FIRST BANCORP Overview and Highlights at and for Three Months Ended
The Company earned net income of$34.0 million , or$0.95 diluted EPS, during the three months endedMarch 31, 2022 compared to net income of$28.2 million , or$0.99 diluted EPS, for the three months endedMarch 31, 2021 . The main drivers to the increase in net income are presented below. Refer also to additional discussion in the Results of Operations section following. •OnOctober 15, 2021 we acquiredSelect Bancorp, Inc. ("Select") which was headquartered inDunn, 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. •Net interest income for the first quarter of 2022 was$76.9 million , a 39.2% increase from the$55.2 million recorded in the first quarter of 2021. The 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 endedMarch 31, 2022 , the Company recorded a provision for credit losses of$3.5 million based on changes in the loan portfolio and economic forecasts, and a reversal of the provision for unfunded commitments of$1.5 million related to fluctuations in the levels and mix of outstanding loans commitments. No provision for credit losses or unfunded commitments was required in the comparable period of 2021, which was the first quarter we adopted CECL. •Noninterest income declined$1.4 million , or 6.9%, from the prior year period primarily due to a$3.4 million decrease in mortgage banking income related to lower levels of activity, a$2.0 million decrease in SBA consulting fees due to lower PPP-related revenues, and a$1.2 million decrease in commissions on sales of financial and insurance products due to the sale of substantially all of the assets of our property and casualty insurance agency subsidiary inJune 2021 . Reductions in noninterest income were substantially offset by higher levels of transactions and number of accounts generating service charge income and bankcard revenue. •Noninterest expense increased$11.4 million , or 28.5% for the quarter endedMarch 31, 2022 as compared to the prior year. Included in theMarch 31, 2022 quarter was$3.5 million in merger and acquisition expenses primarily related to computer system conversion costs. The balance of the increase in noninterest expenses was driven by higher operating expenses resulting from the Select acquisition. •Income tax expense increased$1.0 million relative to the higher pre-tax income. The effective tax rates were 20.4% and 21.3% for the first quarter of 2022 and 2021, respectively. The lower effective tax rate in the first quarter of 2022 was related to higher tax exempt income in that quarter relative to taxable income. Total assets atMarch 31, 2022 amounted to$10.7 billion , a 1.4% increase fromDecember 31, 2021 . The primary balance sheet changes are presented below. Refer also to additional discussion in the Financial Condition section following. •Total loans amounted to$6.1 billion atMarch 31, 2022 , a decrease of$17.0 million , or 0.28% from year end due primarily to reductions in PPP loans through forgiveness which more than offset organic growth during the first quarter of 2022.
•Total investment securities increased
•Total deposits amounted to$9.4 billion atMarch 31, 2022 , an increase of$260.5 million , or 2.9%, fromDecember 31, 2021 . The high core deposit growth is believed to be due to a combination of stimulus funds and changes in customer behaviors during the pandemic, as well as our ongoing growth and retention initiatives.
•We remain well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 12.85% and total risk-based capital ratio of 14.99%.
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•Accumulated other comprehensive loss increased$140.0 million related to higher unrealized losses on available for sale securities due to increased market rates experienced in the first quarter of 2022.
Impact of COVID-19
Our market areas and local economies continue to show signs of recovery from the impact of the COVID-19 pandemic, However, the current pandemic is ongoing and dynamic in nature, and there are many related uncertainties, including, among other things, its severity and new variants that may arise; its ultimate duration and infection spikes that may occur; the impact on our customers, employees and vendors; the impact on the financial services and banking industry; and the ongoing impact on the economy as a whole. Our financial position and results of operations are particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors and supply chain issues, and the decline in the value of assets held by us. The impact of the COVID-19 pandemic lessened in 2021, and we experienced increased commercial activity throughout our market areas. We have not realized significant negative impact on our loan portfolio or asset quality. Further, all COVID-19 deferral status loans have returned to regular payment schedules. While the economic pressures and uncertainties arising from the COVID-19 pandemic have resulted in, and may continue to result in, specific changes in consumer and business spending and borrowing habits, we have seen improvements in many industries in which we have loan exposure including retail/strip centers, hotels/lodging, restaurants, entertainment, and commercial real estate. The ongoing impact on the Company of the continuing pandemic is uncertain. The extent to which the COVID-19 pandemic has a further impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
Critical Accounting Policies and Estimates
The accounting principles we follow and our methods of applying these principles conform with GAAP and with general practices followed by the banking industry. Certain 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. We have identified the accounting policies discussed below 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 ACL represents management's current estimate of credit losses for the
remaining estimated life of financial instruments. We perform periodic and
systematic detailed reviews of the loan portfolio to identify trends and to
assess the overall collectability of the portfolio. We believe the accounting
estimate related to the ACL is a "critical accounting estimate" as: (1) changes
in it can materially affect the provision for credit losses and net income; (2)
it requires management to predict borrowers' likelihood or capacity to repay,
including evaluation of inherently uncertain future economic conditions; (3) the
value of underlying collateral must be estimated on collateral-dependent loans;
(4) prepayment activity must be projected to estimate the life of loans that
often are shorter than contractual terms; and (5) it requires estimation of a
reasonable and supportable forecast period for credit losses. Accordingly, this
is a highly subjective process and requires significant judgment since it is
difficult to evaluate current and future economic conditions in relation to an
overall credit cycle and estimate the timing and extent of loss events that are
expected to occur prior to end of a loan's estimated life.
Our ACL is assessed at each balance sheet date and adjustments are recorded in
the provision for credit losses. The ACL is estimated based on loan level
characteristics using historical loss rates, a reasonable and supportable
economic forecast, and assumptions of probability of default and loss given
default. Loan balances considered uncollectible are charged-off against the ACL.
There are many factors affecting the ACL, some of which are quantitative, while
others require qualitative judgment. Although management believes its process
for determining the ACL adequately considers all the potential factors that
could potentially result in credit losses, the process includes subjective
elements and is susceptible to significant change. To the extent actual outcomes
differ from management estimates, additional provision for credit losses could
be required that could adversely affect our earnings or financial position in
future periods.
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Purchased credit deteriorated ("PCD") loans represent assets that are acquired
with evidence of more than insignificant credit quality deterioration since
origination as of the acquisition date. At acquisition, the allowance for credit
losses on PCD assets is booked directly to the ACL. Any subsequent changes in
the ACL on PCD assets is recorded through the provision for credit losses.
We believe that the ACL is adequate to absorb the expected life of loan credit
losses on the portfolio of loans as of the balance sheet date. Actual losses
incurred may differ materially from our estimates.
We estimate expected credit losses on commitments to extend credit over the
contractual period in which we are exposed to credit risk on the underlying
commitments, unless the obligation is unconditionally cancellable. The allowance
for off-balance sheet credit exposures, which is included in "Other liabilities"
on the Consolidated Balance Sheets, is adjusted for as an increase or decrease
to the provision for unfunded commitments. 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
methodology is based on a loss rate approach that starts with the probability of
funding based on historical experience. Similar to methodology discussed above
related to the loans receivable portfolio, adjustments are made to the
historical losses for current conditions and reasonable and supportable
forecast.
We believe that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. 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. AtMarch 31, 2022 , we had core deposit and other intangibles of$16.9 million subject to amortization and$364.3 million of goodwill, which is not subject to amortization.Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed.Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment. During 2022 there were no triggers warranting interim impairment assessments and for the 2021 annual assessment, we concluded that it was more likely than not that the fair value exceeded its carrying value. The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represent the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 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 for information about recently announced or adopted accounting standards.
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--------------------------------------------------------------------------------Index RESULTS OF OPERATIONS Net Interest Income Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). Changes in the net interest income are the result of changes in volume and the net interest spread which affects NIM. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. NIM refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. Net interest income is also influenced by external factors such as local economic conditions, competition for loans and deposits, and market interest rates. Net interest income for the three months endedMarch 31, 2022 amounted to$76.9 million , an increase of$21.6 million , or 39.2%, from the$55.2 million recorded in the first quarter of 2021. Net interest income on a tax-equivalent basis for the three month period endedMarch 31, 2022 amounted to$77.6 million , an increase of$21.9 million , or 39.3%, from the$55.7 million recorded in the first quarter of 2021. For internal purposes, we evaluate our NIM on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest income then dividing by total average earning assets. We believe that analysis of NIM on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.
The following table presents an analysis of net interest income.
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Average Balances and Net Interest Income Analysis
For the Three Months Ended
2022 2021
($ in thousands) Interest Interest
Average Average Earned Average Average Earned
Volume Rate or Paid Volume Rate or Paid
Assets
Loans (1) (2) $ 6,051,487 4.30 % $ 64,202 $ 4,684,143 4.42 % $ 51,073
Taxable securities 2,995,377 1.79 % 13,210 1,652,834 1.45 % 5,913
Non-taxable securities 288,468 1.47 % 1,048 67,196 1.95 % 323
Short-term investments, primarily 478,861 0.55 % 649 494,233 0.57 %
700
interest-bearing cash Total interest-earning assets 9,814,193 3.27 % 79,109 6,898,406 3.41 % 58,009 Cash and due from banks 115,748 80,898 Premises and equipment 135,990 121,798 Other assets 498,488 376,724 Total assets$ 10,564,419 $ 7,477,826 Liabilities Interest-bearing checking$ 1,576,323 0.06 %$ 224 $ 1,203,942 0.09 %$ 266 Money market deposits 2,606,133 0.13 % 853 1,650,387 0.23 % 918 Savings deposits 721,911 0.06 % 108 538,781 0.10 % 130 Time deposits >$100,000 581,979 0.30 % 430 555,180 0.63 % 858 Other time deposits 298,570 0.21 % 156 224,045 0.39 % 216 Total interest-bearing deposits 5,784,916 0.12 % 1,771 4,172,335 0.68 % 2,388 Borrowings 67,381 2.77 % 460 61,405 2.53 % 383 Total interest-bearing liabilities 5,852,297 0.15 % 2,231 4,233,740 0.27 %
2,771
Noninterest-bearing checking 3,435,437 2,301,780 Other liabilities 66,563 57,116 Shareholders' equity 1,210,122 885,190 Total liabilities and shareholders' equity$ 10,564,419 $ 7,477,826 Net yield on interest-earning assets and net interest income 3.18 %$ 76,878 3.25 % $
55,238
Net yield on interest-earning assets and net interest income - tax-equivalent (3) 3.21 %$ 77,575 3.27 %$ 55,681 Interest rate spread 3.17 % 3.14 % Average prime rate 3.29 % 3.25 % (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of$1.4 million , and$3.4 million for three months endedMarch 31, 2022 and 2021, respectively. (2) Includes accretion of discount on acquired and SBA loans of$2.3 million and$1.3 million for three months endedMarch 31, 2022 and 2021, respectively. (3) Includes tax-equivalent adjustments of$697,000 and$443,000 for three months endedMarch 31, 2022 and 2021, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense. Page 37
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Overall, as demonstrated in the table above, net interest income grew$21.6 million for the three months endedMarch 31, 2022 from the comparable period of the prior year. Higher earning asset volumes, from both organic growth and the Select acquisition, and lower rates on interest-bearing liabilities, which were partially offset by lower yields on interest-earning assets, drove the increase.
•Average loan volumes for the three months ended
•Higher average volume of$1.6 billion on total securities resulted in an increase of$8.0 million in interest income for the three months endedMarch 31, 2022 when compared to the same period in 2021. Also contributing to the increase in interest income was the higher yields on the portfolio as reinvestment rates increased between the periods. •Lower interest rates paid on deposits drove a$0.6 million decrease in deposit interest expense for the three months endedMarch 31, 2022 compared to the same period in 2021. Reductions in rates on deposits more than offset the$1.6 billion increase in average volume for total interest-bearing deposits. •The reduction in NIM was in large part a result of general low market rate environment through most of 2021 and the shift of earning asset mix to lower yielding investment securities from loans as excess liquidity was deployed to securities.
Our NIM for all periods benefited from the net accretion income, primarily associated with purchase accounting premiums/discounts associated with acquisitions. Presented in the table below is the amount of accretion which increased net interest income in each year.
Three Months Ended March 31,
($ in thousands) 2022 2021
Interest income - increased by accretion of loan discount on acquired loans
$ 1,671 752
Interest income - increased by accretion of loan discount on retained SBA loans
667 589
Total interest income impact 2,338 1,341
Interest expense - reduced by premium amortization of deposits 234 15
Interest expense - increased by discount accretion of borrowings
(73) (44)
Total net interest expense impact 161 (29)
Total impact on net interest income $ 2,499 1,312
The increase in loan discount accretion on purchased loans for the first quarter
of 2022 as compared to the prior year was driven by the loans acquired from
Select in the fourth quarter of 2021. Generally the level of loan discount
accretion will decline each year due to the natural paydowns in acquired loan
portfolios. At March 31, 2022 and 2021, unaccreted loan discount on purchased
loans amounted to $15.6 million and $12.7 million , respectively.
In addition to the loan discount accretion recorded on acquired loans, we record
accretion on the discounts associated with the retained unguaranteed portions of
SBA loans sold in the secondary market. The level of SBA loan discount accretion
will vary relative to fluctuations in the SBA loan portfolio. At March 31, 2022
and 2021, unaccreted loan discount on SBA loans amounted to $5.9 million and
$7.1 million , respectively.
Amortization of net deferred loan fees also impacts interest income. During the
first quarter of 2022, we amortized net deferred PPP fees of $1.3 million as
interest income compared to $3.0 million for the first quarter of 2021. At
March 31, 2022 , we had $1.3 million in remaining deferred PPP origination fees
that will be recognized over the lives of the loans, with accelerated
amortization expected to result from the loan forgiveness process. We expect
substantially all of these fees will be recognized in the second quarter of 2022
as a result of the loan forgiveness process.
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Provision for Credit Losses and Provision for Unfunded Commitments
The provisions for credit losses represents our current estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments. Our estimate of credit losses is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. The provision for unfunded commitments represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances. The allowance for unfunded commitments is included in "Other liabilities" in the Consolidated Balance Sheets. The provision for credit losses of$3.5 million for the three months endedMarch 31, 2022 was based on changes in the loan portfolio and updated economic forecasts, and is compared to no provision for the three months endedMarch 31, 2021 . The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined under CECL. We recorded a reversal of provision for unfunded commitments for the three months endedMarch 31, 2022 totaling$1.5 million related primarily to the fluctuations in the levels and mix of outstanding loan commitments. There was no provision for unfunded commitments for the three months endedMarch 31, 2021 .
Additional discussion of our asset quality and credit metrics, which impact our provision for credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses and Loan Loss Experience" sections following.
Noninterest Income
Our noninterest income amounted to$19.3 million and$20.7 million for the three months endedMarch 31, 2022 and 2021, respectively. Included in noninterest income was nonrecurring amounts totaling$1.6 million in other gains and$34,000 in other losses for the three months endedMarch 31, 2022 and 2021, respectively. The following table presents the primary components of noninterest income. For the Three Months Ended March 31, ($ in thousands) 2022 2021 Service charges on deposit accounts $ 3,541 2,733
Other service charges, commissions and fees - net bankcard interchange
4,711 3,523
Other service charges, commissions, and fees - other 2,294 1,999
Fees from presold mortgage loans 1,121 4,544
Commissions from sales of insurance and financial products 945 2,190
SBA consulting fees 780 2,764
SBA loan sale gains 3,261 2,330
Bank-owned life insurance ("BOLI") income 976 620
Other gains (losses), net 1,622 (34)
Noninterest income $ 19,251 20,669
Service charges on deposit accounts increased $0.8 million , or 30%, for the
three months ended March 31, 2022 as compared to the three months ended March
31, 2021 . The increase was driven by the higher number of new customers and
transaction accounts generating fees from both organic growth and the Select
acquisition.
Other service charges, commissions and fees - net bankcard interchange
represents interchange income from debit and credit card transactions, net of
associated interchange expense, and totaled $4.7 million for the three months
ended March 31, 2022 , a 34% increase from the $3.5 million for the three months
ended March 31, 2021 . The growth in card usage by our customers is related to
the higher volume of outstanding cards giving rise to increased transaction
volume as well as customer payment preferences. Because the Company exceeded $10
billion in total assets at December 31, 2021 , it is expected that bankcard
revenue will be adversely impacted by the Durbin Amendment to the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 limit on debit card
interchange fees beginning July 1, 2022 .
Other service charges, commissions and fees - other includes items such as SBA
guarantee servicing fees, ATM charges, wire transfer fees, safety deposit box
rentals, fees from sales of personalized checks, and check cashing fees. The
increase in this line item for the three months ended March 31, 2022 compared to
the three months ended
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Fees from presold mortgages amounted to$1.1 million for the three months endedMarch 31, 2022 , a decline of$3.4 million , or 75%, from the same time period in 2021. The decrease was due to the general decline in home mortgage refinancings and new originations during 2022 as compared to the prior year.
Commissions from sales of insurance and financial products amounted to
The reduction in SBA consulting services for the three months endedMarch 31, 2022 , compared to the same period in 2021 of$2.0 million , or 72%, is directly related to the wind-down of the PPP loan program and lower related revenues earned in the current period. SBA loan sale gains were up$0.9 million , or 40%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 relating to the timing of sales and the volume of originated loans available to be sold in each period. The increase in BOLI income for the three months endedMarch 31, 2022 , compared to the same period in 2021, of$0.4 million was related to the acquisition of Select which contributed$31.0 million in BOLI as of the date of acquisition. Other gains (losses), net amounted to a net gain of$1.6 million for the three months endedMarch 31, 2022 due primarily to death benefits realized on BOLI policies. Noninterest Expenses Total noninterest expenses totaled$51.5 million and$40.1 million for the three months endedMarch 31, 2022 and 2021, respectively. Included in noninterest expense was nonrecurring merger and acquisition costs totaling$3.5 million for the three months endedMarch 31, 2022 . There were no merger costs for the comparable period of 2021. The following table presents the primary components of noninterest expense. For the Three Months Ended March 31, ($ in thousands) 2022 2021 Salaries$ 23,454 $ 20,131 Employee benefits 5,578 4,574 Total personnel expense 29,032 24,705 Occupancy expense 3,384 2,904 Equipment related expenses 1,304 1,045 Merger and acquisition expenses 3,484 - Amortization of intangible assets 1,017 897 Credit card rewards and other expenses 1,243 1,076 Telephone and data lines 935 751 Software costs 1,574 1,207 Data processing expense 2,101 1,343 Advertising and marketing expense 911 610 Foreclosed property (gains) losses, net (80) 157 Non-credit losses 602 185 Other operating expenses 5,958 5,185 Total$ 51,465 $ 40,065 In general, the increase in noninterest expenses was driven by higher operating expenses from personnel, locations, number of accounts, and higher level of activity resulting from the Select acquisition completed in the fourth quarter of 2021. Merger and acquisition expenses amounted to$3.5 million for the three months endedMarch 31, 2022 primarily related to computer system conversion costs. Page 40 --------------------------------------------------------------------------------
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Total personnel expense increased from$24.7 million for the three months endedMarch 31, 2021 to$29.0 million for the three months endedMarch 31, 2022 , an increase of$4.3 million , or 18%. Within personnel expense, total compensation increased$3.3 million , or 16.5% primarily related to the incremental number of associates from the Select acquisition, combined with regular annual salary increases. Employee benefits expense increased$1.0 million , or 22% relative to the higher salaries and other compensation expense combined with higher insurance claims in the first quarter of 2022 compared to the prior year.
Income Taxes
We recorded income tax expense of$8.7 million for the three months endedMarch 31, 2022 and$7.6 million for the three months endedMarch 31, 2021 . Our effective tax rates declined to 20.4% from 21.3% for the three months endedMarch 31, 2022 and 2021, respectively. The lower effective tax rate in the first quarter of 2022 was related to higher tax-exempt income in that quarter relative to taxable income. FINANCIAL CONDITION Total assets atMarch 31, 2022 amounted to$10.7 billion , a 1.4% increase fromDecember 31, 2021 . Total loans atMarch 31, 2022 amounted to$6.1 billion , a 0.3% decrease fromDecember 31, 2021 , and total deposits amounted to$9.4 billion , a 2.9% increase fromDecember 31, 2021 . For the first three months of 2022, loans declined$17.0 million , or 0.3%, related primarily to forgiveness of PPP loans offsetting core growth, which is historically slower in the first quarter of the year. We did experience growth in our commercial real estate and 1-4 family first mortgage categories and expect to experience continued organic growth during the remainder of 2022. The mix of our loan portfolio remained substantially the same atMarch 31, 2022 compared toDecember 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 three month period endedMarch 31, 2022 , we continued to experience growth in our deposit base, with total deposits increasing by$260.5 million , or 2.9% fromDecember 31, 2021 . Deposit growth was primarily in transaction accounts (checking, money market and savings), which we believe to be related to our ongoing deposit growth initiatives, as well as stimulus funds and changes in customer behaviors remaining from the pandemic. 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. Page 41
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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
$ in thousands ended March 31, 2022 ended December 31, 2021Nonperforming assets Nonaccrual loans $ 33,460 34,696 TDRs - accruing 12,727 13,866 Accruing loans >90 days past due - 1,004 Total nonperforming loans 46,187 49,566 Foreclosed real estate 2,750 3,071 Total nonperforming assets $ 48,937 52,637 Asset Quality Ratios Nonaccrual loans to total loans 0.55 % 0.57 % Nonperforming loans to total loans 0.76 % 0.82 %
Nonperforming assets to total loans and foreclosed properties
0.81 % 0.87 %
Nonperforming assets to total assets 0.46 % 0.50 %
Allowance for credit losses to nonaccrual loans 245.27 % 227.08 %
As shown in the table above, nonperforming assets decreased from December 31,
2021 to March 31, 2022 , which was primarily driven by the decrease in TDRs,
decrease in accruing loans past due 90 days or more which were directly related
to the Select acquisition, and the reduction in foreclosed properties.
We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the allowance for credit losses discussed below.
AtMarch 31, 2022 , total nonaccrual loans amounted to$33.5 million , compared to$34.7 million atDecember 31, 2021 . "Real estate-mortgage-commercial and other" is the largest category of nonaccruals loans, at$15.2 million , or 45% of total nonaccrual loans, followed by "Commercial, financial, and agricultural" at$12.6 million , or 38% of total nonaccrual loans. Included in those categories are nonaccrual SBA loans totaling$18.0 million atMarch 31, 2022 , or 54% of total nonaccrual loans, that have$7.4 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. AtMarch 31, 2022 , total accruing TDRs amounted to$12.7 million , compared to$13.9 million atDecember 31, 2021 , with the decrease being attributed to one large commercial TDR paying off during the period. As reflected in Note 4 to the financial statements, total classified loans were relatively flat at$55.8 million atMarch 31, 2022 compared to$56.0 million atDecember 31, 2021 . Special mention loans decreased from$43.1 million atDecember 31, 2021 to$38.2 million atMarch 31, 2022 . Total foreclosed real estate amounted to$2.8 million atMarch 31, 2022 and$3.1 million atDecember 31, 2021 . Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and favorable overall asset quality. During the first quarter of 2022, we recorded sales of three foreclosed properties partially offset by the addition of one foreclosed property. We believe that the fair values of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. Page 42
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The following table presents the detail of all of our foreclosed real estate at each period end: ($ in thousands) At March 31, 2022 At December 31, 2021 Vacant land and farmland $ 103 104 1-4 family residential properties 911 1,231 Commercial real estate 1,736 1,736 Total foreclosed real estate $ 2,750 3,071
Allowance for Credit Losses and Loan Loss Experience
Our ACL is based on the total amount of loan losses that are expected over the remaining life of the loan portfolio. Our estimate of credit losses on loans is determined using a complex model, based primarily on the utilization of discounted cash flows, that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the allowance for credit losses and resulting provision for credit losses.
We recorded
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. For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, allowance for credit losses, charge-offs and recoveries, and key ratios.
Loan Ratios, Loss and Recovery Experience
Three Months Twelve Months Three Months
Ended Ended December 31, Ended
($ in thousands) March 31, 2022 2021 March 31, 2021
Loans outstanding at end of period $ 6,064,698 6,081,715 4,624,054
Average amount of loans outstanding 6,051,487 5,018,391 4,684,143
Allowance for credit losses, at period end 82,069 78,789 65,849
Total charge-offs (1,043) (7,602) (2,317)
Total recoveries 823 4,922 1,203
Net charge-offs $ (220) $ (2,680) $ (1,114)
Ratios:
Net charge-offs as a percent of average loans
(annualized) 0.01 % 0.05 % 0.10 %
Allowance for credit losses as a percent of loans at end of period
1.35 % 1.30 % 1.42 %
Recoveries of loans previously charged-off as a
percent of loans charged-off 78.91 % 64.75 % 51.92 %
In addition to the allowance for credit losses on loans, we maintain an
allowance for lending-related commitments such as unfunded loan commitments. We
estimate expected credit losses associated with these commitments over the
contractual period in which we are exposed to credit risk via a contractual
obligation to extend credit, unless that obligation is unconditionally
cancellable. The allowance for lending-related commitments on off-balance sheet
credit exposures is adjusted as a provision for unfunded commitments 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. The allowance for unfunded commitments of $12.0 million
and $13.5 million at March 31, 2022 and December 31, 2021 , respectively, is
classified on the balance sheet within "Other liabilities".
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We recorded a reversal provision for credit losses on unfunded commitments of
We believe the ACL is adequate at each period end presented. It must be emphasized, however, that the determination of the allowances using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for credit losses or future charges to earnings. See "Critical Accounting Policies - Allowance for Credit Losses on Loans and Unfunded Commitments" in Note 1 to the 2021 Annual Report on Form 10-K filed with theSEC for more information. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses and value of other real estate. 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. Since the beginning of the COVID-19 pandemic in early 2020, we have seen our liquidity levels increase, with increases in deposits account balances leading to higher cash and investment securities levels. In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources: 1) an approximately$876 million line of credit with the FHLB (of which$1.9 million and$2.0 million were outstanding atMarch 31, 2022 andDecember 31, 2021 , respectively); 2) a$100 million federal funds line with a correspondent bank (of which none was outstanding atMarch 31, 2022 orDecember 31, 2021 ); and 3) an approximately$138 million line of credit through theFederal Reserve Bank of Richmond's discount window (of which none was outstanding atMarch 31, 2022 orDecember 31, 2021 ). Unused and available lines of credit amounted to$1.1 billion atMarch 31, 2022 . Our overall liquidity is essentially the same as atDecember 31, 2021 with our liquid assets (cash and securities) as a percentage of our total deposits and borrowings at 33.9% atMarch 31, 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 sinceDecember 31, 2021 , detail of which 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.
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities. Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities throughMarch 31, 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
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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 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 credit 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 regulations. In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution's composite ratings as determined by its regulators. The FRB has not advised us of any requirement specifically applicable to us. AtMarch 31, 2022 , our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents the capital ratios for the Company and the regulatory minimums discussed above for the periods indicated. March 31, 2022 December 31, 2021 Risk-based capital ratios: Common equity Tier 1 to Tier 1 risk weighted assets 12.85 % 12.53 % Minimum required Common Equity Tier 1 capital 7.00 % 7.00 % Tier I capital to Tier 1 risk weighted assets 13.74 % 13.42 % Minimum required Tier 1 capital 8.50 % 8.50 % Total risk-based capital to Tier II risk weighted assets 14.99 % 14.67 % Minimum required total risk-based capital 10.50 % 10.50 % Leverage capital ratio: Tier 1 capital to quarterly average total assets 9.60 % 9.39 % 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. AtMarch 31, 2022 ,First Bank exceeded the minimum ratios established by the regulatory authorities.
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