021 to shareholders of record on June 30, 2021 . This
dividend rate represents an 11.1% increase over the dividend rate declared in
the second quarter of 2020.
SHARE REPURCHASES
There were no share repurchases in the three months ended June 30, 2021 . For the
six months ended June 30, 2021 , we repurchased 106,744 shares of our common
stock at an average price of $37.81 per share, which totaled $4.0 million . At
June 30, 2021 , we had authority from our Board of Directors to repurchase up to
an additional $16.0 million in shares of the Company's common stock. We may
repurchase shares of our stock in open market and privately negotiated
transactions, as market conditions and our liquidity warrants, subject to
compliance with applicable regulations. See also Part II, Item 2 "Unregistered
Sales of Equity Securities and Use of Proceeds."
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
Net interest income is our most significant component of earnings.
Notwithstanding changes in volumes of loans and deposits, our level of net
interest income is continually at risk due to the effect that changes in general
market interest rate trends have on interest yields earned and paid with respect
to our various categories of earning assets and interest-bearing liabilities. It
is our policy to maintain portfolios of earning assets and interest-bearing
liabilities with maturities and repricing opportunities that will afford
protection, to the extent practical, against wide interest rate fluctuations.
Our exposure to interest rate risk is analyzed on a regular basis by management
using standard GAP reports, maturity reports, and an asset/liability software
model that simulates future levels of interest income and expense based on
current interest rates, expected future interest rates, and various intervals of
"shock" interest rates. Over the years, we have been able to maintain a fairly
consistent yield on average earning assets (net interest margin), even during
periods of changing interest rates. Over the past five calendar years, our net
interest margin has ranged from a low of 3.56% (realized in 2020) to a high of
4.09% (realized in 2018). The consistency of
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the net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. AtJune 30, 2021 a majority of our interest-earning assets are subject to repricing within five years (because they are either adjustable rate assets or they are fixed rate assets that mature) and substantially all of our interest-bearing liabilities reprice within five years. Using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call), atJune 30, 2021 , we had over$2 billion more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only measures the magnitude of the timing differences and does not address earnings, market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of "when" various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities subject to interest rate changes within one year atJune 30, 2021 were deposits totaling$3.8 billion comprised of checking, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced with, or in the same proportion, as general market indicators. Overall, we believe that in the near term (twelve months), net interest income will not likely experience significant downward pressure from rising interest rates. Similarly, we would not expect a significant increase in near term net interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. In the short-term (less than twelve months), this generally results in us being asset-sensitive, meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates, which is what we experienced following theMarch 2020 interest rate cuts. However, in the twelve-month and longer horizon, the impact of having a higher level of interest-sensitive liabilities generally lessens the short-term effects of changes in interest rates. The general discussion in the foregoing paragraph applies most directly in a "normal" interest rate environment in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less applicable in periods in which there is a "flat" interest rate curve. A "flat yield curve" means that short-term interest rates are substantially the same as long-term interest rates. Due to actions taken by theFederal Reserve related to short-term interest rates and the impact of the global economy on longer-term interest rates, we are currently in a very low and flat interest rate curve environment. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the Bank, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge, the profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin. While there have been periods in the last few years that the yield curve has steepened slightly, it currently remains very flat. This flat yield curve and the intense competition for high-quality loans in our market areas have resulted in lower interest rates on loans. In an effort to address concerns about the national and global economy theFederal Reserve cut interest rates by 75 basis points in the second half of 2019. And inMarch 2020 , theFederal Reserve cut interest rates by an additional 150 basis points in response to the COVID-19 pandemic. Our interest-bearing cash balances and most of our variable rate loans, generally reset to lower rates soon after these interest rate cuts. We reduced our offering rates on most deposit products and our borrowing costs were also reduced by lower rates and repaying a significant portion of our outstanding borrowings. Overall however, the impact of the interest rate cuts negatively impacted our net interest margin in 2020 and 2021. Assuming no significant changes in interest rates in the next twelve months, we expect continued pressure on our net interest margin (excluding the impact of PPP - see below) as a result of the flat yield curve and the expectation of lower interest rates on the redeployment of cash received on maturing loans and investments that will likely not be fully offset by lower funding costs. Since the announcement of the SBA's PPP program, we have originated at total of approximately$358 million in PPP loans, of which$156 million and$241 million were outstanding atJune 30, 2021 andDecember 31, 2020 , Page 65 --------------------------------------------------------------------------------
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respectively. These loans all have an interest rate of 1.00%. In addition to the interest rate, the SBA compensated us with an origination fee for each loan of between 1% to 5% of the loan amount, depending on the size of each loan. We received a total of approximately$16.9 million in these fees, which were netted against the direct cost to originate each loan that totaled approximately$0.7 million , with the net deferral amount initially being amortized as interest income over their contractual lives of either two years or five years using the effective interest method of recognition. Early repayments, including the loan forgiveness provisions contained in the PPP, result in accelerated amortization. In 2020, we amortized$4.1 million of the PPP loan fees as interest income. For the first six months of 2021, we amortized$5.7 million of the PPP loan fees as interest income. The Company has$6.2 million in remaining deferred PPP loan fees, of which$0.9 million relates to 2020 originations and$5.3 million relates to 2021 originations. While the exact timing of the forgiveness approvals from PPP loans is uncertain, we currently expect the majority of the remaining fees associated with the 2020 originations to be realized during the third quarter of 2021. As it relates to the 2021 PPP originations, we expect approximately one-third of the remaining fees atJune 30, 2021 to be recognized in the third quarter of 2021, half to be recognized in the fourth quarter of 2021, with substantially all of the remainder recognized in the first quarter of 2022. As previously discussed in the section "Net Interest Income," our net interest income has been impacted by certain purchase accounting adjustments related to the acquired banks. The purchase accounting adjustments related to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the loan discount on acquired loans amounted to$3.7 million and$2.0 million for the first six months of 2021 and 2020, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that are initially recorded and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff. For example, in the second quarter of 2021, we experienced pay-offs on five former failed-bank loans that resulted in the elevated level of discount accretion recorded for the quarter. Each of these factors is difficult to predict and susceptible to volatility. The remaining loan discount on acquired loans amounted to$5.3 million atJune 30, 2021 compared to$8.9 million atDecember 31, 2020 . We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign currency positions. See additional discussion regarding net interest income, as well as discussion of the changes in the annual net interest margin in the section entitled "Net Interest Income" above. Item 4 - Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports with theSEC is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is communicated to our management to allow timely decisions regarding required disclosure. Based on the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in allowing timely decisions regarding disclosure to be made about material information required to be included in our periodic reports with theSEC . In addition, no change in our internal control over financial reporting has occurred during, or subsequent to, the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Part II. Other Information Item 1 - Legal Proceedings Various legal proceedings may arise in the ordinary course of business and may be pending or threatened against the Company and its subsidiaries. Neither the Company nor any of its subsidiaries is involved in any pending legal proceedings that management believes are material to the Company or its consolidated financial position. If an exposure were to be identified, it is the Company's policy to establish and accrue appropriate reserves during the accounting period in which a loss is deemed to be probable and the amount is determinable. Page 66 --------------------------------------------------------------------------------
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