FIRST BANCORP /NC/ - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
| North Carolina | 56-1421916 | |||||||||||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |||||||||||||||||||
| 300 SW Broad St., | Southern Pines | , | North Carolina | 28387 | ||||||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||||||||
| (Registrant's telephone number, including area code) | (910) | 246-2500 | ||||||||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered: | ||||||
| Common Stock, No Par Value | FBNC | The Nasdaq Global Select Market | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | |||||||||||
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||||||||||
| Emerging Growth Company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares of the registrant's Common Stock outstanding on April 30, 2021 was 28,489,474.
INDEX
FIRST BANCORP AND SUBSIDIARIES
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FORWARD-LOOKING STATEMENTS
Part I of this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Further, forward-looking statements are intended to speak only as of the date made. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning our opinions or judgment about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions, including the impact of the current pandemic. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 2020 Annual Report on Form 10-K and Item 1A of Part II of this report.
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Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
| ($ in thousands) | March 31, 2021 (unaudited) | December 31, 2020 | |||||||||
| ASSETS | |||||||||||
| Cash and due from banks, noninterest-bearing | $ | 71,206 | 93,724 | ||||||||
| Due from banks, interest-bearing | 458,860 | 273,566 | |||||||||
| Total cash and cash equivalents | 530,066 | 367,290 | |||||||||
| Securities available for sale | 1,821,697 | 1,453,132 | |||||||||
| Securities held to maturity (fair values of $195,424 and $170,734) | 198,843 | 167,551 | |||||||||
| Presold mortgages in process of settlement at fair value | 31,869 | 42,271 | |||||||||
| SBA Loans held for sale | 7,002 | 6,077 | |||||||||
| Loans | 4,624,054 | 4,731,315 | |||||||||
| Allowance for credit losses on loans | (65,849) | (52,388) | |||||||||
| Net loans | 4,558,205 | 4,678,927 | |||||||||
| Premises and equipment | 123,271 | 120,502 | |||||||||
| Operating right-of-use lease assets | 16,899 | 17,514 | |||||||||
| Accrued interest receivable | 18,652 | 20,272 | |||||||||
| Goodwill | 239,272 | 239,272 | |||||||||
| Other intangible assets | 14,606 | 15,366 | |||||||||
| Foreclosed properties | 1,811 | 2,424 | |||||||||
| Bank-owned life insurance | 107,594 | 106,974 | |||||||||
| Other assets | 66,607 | 52,179 | |||||||||
| Total assets | $ | 7,736,394 | 7,289,751 | ||||||||
| LIABILITIES | |||||||||||
| Deposits: Noninterest bearing checking accounts | $ | 2,430,198 | 2,210,012 | ||||||||
| Interest bearing checking accounts | 1,258,500 | 1,172,022 | |||||||||
| Money market accounts | 1,721,230 | 1,581,364 | |||||||||
| Savings accounts | 567,715 | 519,266 | |||||||||
| Time deposits of $100,000 or more | 535,519 | 564,365 | |||||||||
| Other time deposits | 220,325 | 226,567 | |||||||||
| Total deposits | 6,733,487 | 6,273,596 | |||||||||
| Borrowings | 61,342 | 61,829 | |||||||||
| Accrued interest payable | 741 | 904 | |||||||||
| Operating lease liabilities | 17,354 | 17,868 | |||||||||
| Other liabilities | 46,617 | 42,133 | |||||||||
| Total liabilities | 6,859,541 | 6,396,330 | |||||||||
| Commitments and contingencies | |||||||||||
| SHAREHOLDERS’ EQUITY | |||||||||||
| Preferred stock, no par value per share. Authorized: 5,000,000 shares | |||||||||||
| Issued & outstanding: none and none | — | — | |||||||||
| Common stock, no par value per share. Authorized: 40,000,000 shares | |||||||||||
| Issued & outstanding: 28,489,474 and 28,579,335 shares | 397,094 | 400,582 | |||||||||
| Retained earnings | 483,944 | 478,489 | |||||||||
| Stock in rabbi trust assumed in acquisition | (2,256) | (2,243) | |||||||||
| Rabbi trust obligation | 2,256 | 2,243 | |||||||||
| Accumulated other comprehensive income (loss) | (4,185) | 14,350 | |||||||||
| Total shareholders’ equity | 876,853 | 893,421 | |||||||||
| Total liabilities and shareholders’ equity | $ | 7,736,394 | 7,289,751 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
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First Bancorp and Subsidiaries
Consolidated Statements of Income
| ($ in thousands, except share data-unaudited) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| INTEREST INCOME | |||||||||||
| Interest and fees on loans | $ | 51,073 | 55,297 | ||||||||
| Interest on investment securities: | |||||||||||
| Taxable interest income | 5,913 | 5,474 | |||||||||
| Tax-exempt interest income | 323 | 164 | |||||||||
| Other, principally overnight investments | 700 | 1,098 | |||||||||
| Total interest income | 58,009 | 62,033 | |||||||||
| INTEREST EXPENSE | |||||||||||
| Savings, checking and money market accounts | 1,314 | 2,359 | |||||||||
| Time deposits of $100,000 or more | 858 | 2,924 | |||||||||
| Other time deposits | 216 | 490 | |||||||||
| Borrowings | 383 | 1,501 | |||||||||
| Total interest expense | 2,771 | 7,274 | |||||||||
| Net interest income | 55,238 | 54,759 | |||||||||
| Provision for credit losses | — | 5,590 | |||||||||
| Net interest income after provision for credit losses | 55,238 | 49,169 | |||||||||
| NONINTEREST INCOME | |||||||||||
| Service charges on deposit accounts | 2,733 | 3,337 | |||||||||
| Other service charges, commissions and fees | 5,522 | 4,069 | |||||||||
| Fees from presold mortgage loans | 4,544 | 1,841 | |||||||||
| Commissions from sales of insurance and financial products | 2,190 | 2,068 | |||||||||
| SBA consulting fees | 2,764 | 1,027 | |||||||||
| SBA loan sale gains | 2,330 | 647 | |||||||||
| Bank-owned life insurance income | 620 | 642 | |||||||||
| Other gains (losses), net | (34) | 74 | |||||||||
| Total noninterest income | 20,669 | 13,705 | |||||||||
| NONINTEREST EXPENSES | |||||||||||
| Salaries expense | 20,131 | 20,110 | |||||||||
| Employee benefits expense | 4,574 | 4,547 | |||||||||
| Total personnel expense | 24,705 | 24,657 | |||||||||
| Occupancy expense | 2,904 | 2,958 | |||||||||
| Equipment related expenses | 1,045 | 1,145 | |||||||||
| Intangibles amortization expense | 897 | 1,055 | |||||||||
| Foreclosed property losses, net | 157 | 159 | |||||||||
| Other operating expenses | 10,357 | 10,102 | |||||||||
| Total noninterest expenses | 40,065 | 40,076 | |||||||||
| Income before income taxes | 35,842 | 22,798 | |||||||||
| Income tax expense | 7,648 | 4,618 | |||||||||
| Net income | $ | 28,194 | 18,180 | ||||||||
| Earnings per common share: | |||||||||||
| Basic | $ | 0.99 | 0.62 | ||||||||
| Diluted | 0.99 | 0.62 | |||||||||
| Dividends declared per common share | $ | 0.20 | 0.18 | ||||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 28,357,809 | 29,230,788 | |||||||||
| Diluted | 28,537,853 | 29,399,114 | |||||||||
See accompanying notes to unaudited consolidated financial statements.
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First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
| ($ in thousands-unaudited) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Net income | $ | 28,194 | 18,180 | ||||||||
| Other comprehensive income (loss): | |||||||||||
| Unrealized gains (losses) on securities available for sale: | |||||||||||
| Unrealized holding gains (losses) arising during the period, pretax | (24,235) | 20,765 | |||||||||
| Tax (expense) benefit | 5,569 | (4,772) | |||||||||
| Postretirement Plans: | |||||||||||
| Amortization of unrecognized net actuarial loss | 171 | 178 | |||||||||
| Tax benefit | (40) | (41) | |||||||||
| Other comprehensive income (loss) | (18,535) | 16,130 | |||||||||
| Comprehensive income | $ | 9,659 | 34,310 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
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First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
| ($ in thousands, except share data - unaudited) | Common Stock | Retained Earnings | Stock in Rabbi Trust Assumed in Acquisition | Rabbi Trust Obligation | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Balances, January 1, 2020 | 29,601 | $ | 429,514 | 417,764 | (2,587) | 2,587 | 5,123 | 852,401 | |||||||||||||||||||||||||||||||||
| Net income | 18,180 | 18,180 | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.18 per common share) | (5,235) | (5,235) | |||||||||||||||||||||||||||||||||||||||
| Change in Rabbi Trust obligation | (15) | 15 | — | ||||||||||||||||||||||||||||||||||||||
| Stock repurchases | (576) | (20,000) | (20,000) | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 16 | 722 | 722 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 16,130 | 16,130 | |||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2020 | 29,041 | $ | 410,236 | 430,709 | (2,602) | 2,602 | 21,253 | 862,198 | |||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Balances, January 1, 2021 | 28,579 | $ | 400,582 | 478,489 | (2,243) | 2,243 | 14,350 | 893,421 | |||||||||||||||||||||||||||||||||
| (17,051) | (17,051) | ||||||||||||||||||||||||||||||||||||||||
| Net income | 28,194 | 28,194 | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.20 per common share) | (5,688) | (5,688) | |||||||||||||||||||||||||||||||||||||||
| Change in Rabbi Trust obligation | (13) | 13 | — | ||||||||||||||||||||||||||||||||||||||
| Stock repurchases | (107) | (4,036) | (4,036) | ||||||||||||||||||||||||||||||||||||||
| Stock withheld for payment of taxes | (3) | (103) | (103) | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 20 | 651 | 651 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (18,535) | (18,535) | |||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2021 | 28,489 | $ | 397,094 | 483,944 | (2,256) | 2,256 | (4,185) | 876,853 | |||||||||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
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First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
| ($ in thousands-unaudited) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows From Operating Activities | |||||||||||
| Net income | $ | 28,194 | 18,180 | ||||||||
| Reconciliation of net income to net cash provided by operating activities: | |||||||||||
| Provision for credit losses | — | 5,590 | |||||||||
| Net security premium amortization | 2,876 | 804 | |||||||||
| Loan discount accretion | (1,341) | (1,841) | |||||||||
| Other purchase accounting accretion and amortization, net | 29 | 14 | |||||||||
| Foreclosed property losses and write-downs, net | 157 | 159 | |||||||||
| Other losses | 34 | (74) | |||||||||
| Increase in net deferred loan fees | 2,845 | 320 | |||||||||
| Bank-owned life insurance income | (620) | (642) | |||||||||
| Depreciation of premises and equipment | 1,448 | 1,563 | |||||||||
| Amortization of operating lease right-of-use assets | 517 | 496 | |||||||||
| Repayments of lease obligations | (416) | (452) | |||||||||
| Stock-based compensation expense | 397 | 513 | |||||||||
| Amortization of intangible assets | 897 | 1,055 | |||||||||
| Amortization of SBA servicing assets | 470 | 918 | |||||||||
| Fees/gains from sale of presold mortgages and SBA loans | (6,874) | (2,488) | |||||||||
| Origination of presold mortgage loans in process of settlement | (112,592) | (48,143) | |||||||||
| Proceeds from sales of presold mortgage loans in process of settlement | 127,346 | 54,764 | |||||||||
| Origination of SBA loans for sale | (37,359) | (36,081) | |||||||||
| Proceeds from sales of SBA loans | 32,467 | 16,031 | |||||||||
| Decrease in accrued interest receivable | 1,620 | 881 | |||||||||
| Increase in other assets | (5,242) | (1,096) | |||||||||
| Increase in net deferred income tax asset | (4,596) | (63) | |||||||||
| Decrease in accrued interest payable | (163) | (54) | |||||||||
| Increase in other liabilities | 639 | 3,318 | |||||||||
| Net cash provided by operating activities | 30,733 | 13,672 | |||||||||
| Cash Flows From Investing Activities | |||||||||||
| Purchases of securities available for sale | (475,960) | (9,423) | |||||||||
| Purchases of securities held to maturity | (37,438) | (3,624) | |||||||||
| Proceeds from maturities/issuer calls of securities available for sale | 80,650 | 45,037 | |||||||||
| Proceeds from maturities/issuer calls of securities held to maturity | 5,780 | 10,075 | |||||||||
| Redemptions (purchases) of FRB and FHLB stock, net | 1,836 | (4,572) | |||||||||
| Net decrease (increase) in loans | 110,212 | (95,680) | |||||||||
| Proceeds from sales of foreclosed properties | 1,183 | 889 | |||||||||
| Purchases of premises and equipment | (4,534) | (1,321) | |||||||||
| Proceeds from sales of premises and equipment | 218 | 189 | |||||||||
| Net cash used by investing activities | (318,053) | (58,430) | |||||||||
| Cash Flows From Financing Activities | |||||||||||
| Net increase in deposits | 459,906 | 113,664 | |||||||||
| Net decrease in short-term borrowings | — | (48,000) | |||||||||
| Proceeds from long-term borrowings | — | 150,000 | |||||||||
| Payments on long-term borrowings | (531) | (531) | |||||||||
| Cash dividends paid – common stock | (5,140) | (5,328) | |||||||||
| Repurchases of common stock | (4,036) | (20,000) | |||||||||
| Payment of taxes related to stock withheld | (103) | — | |||||||||
| Net cash provided by financing activities | 450,096 | 189,805 | |||||||||
| Increase in cash and cash equivalents | 162,776 | 145,047 | |||||||||
| Cash and cash equivalents, beginning of period | 367,290 | 231,302 | |||||||||
| Cash and cash equivalents, end of period | $ | 530,066 | 376,349 | ||||||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||
| Cash paid during the period for interest | $ | 2,934 | 7,328 | ||||||||
| Cash paid during the period for income taxes | 9,585 | 20 | |||||||||
| Non-cash: Unrealized (loss) gain on securities available for sale, net of taxes | (18,666) | 15,993 | |||||||||
| Non-cash: Foreclosed loans transferred to other real estate | 727 | 662 | |||||||||
| Non-cash: Initial recognition of operating lease right-of-use assets and operating lease liabilities | 444 | — | |||||||||
See accompanying notes to consolidated financial statements.
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First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
| (unaudited) | For the Period Ended March 31, 2021 | |||||||
Note 1 - Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of March 31, 2021, the consolidated results of operations for the three months ended March 31, 2021 and 2020, and the consolidated cash flows for the three months ended March 31, 2021 and 2020. Any such adjustments were of a normal, recurring nature. Reference is made to the 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for a discussion of accounting policies and other relevant information with respect to the financial statements. The results of operations for the periods ended March 31, 2021 and 2020 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.
Recent Developments: COVID-19 - The COVID-19 pandemic has continued to impact our operations in 2021. We remain committed and focused on the health and safety of our team members, customers, and communities, and we continue to have a many employees working remotely. The most significant effects of the pandemic that we have continued to experience in 2021 have been lower loan demand (excluding PPP loans) and high deposit growth, which has likely been impacted by stimulus payments and higher savings rates by our customers. Low interest rates have also resulted in high levels of mortgage loan refinancings, which have increased our mortgage loan sales income, but have reduced our level of mortgage loans outstanding. Thus far, we have not experienced a meaningful increase in problem loans or charge-offs.
On December 27, 2020, the Economic Aid Act was signed into law, which included another round of Paycheck Protection Program (PPP) funding. The Company began originating the new round of PPP loans in January 2021. During the first quarter of 2021, the Company funded $111 million in PPP loans, while also processing $111 million in forgiveness payments related to 2020 PPP loan originations.
In response to the pandemic onset in 2020, the Company generally offered impacted borrowers loan payment deferrals of 90 days in duration. Since that time, most of our borrowers have resumed payments and as of March 31, 2021, the Company had remaining pandemic-related loan deferrals of $5.9 million.
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.
Note 2 – Accounting Policies
Note 1 to the 2020 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and a discussion of recent accounting pronouncements. The following paragraphs update that information as necessary.
Accounting Standards Adopted in 2021
On January 1, 2021, the Company adopted Accounting Standards Codification ("ASC") 326 ("CECL"), which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. It also applies to off-balance sheet credit exposures, such as unfunded commitments to extend credit. In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not they will be required to sell.
The Company adopted CECL as of January 1, 2021 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after
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January 1, 2021 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $14.6 million, which is presented as a reduction to loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $7.5 million, which is recorded within Other Liabilities. The adoption of CECL had an insignificant impact on the Company's held to maturity and available for sale securities portfolios. The Company recorded a net decrease to retained earnings of $17.1 million as of January 1, 2021 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Federal banking regulatory agencies provided optional relief to delay the adverse regulatory capital impact of CECL at adoption. The Company did not elect the option.
The Company adopted CECL using the prospective transition approach for PCD assets that were previously classified as PCI under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The amortized cost basis of the PCD assets was adjusted to reflect the addition of $0.1 million of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at a rate that approximates the effective interest rate as of January 1, 2021.
With regard to PCD assets, because the Company elected to disaggregate the former PCI pools and no longer considers these pools to be the unit of account, contractually delinquent PCD loans will be reported as nonaccrual loans using the same criteria as other loans. Similarly, although management did not reassess whether modifications to individual acquired financial assets accounted for in pools were TDRs as of the date of adoption, PCD loans that are restructured and meet the definition of troubled debt restructurings after the adoption of CECL will be reported as such.
Accrued interest for all financial instruments is included in a separate line on the face of the Consolidated Balance Sheets. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectable interest.
The allowance for credit losses for the majority of loans was calculated using a discounted cash flow methodology applied at a loan level with a one-year reasonable and supportable forecast period and a three-year straight-line reversion period. The Company elected to use, as a practical expedient, the fair value of collateral when determining the allowance for credit losses on loans for which repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty (collateral-dependent loans).
The Company's CECL allowances will fluctuate over time due to macroeconomic conditions and forecasts as well as the size and composition of the loan portfolios.
In August 2018, the FASB amended the Compensation - Retirement Benefits – Defined Benefit Plans Topic of the Accounting Standards Codification to improve disclosure requirements for employers that sponsor defined benefit pension and other postretirement plans. The guidance removed disclosures that were no longer considered cost-beneficial, clarified the specific requirements of disclosures, and added disclosure requirements identified as relevant. The amendments were effective for the Company on January 1, 2021 and the adoption of this amendment did not have a material effect on its financial statements.
Securities - Debt securities that the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” and carried at amortized cost. Debt securities not classified as held to maturity are classified as “available for sale” and carried at fair value, with unrealized holding gains and losses being reported as other comprehensive income or loss and reported as a separate component of shareholders’ equity.
Interest income includes amortization or purchase premiums or discounts. Premiums and discounts are generally amortized into income on a level yield basis, with premiums being amortized to the earliest call date and discounts being accreted to the stated maturity date. Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification method.
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A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.
Allowance for Credit Losses - Securities Held to Maturity - Since the adoption of ASC 326 (CECL), the Company measures expected credit losses on held to maturity debt securities on an individual security basis. Accrued interest receivable on held to maturity debt securities totaled $1.12 million at March 31, 2021 and was excluded from the estimate of credit losses.
The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount.
Virtually all of the mortgage-backed securities held by the Company are issued by government-sponsored corporations. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The state and local governments securities held by the Company are highly rating by major rating agencies. As a result, the allowance for credit losses on held to maturity securities was immaterial at March 31, 2021.
Allowance for Credit Losses - Securities Available for Sale - For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income with the establishment of an allowance under CECL compared to a direct write down of the security under Incurred Loss. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2021, there was no allowance for credit losses related to the available-for-sale portfolio.
Accrued interest receivable on available for sale debt securities totaled $3.34 million at March 31, 2021 and was excluded from the estimate of credit losses.
Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $14.2 million at March 31, 2021 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under
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the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.
Purchased Credit Deteriorated (PCD) Loans - Upon adoption of CECL, loans that were designated as purchased credit impaired (PCI) loans under the previous accounting guidance were classified as PCD loans without reassessment. The amount of PCD loans was immaterial at each period end.
In future acquisitions, the Company may purchase loans, some of which have experienced more than insignificant credit deterioration since origination. In those cases, the Company will consider internal loan grades, delinquency status and other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at the amount paid. An initial allowance for credit losses is determined using the same methodology as other loans held for investment, but with no impact to earnings. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the allowance for loan losses recorded through provision expense.
Allowance for Credit Losses - Loans - The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Estimated recoveries are considered for post-CECL adoption date charge-offs to the extend that they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. The Discounted Cash Flow (“DCF”) method is utilized for substantially all pools, with discounted cash flows computed for each loan in a pool based on its individual characteristics (e.g. maturity date, payment amount, interest rate, etc.), and the results are aggregated at the pool level. A probability of default and loss given default, as adjusted for recoveries (as noted above), are applied to the discounted cash flows for each pool, while considering prepayment and principal curtailment effects. The analysis produces a discounted expected cash flow total for each pool, which is then compared to the amortized cost of the pool to arrive at the expected credit loss.
In determining the proper level of default rates and loss given default, management has determined that the loss experience of the Company provides the best basis for its assessment of expected credit losses. It therefore utilized its own historical credit loss experience by each loan segment over an economic cycle, while excluding loss experience from certain acquired institutions (i.e., failed banks).
Management considers forward-looking information in estimating expected credit losses. For substantially all segments of collectively evaluated loans, the Company incorporates two or more macroeconomic drivers using a statistical regression modeling methodology. The Company subscribes to a third-party service which provides a quarterly macroeconomic baseline outlook and alternative scenarios for the United States economy. The baseline, along with the evaluation of alternative scenarios, is evaluated by management to determine the best estimate within the range of expected credit losses. The baseline forecast incorporates an equal probability of the United States economy performing better or worse than this projection. With the ongoing pandemic, along with periodic starts and stops to reopening the economy and the impact of government stimulus, the baseline and alternative scenarios have reflected a high degree of volatility in economic forecasts from month-to-month. The Company based it's adoption date allowance for credit loss adjustment primarily on the baseline forecast, which reflected ongoing threats to the economy, primarily arising from the pandemic. In reviewing the March 2021 forecasts, management noted the continued high degree of volatility of the 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 its March 31, 2021 computation 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. This more negative forecast's projections were materially consistent with the adoption-date forecast's projections under the baseline scenario.
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Management has also evaluated the appropriateness of the reasonable and supportable forecast scenarios utilized for each period and has made adjustments as needed. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long term mean of historical factors over twelve quarters using a straight-line approach. The Company generally utilizes a four-quarter forecast and a twelve-quarter reversion period to the long-term average, which is then held static for the remainder of the forecast period.
Included in its systematic methodology to determine its ACL, Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e., formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending policies, procedures, and strategies, 2) changes in the nature and volume of the portfolio, 3) staff experience, 4) changes in volume and trends in classified loans, delinquencies and nonaccrual loans, 5) concentration risk, 6) trends in underlying collateral value, 7) external factors, including competition and legal and regulatory factors, 8) changes in the quality of the Company's loan review system, and 9) economic conditions not already captured.
The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a discounted cash flow methodology at the loan level, with loss rates, prepayment assumptions and curtailment assumptions driven by each loan’s collateral type:
Commercial, financial, and agricultural - Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral which often consists of inventory, accounts receivable and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also included in this category for periods subsequent to March 31, 2020 are PPP loans, which are fully guaranteed by the SBA and thus have minimal risk.
Real estate - construction, land development, & other land loans - Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans (see below). Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.
Real estate - mortgage - residential (1-4 family) first - Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.
Real estate - mortgage - home equity loans / lines of credit - Risks common to home equity loans and lines of credit are general economic conditions, including an increase in unemployment rates, and declining real estate values which reduce or eliminate the borrower’s home equity.
Real estate - mortgage - commercial and other - Loans in this category are susceptible to declines in occupancy rates, business failure and general economic conditions. Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category.
Consumer loans - Risks common to these loans include regulatory risks, unemployment and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.
When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
When the discounted cash flow method is used to determine the allowance for credit losses, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments.
Determining the Contractual Term - Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or
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renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Troubled Debt Restructurings (TDRs) - A loan for which the terms have been modified resulting in a more than insignificant concession, and for which the borrower is experiencing financial difficulties, is generally considered to be a TDR. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.
Allowance for Credit Losses - Unfunded Loan Commitments - Effective with the adoption of CECL, the Company estimates expected credit losses on commitments to extend credit over the contractual period in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancelable by the Company. The allowance for off-balance sheet credit exposures, which is reflected within "Other Liabilities," is adjusted for as an increase or decrease to the provision for credit losses. 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 is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.
Note 3 – Stock-Based Compensation
The Company recorded total stock-based compensation expense of $397,000 and $513,000 for the three months ended March 31, 2021 and 2020, respectively. The Company recognized $91,000 and $118,000 of income tax benefits related to stock-based compensation expense in the income statement for the three months ended March 31, 2021 and 2020, respectively.
At March 31, 2021, the sole equity-based compensation plan for the Company is the First Bancorp 2014 Equity Plan (the "Equity Plan"), which was approved by shareholders on May 8, 2014. As of March 31, 2021, the Equity Plan had 530,345 shares remaining available for grant.
The Equity Plan is intended to serve as a means to attract, retain and motivate key employees and directors and to associate the interests of the plans' participants with those of the Company and its shareholders. The Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.
Recent equity awards to employees have been made in the form of shares of restricted stock with service vesting conditions only. Compensation expense for these awards is recorded over the requisite service periods. Upon forfeiture, any previously recognized compensation cost is reversed. Upon a change in control (as defined in the Equity Plan), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.
Certain of the Company’s equity grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company recognizes compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for each incremental award. Compensation expense is based on the estimated number of stock awards that will ultimately vest. Over the past five years, there have been insignificant amounts of forfeitures, and therefore the Company assumes that all awards granted with service conditions only will vest. The Company issues new shares of common stock when options are exercised.
In addition to employee equity awards, the Company's practice is to grant common shares, valued at approximately $32,000, to each non-employee director (currently 10 in total) in June of each year. Compensation expense associated with these director awards is recognized on the date of award since there are no vesting conditions.
The following table presents information regarding the activity for the first three months of 2021 related to the Company’s outstanding restricted stock:
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| Long-Term Restricted Stock | ||||||||||||||
| Number of Units | Weighted-Average Grant-Date Fair Value | |||||||||||||
| Nonvested at January 1, 2021 | 172,105 | $ | 33.80 | |||||||||||
| Granted during the period | 26,350 | 35.19 | ||||||||||||
| Vested during the period | (6,057) | 36.35 | ||||||||||||
| Forfeited or expired during the period | (6,819) | 37.32 | ||||||||||||
| Nonvested at March 31, 2021 | 185,579 | $ | 33.79 | |||||||||||
Total unrecognized compensation expense as of March 31, 2021 amounted to $2,576,000 with a weighted-average remaining term of 2.0 years. For the nonvested awards that are outstanding at March 31, 2021, the Company expects to record $1,542,000 in compensation expense in the next twelve months, $1,308,000 of which is expected to be recorded in the remaining quarters of 2021.
Note 4 – Earnings Per Common Share
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings Per Common Share:
| For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| ($ in thousands except per share amounts) | Income (Numerator) | Shares (Denominator) | Per Share Amount | Income (Numerator) | Shares (Denominator) | Per Share Amount | ||||||||||||||||||||||||||||||||
| Basic EPS: | ||||||||||||||||||||||||||||||||||||||
| Net income | $ | 28,194 | $ | 18,180 | ||||||||||||||||||||||||||||||||||
| Less: income allocated to participating securities | (178) | (81) | ||||||||||||||||||||||||||||||||||||
| Basic EPS per common share | $ | 28,016 | 28,357,809 | $ | 0.99 | $ | 18,099 | 29,230,788 | $ | 0.62 | ||||||||||||||||||||||||||||
| Diluted EPS: | ||||||||||||||||||||||||||||||||||||||
| Net income | $ | 28,194 | 28,357,809 | $ | 18,180 | 29,230,788 | ||||||||||||||||||||||||||||||||
| Effect of Dilutive Securities | — | 180,044 | — | 168,326 | ||||||||||||||||||||||||||||||||||
| Diluted EPS per common share | $ | 28,194 | 28,537,853 | $ | 0.99 | $ | 18,180 | 29,399,114 | $ | 0.62 | ||||||||||||||||||||||||||||
Note 5 – Securities
The book values and approximate fair values of investment securities at March 31, 2021 and December 31, 2020 are summarized as follows:
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| ($ in thousands) | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Fair Value | Unrealized | Amortized Cost | Fair Value | Unrealized | ||||||||||||||||||||||||||||||||||||||||||
| Gains | (Losses) | Gains | (Losses) | ||||||||||||||||||||||||||||||||||||||||||||
| Securities available for sale: | |||||||||||||||||||||||||||||||||||||||||||||||
| Government-sponsored enterprise securities | $ | 70,015 | 67,022 | — | (2,993) | 70,016 | 70,206 | 371 | (181) | ||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | 1,711,809 | 1,709,811 | 17,167 | (19,165) | 1,318,998 | 1,337,706 | 20,832 | (2,124) | |||||||||||||||||||||||||||||||||||||||
| Corporate bonds | 43,660 | 44,864 | 1,414 | (210) | 43,670 | 45,220 | 1,760 | (210) | |||||||||||||||||||||||||||||||||||||||
| Total available for sale | $ | 1,825,484 | 1,821,697 | 18,581 | (22,368) | 1,432,684 | 1,453,132 | 22,963 | (2,515) | ||||||||||||||||||||||||||||||||||||||
| Securities held to maturity: | |||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | $ | 26,977 | 27,999 | 1,022 | — | 29,959 | 30,900 | 941 | — | ||||||||||||||||||||||||||||||||||||||
| State and local governments | 171,866 | 167,425 | 410 | (4,851) | 137,592 | 139,834 | 2,407 | (165) | |||||||||||||||||||||||||||||||||||||||
| Total held to maturity | $ | 198,843 | 195,424 | 1,432 | (4,851) | 167,551 | 170,734 | 3,348 | (165) | ||||||||||||||||||||||||||||||||||||||
All of the Company’s mortgage-backed securities were issued by government-sponsored corporations, except for private mortgage-backed securities with a fair value of $0.9 million and $1.0 million as of March 31, 2021 and December 31, 2020, respectively.
The following table presents information regarding securities with unrealized losses at March 31, 2021:
| ($ in thousands) | Securities in an Unrealized Loss Position for Less than 12 Months | Securities in an Unrealized Loss Position for More than 12 Months | Total | ||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Government-sponsored enterprise securities | $ | 67,022 | 2,993 | — | — | 67,022 | 2,993 | ||||||||||||||||||||||||||||
| Mortgage-backed securities | 1,094,263 | 19,010 | 5,844 | 155 | 1,100,107 | 19,165 | |||||||||||||||||||||||||||||
| Corporate bonds | — | — | 4,790 | 210 | 4,790 | 210 | |||||||||||||||||||||||||||||
| State and local governments | 108,006 | 4,851 | — | — | 108,006 | 4,851 | |||||||||||||||||||||||||||||
| Total unrealized loss position | $ | 1,269,291 | 26,854 | 10,634 | 365 | 1,279,925 | 27,219 | ||||||||||||||||||||||||||||
The following table presents information regarding securities with unrealized losses at December 31, 2020:
| ($ in thousands) | Securities in an Unrealized Loss Position for Less than 12 Months | Securities in an Unrealized Loss Position for More than 12 Months | Total | ||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Government-sponsored enterprise securities | $ | 29,812 | 181 | — | — | 29,812 | 181 | ||||||||||||||||||||||||||||
| Mortgage-backed securities | 497,992 | 1,957 | 6,168 | 167 | 504,160 | 2,124 | |||||||||||||||||||||||||||||
| Corporate bonds | 3,956 | 45 | 835 | 165 | 4,791 | 210 | |||||||||||||||||||||||||||||
| State and local governments | 23,310 | 165 | — | — | 23,310 | 165 | |||||||||||||||||||||||||||||
| Total unrealized loss position | $ | 555,070 | 2,348 | 7,003 | 332 | 562,073 | 2,680 | ||||||||||||||||||||||||||||
As of March 31, 2021 and December 31, 2020, the Company's security portfolio held 161 securities and 69 securities that were in an unrealized loss position, respectively. In the above tables, all of the securities that were in an unrealized loss position at March 31, 2021 and December 31, 2020 are bonds that the Company has determined
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are in a loss position due primarily to interest rate factors and not credit quality concerns. In arriving at this conclusion, the Company reviewed third-party credit ratings and considered the severity of the impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.
No impairment charges were recognized for any securities during the three months ended March 31, 2020. At adoption of CECL on January 1, 2021 and at March 31, 2021, the Company determined that expected credit losses associated with held to maturity debt securities was insignificant. See Note 2 for additional details on the adoption of CECL as it relates to the securities portfolio.
The book values and approximate fair values of investment securities at March 31, 2021, by contractual maturity, are summarized in the table below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Securities Available for Sale | Securities Held to Maturity | ||||||||||||||||||||||
| ($ in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| Securities | |||||||||||||||||||||||
| Due within one year | $ | — | — | 1,587 | 1,620 | ||||||||||||||||||
| Due after one year but within five years | 28,660 | 30,023 | 537 | 557 | |||||||||||||||||||
| Due after five years but within ten years | 74,015 | 71,578 | 5,355 | 5,389 | |||||||||||||||||||
| Due after ten years | 11,000 | 10,285 | 164,387 | 159,859 | |||||||||||||||||||
| Mortgage-backed securities | 1,711,809 | 1,709,811 | 26,977 | 27,999 | |||||||||||||||||||
| Total securities | $ | 1,825,484 | 1,821,697 | 198,843 | 195,424 | ||||||||||||||||||
At March 31, 2021 and December 31, 2020 investment securities with carrying values of $718,340,000 and $630,303,000, respectively, were pledged as collateral for public deposits.
Included in “other assets” in the Consolidated Balance Sheets are investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond (“FRB”) stock totaling $21,690,000 and $23,526,000 at March 31, 2021 and December 31, 2020, respectively. These investments do not have readily determinable fair values. The FHLB stock had a cost and fair value of $3,970,000 and $5,855,000 at March 31, 2021 and December 31, 2020, respectively, and serves as part of the collateral for the Company’s line of credit with the FHLB and is also a requirement for membership in the FHLB system. The FRB stock had a cost and fair value of $17,720,000 and $17,671,000 at March 31, 2021 and December 31, 2020, respectively, and is a requirement for FRB member bank qualification. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end.
The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain litigation against Visa, to which the Company is not a party. The Class B shares have transfer restrictions, and the conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at March 31, 2021 was approximately 1.62, which means the Company would receive approximately 20,051 Class A shares if the stock had converted on that date. This Class B stock does not have a readily determinable fair value and is carried at zero. If a readily determinable fair value becomes available for the Class B shares, or upon the conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a credit to earnings.
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Note 6 – Loans, Allowance for Credit Losses, and Asset Quality Information
The following is a summary of the major categories of total loans outstanding:
| ($ in thousands) | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||
| Amount | Percentage | Amount | Percentage | ||||||||||||||||||||
| All loans: | |||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 768,318 | 17 | % | $ | 782,549 | 17 | % | |||||||||||||||
| Real estate – construction, land development & other land loans | 548,508 | 12 | % | 570,672 | 12 | % | |||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 916,169 | 20 | % | 972,378 | 21 | % | |||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | 294,611 | 6 | % | 306,256 | 6 | % | |||||||||||||||||
| Real estate – mortgage – commercial and other | 2,049,507 | 44 | % | 2,049,203 | 43 | % | |||||||||||||||||
| Consumer loans | 53,484 | 1 | % | 53,955 | 1 | % | |||||||||||||||||
| Subtotal | 4,630,597 | 100 | % | 4,735,013 | 100 | % | |||||||||||||||||
| Unamortized net deferred loan costs (fees) | (6,543) | (3,698) | |||||||||||||||||||||
| Total loans | $ | 4,624,054 | $ | 4,731,315 | |||||||||||||||||||
Included in the line item "Commercial, financial, and agricultural" in the table above are Paycheck Protection Program ("PPP") loans totaling $241.4 million and $240.5 million at March 31, 2021 and December 31, 2020, respectively. PPP loans are fully guaranteed by the SBA. Included in unamortized net deferred loan fees are approximately $9.0 million and $6.0 million at March 31, 2021 and December 31, 2020, respectively, in unamortized net deferred loan fees associated with PPP loans. These fees are being amortized under the effective interest method over the terms of the loans. Accelerated amortization is recorded in the periods in which principal amounts are forgiven in accordance with the terms of the program.
Also included in the table above are various non-PPP SBA loans, with additional information on these loans presented in the table below.
| ($ in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Guaranteed portions of non-PPP SBA loans included in table above | $ | 35,007 | 33,959 | ||||||||
| Unguaranteed portions of non-PPP SBA loans included in table above | 133,917 | 135,703 | |||||||||
| Total non-PPP SBA loans included in the table above | $ | 168,924 | 169,662 | ||||||||
| Sold portions of SBA loans with servicing retained - not included in tables above | $ | 412,472 | 395,398 | ||||||||
At both March 31, 2021 and December 31, 2020, there was a remaining unaccreted discount on the retained portion of sold SBA loans amounting to $7.3 million.
As of March 31, 2021, unamortized discounts on acquired loans totaled $8.2 million.
At December 31, 2020, there were remaining accretable discounts of $7.9 million, related to purchased non-impaired loans. The discounts are amortized as yield adjustments over the respective lives of the loans, so long as the loans perform. At December 31, 2020, the carrying value of purchased credit impaired (PCI) loans were $8.6 million.
The following table presents changes in the accretable yield for PCI loans for the three months ended March 31, 2020.
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| Accretable Yield for PCI loans | For the Three Months Ended March 31, 2020 | ||||
| Balance at beginning of period | 4,149 | ||||
| Accretion | (567) | ||||
| Reclassification from (to) nonaccretable difference | 304 | ||||
| Other, net | (453) | ||||
| Balance at end of period | 3,433 | ||||
During the first three months of 2020, the Company received $446,000 in payments that exceeded the carrying amount of the related PCI loans, of which $352,000 was recognized as loan discount accretion income and $80,000 was recorded as additional loan interest income.
Nonperforming assets are defined as nonaccrual loans, troubled debt restructured loans (TDRs), loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows.
| ($ in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Nonperforming assets | |||||||||||
| Nonaccrual loans | $ | 39,566 | 35,076 | ||||||||
| TDRs - accruing | 8,601 | 9,497 | |||||||||
| Accruing loans > 90 days past due | — | — | |||||||||
| Total nonperforming loans | 48,167 | 44,573 | |||||||||
| Foreclosed real estate | 1,811 | 2,424 | |||||||||
| Total nonperforming assets | $ | 49,978 | 46,997 | ||||||||
At both March 31, 2021 and December 31, 2020, the Company had $1.9 million in residential mortgage loans in process of foreclosure, respectively.
The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated.
| CECL | Incurred Loss | |||||||||||||||||||||||||
| ($ in thousands) | March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||
| Nonaccrual Loans with No Allowance | Nonaccrual Loans with an Allowance | Total Nonaccrual Loans | Nonaccrual Loans | |||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | — | $ | 10,330 | $ | 10,330 | 9,681 | |||||||||||||||||||
| Real estate – construction, land development & other land loans | 227 | 313 | 540 | 643 | ||||||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 2,444 | 3,763 | 6,207 | 6,048 | ||||||||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | 378 | 1,298 | 1,676 | 1,333 | ||||||||||||||||||||||
| Real estate – mortgage – commercial and other | 7,521 | 13,133 | 20,654 | 17,191 | ||||||||||||||||||||||
| Consumer loans | — | 159 | 159 | 180 | ||||||||||||||||||||||
| Total | $ | 10,570 | $ | 28,996 | $ | 39,566 | 35,076 | |||||||||||||||||||
Interest income recognized during the period on nonaccrual loans was immaterial.
Page 19
The following table represents the accrued interest receivables written off by reversing interest income during the three months ended March 31, 2021.
| ($ in thousands) | For the Three Months Ended March 31, 2021 | ||||
| Commercial, financial, and agricultural | $ | 64 | |||
| Real estate – construction, land development & other land loans | — | ||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 5 | ||||
| Real estate – mortgage – home equity loans / lines of credit | 4 | ||||
| Real estate – mortgage – commercial and other | 220 | ||||
| Consumer loans | — | ||||
| Total | $ | 293 | |||
The following table presents an analysis of the payment status of the Company’s loans as of March 31, 2021.
| ($ in thousands) | Accruing 30-59 Days Past Due | Accruing 60-89 Days Past Due | Accruing 90 Days or More Past Due | Nonaccrual Loans | Accruing Current | Total Loans Receivable | |||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 787 | 286 | — | 10,330 | 756,915 | 768,318 | ||||||||||||||||||||||||||||
| Real estate – construction, land development & other land loans | 938 | 91 | — | 540 | 546,939 | 548,508 | |||||||||||||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 6,257 | 80 | — | 6,207 | 903,625 | 916,169 | |||||||||||||||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | 487 | — | — | 1,676 | 292,448 | 294,611 | |||||||||||||||||||||||||||||
| Real estate – mortgage – commercial and other | 628 | 1,352 | — | 20,654 | 2,026,873 | 2,049,507 | |||||||||||||||||||||||||||||
| Consumer loans | 82 | 68 | — | 159 | 53,175 | 53,484 | |||||||||||||||||||||||||||||
| Total | $ | 9,179 | 1,877 | — | 39,566 | 4,579,975 | 4,630,597 | ||||||||||||||||||||||||||||
| Unamortized net deferred loan fees | (6,543) | ||||||||||||||||||||||||||||||||||
| Total loans | $ | 4,624,054 | |||||||||||||||||||||||||||||||||
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2020.
| ($ in thousands) | Accruing 30-59 Days Past Due | Accruing 60-89 Days Past Due | Accruing 90 Days or More Past Due | Nonaccrual Loans | Accruing Current | Total Loans Receivable | |||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 1,464 | 1,101 | — | 9,681 | 770,166 | 782,412 | ||||||||||||||||||||||||||||
| Real estate – construction, land development & other land loans | 572 | — | — | 643 | 569,307 | 570,522 | |||||||||||||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 10,146 | 869 | — | 6,048 | 951,088 | 968,151 | |||||||||||||||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | 1,088 | 42 | — | 1,333 | 303,693 | 306,156 | |||||||||||||||||||||||||||||
| Real estate – mortgage – commercial and other | 2,540 | 3,111 | — | 17,191 | 2,022,422 | 2,045,264 | |||||||||||||||||||||||||||||
| Consumer loans | 180 | 36 | — | 180 | 53,521 | 53,917 | |||||||||||||||||||||||||||||
| Purchased credit impaired | 328 | 112 | 719 | — | 7,432 | 8,591 | |||||||||||||||||||||||||||||
| Total | $ | 16,318 | 5,271 | 719 | 35,076 | 4,677,629 | 4,735,013 | ||||||||||||||||||||||||||||
| Unamortized net deferred loan fees | (3,698) | ||||||||||||||||||||||||||||||||||
| Total loans | $ | 4,731,315 | |||||||||||||||||||||||||||||||||
Page 20
The following table presents an analysis of collateral-dependent loans of the Company as of March 31, 2021.
| ($ in thousands) | Residential Property | Business Assets | Land | Commercial Property | Other | Total Collateral-Dependent Loans | |||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 400 | 4,916 | — | 974 | — | 6,290 | ||||||||||||||||||||||||||||
| Real estate – construction, land development & other land loans | — | — | 547 | — | — | 547 | |||||||||||||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 3,434 | — | — | — | — | 3,434 | |||||||||||||||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | 378 | — | — | — | — | 378 | |||||||||||||||||||||||||||||
| Real estate – mortgage – commercial and other | — | — | 4,664 | 14,956 | — | 19,620 | |||||||||||||||||||||||||||||
| Consumer loans | — | — | — | — | 4 | 4 | |||||||||||||||||||||||||||||
| Total | $ | 4,212 | 4,916 | 5,211 | 15,930 | 4 | 30,273 | ||||||||||||||||||||||||||||
The Company designates individually evaluated loans on nonaccrual with a net book balance of $250,000 or greater as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
The Company's policy is to obtain third-party appraisals on any significant pieces of collateral. For loans secured by real estate, the Company's policy is to write nonaccrual loans down to 90% of the appraised value, which considers estimated selling costs. For real estate collateral that is in industries that are undergoing heightened stress, such as hotel loans in the current environment, the Company often discounts the collateral values by an additional 10-25% due to additional discounts that are estimated to be incurred in a near-term sale. For non real-estate collateral secured loans, the Company generally writes nonaccrual loans down to 75% of the appraised value, which provides for selling costs and liquidity discounts that are usually incurred when disposing of non real-estate collateral. For reviewed loans that are not on nonaccrual basis, the Company assigns a specific allowance based on the parameters noted above.
The Company does not believe that there is significant over-coverage of collateral for any of the loan types noted above.
The following table presents the activity in the allowance for loan losses for all loans for the three months ended March 31, 2021 (under the CECL methodology).
| ($ in thousands) | Commercial, Financial, and Agricultural | Real Estate – Construction, Land Development & Other Land Loans | Real Estate – Residential (1-4 Family) First Mortgages | Real Estate – Mortgage – Home Equity Lines of Credit | Real Estate – Mortgage – Commercial and Other | Consumer Loans | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
| As of and for the three months ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 11,316 | 5,355 | 8,048 | 2,375 | 23,603 | 1,478 | 213 | 52,388 | ||||||||||||||||||||||||||||||||||||||
| Adjustment for implementation of CECL | 3,067 | 6,140 | 2,584 | 2,580 | (257) | 674 | (213) | 14,575 | |||||||||||||||||||||||||||||||||||||||
| Charge-offs | (1,438) | (66) | (38) | (131) | (510) | (134) | — | (2,317) | |||||||||||||||||||||||||||||||||||||||
| Recoveries | 514 | 294 | 87 | 11 | 262 | 35 | — | 1,203 | |||||||||||||||||||||||||||||||||||||||
| Provisions | 147 | (1,589) | (1,685) | (526) | 3,409 | 244 | — | — | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 13,606 | 10,134 | 8,996 | 4,309 | 26,507 | 2,297 | — | 65,849 | ||||||||||||||||||||||||||||||||||||||
Page 21
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2020 (under the Incurred Loss methodology).
| ($ in thousands) | Commercial, Financial, and Agricultural | Real Estate – Construction, Land Development & Other Land Loans | Real Estate – Residential (1-4 Family) First Mortgages | Real Estate – Mortgage – Home Equity Lines of Credit | Real Estate – Mortgage – Commercial and Other | Consumer Loans | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
| As of and for the year ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 4,553 | 1,976 | 3,832 | 1,127 | 8,938 | 972 | — | 21,398 | ||||||||||||||||||||||||||||||||||||||
| Charge-offs | (5,608) | (51) | (478) | (524) | (968) | (873) | — | (8,502) | |||||||||||||||||||||||||||||||||||||||
| Recoveries | 745 | 1,552 | 754 | 487 | 621 | 294 | — | 4,453 | |||||||||||||||||||||||||||||||||||||||
| Provisions | 11,626 | 1,878 | 3,940 | 1,285 | 15,012 | 1,085 | 213 | 35,039 | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 11,316 | 5,355 | 8,048 | 2,375 | 23,603 | 1,478 | 213 | 52,388 | ||||||||||||||||||||||||||||||||||||||
| Ending balances as of December 31, 2020: Allowance for loan losses | |||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 3,546 | 30 | 800 | — | 2,175 | — | — | 6,551 | ||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 7,742 | 5,325 | 7,141 | 2,375 | 21,428 | 1,475 | 213 | 45,699 | ||||||||||||||||||||||||||||||||||||||
| Purchased credit impaired | $ | 28 | — | 107 | — | — | 3 | — | 138 | ||||||||||||||||||||||||||||||||||||||
| Loans receivable as of December 31, 2020: | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance – total | $ | 782,549 | 570,672 | 972,378 | 306,256 | 2,049,203 | 53,955 | — | 4,735,013 | ||||||||||||||||||||||||||||||||||||||
| Unamortized net deferred loan fees | (3,698) | ||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 4,731,315 | |||||||||||||||||||||||||||||||||||||||||||||
| Ending balances as of December 31, 2020: Loans | |||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 7,700 | 677 | 9,303 | 15 | 18,582 | 4 | — | 36,281 | ||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 774,712 | 569,845 | 958,848 | 306,141 | 2,026,682 | 53,913 | — | 4,690,141 | ||||||||||||||||||||||||||||||||||||||
| Purchased credit impaired | $ | 137 | 150 | 4,227 | 100 | 3,939 | 38 | — | 8,591 | ||||||||||||||||||||||||||||||||||||||
Page 22
The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2020 (under the Incurred Loss methodology).
| ($ in thousands) | Commercial, Financial, and Agricultural | Real Estate – Construction, Land Development & Other Land Loans | Real Estate – Residential (1-4 Family) First Mortgages | Real Estate – Mortgage – Home Equity Lines of Credit | Real Estate – Mortgage – Commercial and Other | Consumer Loans | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
| As of and for the three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 4,553 | 1,976 | 3,832 | 1,127 | 8,938 | 972 | — | 21,398 | ||||||||||||||||||||||||||||||||||||||
| Charge-offs | (2,460) | (40) | (195) | (68) | (263) | (287) | — | (3,313) | |||||||||||||||||||||||||||||||||||||||
| Recoveries | 217 | 290 | 91 | 83 | 47 | 95 | — | 823 | |||||||||||||||||||||||||||||||||||||||
| Provisions | 1,894 | 373 | 645 | 252 | 2,191 | 235 | — | 5,590 | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 4,204 | 2,599 | 4,373 | 1,394 | 10,913 | 1,015 | — | 24,498 | ||||||||||||||||||||||||||||||||||||||
| Ending balances as of March 31, 2020: Allowance for loan losses | |||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 1,093 | 73 | 739 | 90 | 1,233 | — | — | 3,228 | ||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 3,069 | 2,526 | 3,528 | 1,304 | 9,680 | 1,006 | — | 21,113 | ||||||||||||||||||||||||||||||||||||||
| Purchased credit impaired | $ | 42 | — | 106 | — | — | 9 | — | 157 | ||||||||||||||||||||||||||||||||||||||
| Loans receivable as of March 31, 2020: | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance – total | $ | 521,470 | 590,485 | 1,083,022 | 331,170 | 1,970,716 | 54,133 | — | 4,550,996 | ||||||||||||||||||||||||||||||||||||||
| Unamortized net deferred loan costs | 1,712 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 4,552,708 | |||||||||||||||||||||||||||||||||||||||||||||
| Ending balances as of March 31, 2020: Loans | |||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 3,050 | 756 | 9,915 | 433 | 11,862 | — | — | 26,016 | ||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 518,233 | 589,566 | 1,067,805 | 330,644 | 1,954,834 | 54,059 | — | 4,515,141 | ||||||||||||||||||||||||||||||||||||||
| Purchased credit impaired | $ | 187 | 163 | 5,302 | 93 | 4,020 | 74 | — | 9,839 | ||||||||||||||||||||||||||||||||||||||
Page 23
The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, 2020.
| ($ in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | |||||||||||||||||||
| Impaired loans with no related allowance recorded: | |||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 3,688 | 4,325 | — | 750 | ||||||||||||||||||
| Real estate – mortgage – construction, land development & other land loans | 554 | 694 | — | 308 | |||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 4,115 | 4,456 | — | 4,447 | |||||||||||||||||||
| Real estate – mortgage –home equity loans / lines of credit | 15 | 27 | — | 264 | |||||||||||||||||||
| Real estate – mortgage –commercial and other | 11,763 | 13,107 | — | 9,026 | |||||||||||||||||||
| Consumer loans | 4 | 4 | — | 1 | |||||||||||||||||||
| Total impaired loans with no allowance | $ | 20,139 | 22,613 | — | 14,796 | ||||||||||||||||||
| Impaired loans with an allowance recorded: | |||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 4,012 | 4,398 | 3,546 | 5,139 | ||||||||||||||||||
| Real estate – mortgage – construction, land development & other land loans | 123 | 131 | 30 | 502 | |||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 5,188 | 5,361 | 800 | 5,186 | |||||||||||||||||||
| Real estate – mortgage –home equity loans / lines of credit | — | — | — | 21 | |||||||||||||||||||
| Real estate – mortgage –commercial and other | 6,819 | 7,552 | 2,175 | 5,786 | |||||||||||||||||||
| Consumer loans | — | — | — | — | |||||||||||||||||||
| Total impaired loans with allowance | $ | 16,142 | 17,442 | 6,551 | 16,634 | ||||||||||||||||||
Interest income recorded on impaired loans during the year ended December 31, 2020 was $1.1 million, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on accruing TDRs.
The Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.
Page 24
The following describes the Company’s internal risk grades in ascending order of likelihood of loss:
| Risk Grade | Description | |||||||
| Pass: | ||||||||
| 1 | Loans with virtually no risk, including cash secured loans. | |||||||
| 2 | Loans with documented significant overall financial strength. These loans have minimum chance of loss due to the presence of multiple sources of repayment – each clearly sufficient to satisfy the obligation. | |||||||
| 3 | Loans with documented satisfactory overall financial strength. These loans have a low loss potential due to presence of at least two clearly identified sources of repayment – each of which is sufficient to satisfy the obligation under the present circumstances. | |||||||
| 4 | Loans to borrowers with acceptable financial condition. These loans could have signs of minor operational weaknesses, lack of adequate financial information, or loans supported by collateral with questionable value or marketability. | |||||||
| 5 | Loans that represent above average risk due to minor weaknesses and warrant closer scrutiny by management. Collateral is generally required and felt to provide reasonable coverage with realizable liquidation values in normal circumstances. Repayment performance is satisfactory. | |||||||
| P (Pass) | Consumer loans (<$500,000) that are of satisfactory credit quality with borrowers who exhibit good personal credit history, average personal financial strength and moderate debt levels. These loans generally conform to Bank policy, but may include approved mitigated exceptions to the guidelines. | |||||||
| Special Mention: | ||||||||
| 6 | Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank. | |||||||
| Classified: | ||||||||
| 7 | An existing loan inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. | |||||||
| 8 | Loans that have a well-defined weakness that make the collection or liquidation in full highly questionable and improbable. Loss appears imminent, but the exact amount and timing is uncertain. | |||||||
| 9 | Loans that are considered uncollectible and are in the process of being charged-off. This grade is a temporary grade assigned for administrative purposes until the charge-off is completed. | |||||||
| F (Fail) | Consumer loans (<$500,000) with a well-defined weakness, such as exceptions of any kind with no mitigating factors, history of paying outside the terms of the note, insufficient income to support the current level of debt, etc. | |||||||
Page 25
The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of March 31, 2021.
| Term Loans by Year of Origination | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Total | |||||||||||||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 147,842 | 293,349 | 105,182 | 87,514 | 21,260 | 27,420 | 66,442 | 749,009 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | 22 | 653 | 3,690 | 2,900 | 49 | 42 | 452 | 7,808 | |||||||||||||||||||||||||||||||||||||||
| Classified | 177 | 4,067 | 3,724 | 2,729 | 255 | 48 | 501 | 11,501 | |||||||||||||||||||||||||||||||||||||||
| Total commercial, financial, and agricultural | 148,041 | 298,069 | 112,596 | 93,143 | 21,564 | 27,510 | 67,395 | 768,318 | |||||||||||||||||||||||||||||||||||||||
| Real estate – construction, land development & other land loans | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 104,771 | 311,765 | 70,727 | 12,754 | 12,577 | 11,343 | 18,161 | 542,098 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | 48 | 4,037 | 55 | 3 | 116 | 254 | 109 | 4,622 | |||||||||||||||||||||||||||||||||||||||
| Classified | 28 | 486 | 217 | 292 | 88 | 414 | 263 | 1,788 | |||||||||||||||||||||||||||||||||||||||
| Total real estate – construction, land development & other land loans | 104,847 | 316,288 | 70,999 | 13,049 | 12,781 | 12,011 | 18,533 | 548,508 | |||||||||||||||||||||||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 26,304 | 172,807 | 170,991 | 180,894 | 119,528 | 213,166 | 7,325 | 891,015 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | 638 | 1,459 | 291 | 313 | 384 | 3,963 | 23 | 7,071 | |||||||||||||||||||||||||||||||||||||||
| Classified | 431 | 1,406 | 2,508 | 2,210 | 1,180 | 9,910 | 438 | 18,083 | |||||||||||||||||||||||||||||||||||||||
| Total real estate – mortgage – residential (1-4 family) first mortgages | 27,373 | 175,672 | 173,790 | 183,417 | 121,092 | 227,039 | 7,786 | 916,169 | |||||||||||||||||||||||||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 175 | 531 | 1,139 | 1,827 | 1,810 | 1,388 | 279,116 | 285,986 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | 18 | — | — | 20 | 1,298 | 1,336 | |||||||||||||||||||||||||||||||||||||||
| Classified | — | 162 | 137 | — | — | 738 | 6,252 | 7,289 | |||||||||||||||||||||||||||||||||||||||
| Total real estate – mortgage – home equity loans / lines of credit | 175 | 693 | 1,294 | 1,827 | 1,810 | 2,146 | 286,666 | 294,611 | |||||||||||||||||||||||||||||||||||||||
| Real estate – mortgage – commercial and other | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 180,222 | 699,117 | 349,785 | 222,224 | 189,511 | 326,685 | 26,465 | 1,994,009 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | 3,833 | 15,743 | 2,775 | 2,940 | 3,394 | 1,915 | 817 | 31,417 | |||||||||||||||||||||||||||||||||||||||
| Classified | 379 | 6,569 | 6,783 | 2,842 | 2,900 | 4,346 | 262 | 24,081 | |||||||||||||||||||||||||||||||||||||||
| Total real estate – mortgage – commercial and other | 184,434 | 721,429 | 359,343 | 228,006 | 195,805 | 332,946 | 27,544 | 2,049,507 | |||||||||||||||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 4,696 | 26,569 | 5,675 | 2,872 | 1,281 | 1,293 | 10,626 | 53,012 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | 76 | 76 | |||||||||||||||||||||||||||||||||||||||
| Classified | — | 88 | 45 | 28 | — | 84 | 151 | 396 | |||||||||||||||||||||||||||||||||||||||
| Total consumer loans | 4,696 | 26,657 | 5,720 | 2,900 | 1,281 | 1,377 | 10,853 | 53,484 | |||||||||||||||||||||||||||||||||||||||
| Total | 469,566 | 1,538,808 | 723,742 | 522,342 | 354,333 | 603,029 | 418,777 | 4,630,597 | |||||||||||||||||||||||||||||||||||||||
| Unamortized net deferred loan fees | (6,543) | ||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | 4,624,054 | ||||||||||||||||||||||||||||||||||||||||||||||
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In the table above, substantially all of the "Classified Loans" have grades of 7 or Fail, with those categories having similar levels of risk. The amount of revolving lines of credit that converted to term loans during the period was immaterial.
The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2020.
| ($ in thousands) | Pass | Special Mention Loans | Classified Accruing Loans | Classified Nonaccrual Loans | Total | ||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 762,091 | 9,553 | 1,087 | 9,681 | 782,412 | |||||||||||||||||||||||
| Real estate – construction, land development & other land loans | 560,845 | 7,877 | 1,157 | 643 | 570,522 | ||||||||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 943,455 | 7,609 | 11,039 | 6,048 | 968,151 | ||||||||||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | 297,795 | 1,468 | 5,560 | 1,333 | 306,156 | ||||||||||||||||||||||||
| Real estate – mortgage – commercial and other | 1,988,684 | 34,588 | 4,801 | 17,191 | 2,045,264 | ||||||||||||||||||||||||
| Consumer loans | 53,488 | 80 | 169 | 180 | 53,917 | ||||||||||||||||||||||||
| Purchased credit impaired | 6,901 | 85 | 1,605 | — | 8,591 | ||||||||||||||||||||||||
| Total | $ | 4,613,259 | 61,260 | 25,418 | 35,076 | 4,735,013 | |||||||||||||||||||||||
| Unamortized net deferred loan fees | (3,698) | ||||||||||||||||||||||||||||
| Total loans | 4,731,315 | ||||||||||||||||||||||||||||
Troubled Debt Restructurings
The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, extension of terms and other actions intended to minimize potential losses.
The vast majority of the Company’s TDR's modified during the periods ended March 31, 2021 and March 31, 2020 related to interest rate reductions combined with extension of terms. The Company does not generally grant principal forgiveness.
The Company’s TDR's can be classified as either nonaccrual or accruing based on the loan’s payment status. The TDR's that are nonaccrual are reported within the nonaccrual loan totals presented previously.
As of March 31, 2021, the Company had granted short-term deferrals related to the COVID-19 pandemic for $5.9 million of loans that were otherwise performing prior to modification. Pursuant to the CARES Act and banking regulator guidance, these loans were not considered TDRs.
The following table presents information related to loans modified in a TDR during the three months ended March 31, 2021 and 2020.
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| ($ in thousands) | For the three months ended March 31, 2021 | For the three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||
| Number of Contracts | Pre- Modification Restructured Balances | Post- Modification Restructured Balances | Number of Contracts | Pre- Modification Restructured Balances | Post- Modification Restructured Balances | ||||||||||||||||||||||||||||||
| TDRs – Accruing | |||||||||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | — | $ | — | $ | — | 2 | $ | 143 | $ | 143 | |||||||||||||||||||||||||
| Real estate – construction, land development & other land loans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Real estate – mortgage – commercial and other | 1 | 160 | 160 | — | — | — | |||||||||||||||||||||||||||||
| Consumer loans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| TDRs – Nonaccrual | |||||||||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | 1 | 111 | 108 | — | — | — | |||||||||||||||||||||||||||||
| Real estate – construction, land development & other land loans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Real estate – mortgage – commercial and other | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Consumer loans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total TDRs arising during period | 2 | $ | 271 | $ | 268 | 2 | $ | 143 | $ | 143 | |||||||||||||||||||||||||
The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate. There were no accruing TDR's that were modified in the previous twelve months and that defaulted during the three months ended March 31, 2021 or 2020.
Allowance for Credit Losses - Unfunded Loan Commitments
In addition to the allowance for credit losses on loans, the Company maintains an allowance for lending-related commitments such as unfunded loan commitments and letters of credit. Under CECL, the Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for lending-related 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, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed in Note 2. The allowance for credit losses for unfunded loan commitments of $8.1 million and $0.6 million at March 31, 2021 and December 31, 2020, respectively, is separately classified on the balance sheet within Other Liabilities. The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended March 31, 2021.
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| ($ in thousands) | Total Allowance for Credit Losses - Unfunded Loan Commitments | ||||
| Beginning balance at December 31, 2020 | $ | 582 | |||
| Adjustment for implementation of CECL on January 1, 2021 | 7,504 | ||||
| Charge-offs | — | ||||
| Recoveries | — | ||||
| Provisions for credit losses on unfunded commitments | — | ||||
| Ending balance at March 31, 2021 | $ | 8,086 | |||
Allowance for Credit Losses - Securities Held to Maturity
As previously discussed, the allowance for credit losses for securities held to maturity was immaterial at March 31, 2021.
Note 7 – Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of March 31, 2021 and December 31, 2020, and the carrying amount of unamortized intangible assets as of those same dates.
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| ($ in thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||
| Amortizable intangible assets: | ||||||||||||||||||||||||||
| Customer lists | $ | 7,613 | 3,023 | 7,613 | 2,814 | |||||||||||||||||||||
| Core deposit intangibles | 28,440 | 24,500 | 28,440 | 23,832 | ||||||||||||||||||||||
| SBA servicing asset | 10,583 | 4,658 | 9,976 | 4,188 | ||||||||||||||||||||||
| Other | 1,403 | 1,252 | 1,403 | 1,232 | ||||||||||||||||||||||
| Total | $ | 48,039 | 33,433 | 47,432 | 32,066 | |||||||||||||||||||||
| Unamortizable intangible assets: | ||||||||||||||||||||||||||
| Goodwill | $ | 239,272 | 239,272 | |||||||||||||||||||||||
SBA servicing assets are recorded for the portions of SBA loans that the Company has sold but continues to service for a fee. Servicing assets are initially recorded at fair value and amortized over the expected lives of the related loans and are tested for impairment on a quarterly basis. SBA servicing asset amortization expense is recorded within noninterest income as an offset to SBA servicing fees within the line item "Other service charges, commissions, and fees." As derived from the table above, the Company had a SBA servicing asset at March 31, 2021 with a remaining book value of $5,925,000. The Company recorded $607,000 and $217,000 in servicing assets associated with the guaranteed portion of SBA loans sold during the first three months of 2021 and 2020, respectively. During the first three months of 2021 and 2020, the Company recorded $470,000 and $918,000, respectively, in related amortization expense. Included in the amortization expense for the first three months of 2020 was an impairment charge of approximately $500,000 due to a decrease in the fair value of the asset resulting from deterioration in market conditions at March 31, 2020. At March 31, 2021 and December 31, 2020, the Company serviced for others SBA loans totaling $412.5 million and $395.4 million, respectively.
Amortization expense of all other intangible assets, excluding the SBA servicing asset, totaled $897,000 and $1,055,000 for the three months ended March 31, 2021 and 2020, respectively.
Goodwill is evaluated for impairment on at least an annual basis, with the annual evaluation occurring on October 31 of each year. During the period ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis. In this analysis, the Company determined that none of its goodwill was impaired as of March 31, 2020. Due to improving economic conditions and increases in the Company's stock price and market capitalization at year end 2020 and the first quarter of 2021, no triggering events were identified and therefore, the Company did not perform an interim impairment evaluation at December 31, 2020 or March 31, 2021.
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The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets. These amounts will be recorded as "Intangibles amortization expense" within the noninterest expense section of the Consolidated Statements of Income. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets. income within the line item "Other service charges, commissions and fees" of the Consolidated Statements of Income.
| ($ in thousands) | Estimated Amortization Expense | |||||||
| April 1, 2021 to December 31, 2021 | $ | 2,375 | ||||||
| 2022 | 2,367 | |||||||
| 2023 | 1,386 | |||||||
| 2024 | 741 | |||||||
| 2025 | 562 | |||||||
| Thereafter | 1,250 | |||||||
| Total | $ | 8,681 | ||||||
Note 8 – Pension Plans
The Company has historically sponsored two defined benefit pension plans – a qualified retirement plan (the “Pension Plan”) which was generally available to all employees, and a Supplemental Executive Retirement Plan (the “SERP”), which was for the benefit of certain senior management executives of the Company. Effective December 31, 2012, the Company froze both plans for all participants. Although no previously accrued benefits were lost, employees no longer accrue benefits for service subsequent to 2012.
The Company recorded periodic pension cost totaling $191,000 and $216,000 for the three months ended March 31, 2021 and 2020, respectively. The following table contains the components of the pension cost.
| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| ($ in thousands) | 2021 Pension Plan | 2020 Pension Plan | 2021 SERP | 2020 SERP | 2021 Total Both Plans | 2020 Total Both Plans | |||||||||||||||||||||||||||||
| Service cost | $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Interest cost | 306 | 308 | 39 | 55 | 345 | 363 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (325) | (325) | — | — | (325) | (325) | |||||||||||||||||||||||||||||
| Amortization of net (gain)/loss | 210 | 219 | (39) | (41) | 171 | 178 | |||||||||||||||||||||||||||||
| Net periodic pension cost | $ | 191 | 202 | — | 14 | 191 | 216 | ||||||||||||||||||||||||||||
The service cost component of net periodic pension cost is included in salaries and benefits expense and all other components of net periodic pension cost are included in other noninterest expense.
The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants and are intended to be deductible for income tax purposes. The Company did not contribute to the Pension Plan in the first three months of 2021 and does not expect to contribute to the Pension Plan in the remainder of 2021.
The Company’s funding policy with respect to the SERP is to fund the related benefits from the operating cash flow of the Company.
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Note 9 – Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) for the Company are as follows:
| ($ in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Unrealized gain (loss) on securities available for sale | $ | (3,787) | 20,448 | ||||||||
| Deferred tax asset (liability) | 870 | (4,699) | |||||||||
| Net unrealized gain (loss) on securities available for sale | (2,917) | 15,749 | |||||||||
| Postretirement plans asset (liability) | (1,646) | (1,817) | |||||||||
| Deferred tax asset (liability) | 378 | 418 | |||||||||
| Net postretirement plans asset (liability) | (1,268) | (1,399) | |||||||||
| Total accumulated other comprehensive income (loss) | $ | (4,185) | 14,350 | ||||||||
The following table discloses the changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2021 (all amounts are net of tax).
| ($ in thousands) | Unrealized Gain (Loss) on Securities Available for Sale | Postretirement Plans Asset (Liability) | Total | ||||||||||||||
| Beginning balance at January 1, 2021 | $ | 15,749 | (1,399) | 14,350 | |||||||||||||
| Other comprehensive income (loss) before reclassifications | (18,666) | — | (18,666) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income | — | 131 | 131 | ||||||||||||||
| Net current-period other comprehensive income (loss) | (18,666) | 131 | (18,535) | ||||||||||||||
| Ending balance at March 31, 2021 | $ | (2,917) | (1,268) | (4,185) | |||||||||||||
The following table discloses the changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2020 (all amounts are net of tax).
| ($ in thousands) | Unrealized Gain (Loss) on Securities Available for Sale | Postretirement Plans Asset (Liability) | Total | ||||||||||||||
| Beginning balance at January 1, 2020 | $ | 7,504 | (2,381) | 5,123 | |||||||||||||
| Other comprehensive income (loss) before reclassifications | 15,993 | — | 15,993 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income | — | 137 | 137 | ||||||||||||||
| Net current-period other comprehensive income (loss) | 15,993 | 137 | 16,130 | ||||||||||||||
| Ending balance at March 31, 2020 | $ | 23,497 | (2,244) | 21,253 | |||||||||||||
Amounts reclassified from accumulated other comprehensive income for Unrealized Gain (Loss) on Securities Available for Sale represent realized securities gains or losses, net of tax effects. Amounts reclassified from accumulated other comprehensive income for Postretirement Plans Asset (Liability) represent amortization of amounts included in Accumulated Other Comprehensive Income, net of taxes, and are recorded in the "Other operating expenses" line item of the Consolidated Statements of Income.
Note 10 – Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
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Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at March 31, 2021.
| ($ in thousands) | ||||||||||||||||||||||||||
| Description of Financial Instruments | Fair Value at March 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| Recurring | ||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||
| Government-sponsored enterprise securities | $ | 67,022 | — | 67,022 | — | |||||||||||||||||||||
| Mortgage-backed securities | 1,709,811 | — | 1,709,811 | — | ||||||||||||||||||||||
| Corporate bonds | 44,864 | — | 44,864 | — | ||||||||||||||||||||||
| Total available for sale securities | $ | 1,821,697 | — | 1,821,697 | — | |||||||||||||||||||||
| Presold mortgages in process of settlement | $ | 31,869 | 31,869 | — | — | |||||||||||||||||||||
| Nonrecurring | ||||||||||||||||||||||||||
| Collateral dependent loans | $ | 28,082 | — | — | 28,082 | |||||||||||||||||||||
| Foreclosed real estate | 1,484 | — | — | 1,484 | ||||||||||||||||||||||
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2020.
| ($ in thousands) | ||||||||||||||||||||||||||
| Description of Financial Instruments | Fair Value at December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| Recurring | ||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||
| Government-sponsored enterprise securities | $ | 70,206 | — | 70,206 | — | |||||||||||||||||||||
| Mortgage-backed securities | 1,337,706 | — | 1,337,706 | — | ||||||||||||||||||||||
| Corporate bonds | 45,220 | — | 45,220 | — | ||||||||||||||||||||||
| Total available for sale securities | $ | 1,453,132 | — | 1,453,132 | — | |||||||||||||||||||||
| Presold mortgages in process of settlement | $ | 42,271 | 42,271 | — | — | |||||||||||||||||||||
| Nonrecurring | ||||||||||||||||||||||||||
| Impaired loans | $ | 22,142 | — | — | 22,142 | |||||||||||||||||||||
| Foreclosed real estate | 1,484 | — | — | 1,484 | ||||||||||||||||||||||
The following is a description of the valuation methodologies used for instruments measured at fair value.
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Presold Mortgages in Process of Settlement - The fair value is based on the committed price that an investor has agreed to pay for the loan and is considered a Level 1 input.
Securities Available for Sale — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by our third-party bond accounting provider using matrix pricing. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities, commercial mortgage-backed obligations, government-sponsored enterprise securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy.
Collateral-dependent loans — Fair values for collateral-dependent loans are measured on a non-recurring basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is generally determined by third-party appraisers using an income or market valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Appraisals used in this analysis are generally obtained at least annually based on when the loans first became impaired, and thus the appraisals are not necessarily as of the period ends presented. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income.
Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). Appraisals used in this analysis are generally obtained at least annually based on when the assets were acquired, and thus the appraisals are not necessarily as of the period ends presented. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the Consolidated Statements of Income.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:
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| ($ in thousands) | ||||||||||||||||||||||||||
| Description | Fair Value at March 31, 2021 | Valuation Technique | Significant Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||||||||
| Nonaccrual loans - valued at collateral value | $ | 22,176 | Appraised value | Discounts applied for estimated costs to sell | 10% | |||||||||||||||||||||
| Nonaccrual loans - valued at PV of expected cash flows | 5,906 | PV of expected cash flows | Discount rates used in the calculation of the present value ("PV") of expected cash flows | 4-11% (6.18%) | ||||||||||||||||||||||
| Foreclosed real estate | 1,484 | Appraised value | Discounts for estimated costs to sell | 10% | ||||||||||||||||||||||
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
| ($ in thousands) | ||||||||||||||||||||||||||
| Description | Fair Value at December 31, 2020 | Valuation Technique | Significant Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||||||||
| Impaired loans - valued at collateral value | $ | 16,000 | Appraised value | Discounts applied for estimated costs to sell | 10% | |||||||||||||||||||||
| Impaired loans - valued at PV of expected cash flows | 6,142 | PV of expected cash flows | Discount rates used in the calculation of PV of expected cash flows | 4-11% (6.21%) | ||||||||||||||||||||||
| Foreclosed real estate | 1,484 | Appraised value | Discounts for estimated costs to sell | 10% | ||||||||||||||||||||||
The carrying amounts and estimated fair values of financial instruments not carried at fair value at March 31, 2021 and December 31, 2020 are as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| ($ in thousands) | Level in Fair Value Hierarchy | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||||||
| Cash and due from banks, noninterest-bearing | Level 1 | $ | 71,206 | 71,206 | 93,724 | 93,724 | |||||||||||||||||||||||
| Due from banks, interest-bearing | Level 1 | 458,860 | 458,860 | 273,566 | 273,566 | ||||||||||||||||||||||||
| Securities held to maturity | Level 2 | 198,843 | 195,424 | 167,551 | 170,734 | ||||||||||||||||||||||||
| SBA loans held for sale | Level 2 | 7,002 | 7,905 | 6,077 | 7,465 | ||||||||||||||||||||||||
| Total loans, net of allowance | Level 3 | 4,558,205 | 4,537,472 | 4,678,927 | 4,661,197 | ||||||||||||||||||||||||
| Accrued interest receivable | Level 1 | 18,652 | 18,652 | 20,272 | 20,272 | ||||||||||||||||||||||||
| Bank-owned life insurance | Level 1 | 107,594 | 107,594 | 106,974 | 106,974 | ||||||||||||||||||||||||
| SBA Servicing Asset | Level 3 | 5,925 | 6,481 | 5,788 | 6,569 | ||||||||||||||||||||||||
| Deposits | Level 2 | 6,733,487 | 6,734,623 | 6,273,596 | 6,275,329 | ||||||||||||||||||||||||
| Borrowings | Level 2 | 61,342 | 53,005 | 61,829 | 53,321 | ||||||||||||||||||||||||
| Accrued interest payable | Level 2 | 741 | 741 | 904 | 904 | ||||||||||||||||||||||||
| Commitments to extend credit | Level 3 | — | 8,086 | — | 461 | ||||||||||||||||||||||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
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Note 11 – Revenue from Contracts with Customers
All of the Company’s revenues that are in the scope of the “Revenue from Contracts with Customers” accounting standard (“ASC 606”) are recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three months ended March 31, 2021 and 2020. Items outside the scope of ASC 606 are noted as such.
| For the Three Months Ended | |||||||||||
| $ in thousands | March 31, 2021 | March 31, 2020 | |||||||||
| Noninterest Income | |||||||||||
In-scope of ASC 606: | |||||||||||
Service charges on deposit accounts: | $ | 2,733 | 3,337 | ||||||||
Other service charges, commissions, and fees: | |||||||||||
Interchange income | 3,524 | 2,887 | |||||||||
Other service charges and fees | 1,998 | 1,182 | |||||||||
Commissions from sales of insurance and financial products: | |||||||||||
Insurance income | 1,326 | 1,198 | |||||||||
Wealth management income | 864 | 870 | |||||||||
SBA consulting fees | 2,764 | 1,027 | |||||||||
Noninterest income (in-scope of ASC 606) | 13,209 | 10,501 | |||||||||
Noninterest income (out-of-scope of ASC 606) | 7,460 | 3,204 | |||||||||
| Total noninterest income | $ | 20,669 | 13,705 | ||||||||
A description of the Company’s revenue streams accounted for under ASC 606 is detailed below.
Service charges on deposit accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Overdraft fees are recognized at the point in time that the overdraft occurs. Maintenance and activity fees include account maintenance fees and transaction-based fees. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Service charges on deposits are withdrawn from the customer’s account balance.
Other service charges, commissions, and fees: The Company earns interchange income on its customers’ debit and credit card usage and earns fees from other services utilized by its customers. Interchange income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange fees are offset with interchange expenses and are presented on a net basis. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, ATM surcharge fees, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Commissions from the sale of insurance and financial products: The Company earns commissions from the sale of insurance policies and wealth management products.
Insurance income generally consists of commissions from the sale of insurance policies and performance-based commissions from insurance companies. The Company recognizes commission income from the sale of insurance policies when it acts as an agent between the insurance company and the policyholder. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Performance-based commissions from insurance companies are recognized at a point in time as policies are sold.
Wealth Management Income primarily consists of commissions received on financial product sales, such as annuities. The Company’s performance obligation is generally satisfied upon the issuance of the financial product.
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Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company also earns some fees from asset management, which is billed quarterly for services rendered in the most recent period, for which the performance obligation has been satisfied.
SBA consulting fees: The Company earns fees for its consulting services related to the origination of SBA loans. Fees are based on a percentage of the dollar amount of the originated loans and are recorded when the performance obligation has been satisfied. During 2020, the Company's SBA subsidiary assisted its third-party clients in the origination of PPP loans and charged and received fees for doing so. For several clients, the forgiveness piece of the PPP process, which will occur at a future time, was included in the fees charged. Accordingly, the Company recorded deferred revenue, which amounted to $1.4 million at December 31, 2020. During the first three months of 2021, the Company realized approximately $0.8 million of this deferred revenue related to fulfilling a portion of the forgiveness services. At March 31, 2021, the remaining amount of deferred revenue was $0.6 million. These fees will be recorded as income in the period in which the services associated with the forgiveness process are rendered.
The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.
Note 12 – Leases
The Company enters into leases in the normal course of business. As of March 31, 2021, the Company leased seven branch offices for which the land and buildings are leased and eight branch offices for which the land is leased but the building is owned. The Company also leases office space for several operational departments. All of the Company’s leases are operating leases under applicable accounting standards and the lease agreements have maturity dates ranging from May 2021 through May 2076, some of which include options for multiple - and ten-year extensions. The weighted average remaining life of the lease term for these leases was 18.2 years as of March 31, 2021. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. As permitted by applicable accounting standards, the Company has elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company's Consolidated Balance Sheets.
Leases are classified as either operating or finance leases at the lease commencement date, and as previously noted, all of the Company's leases have been determined to be operating leases. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company uses its incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments when the rate implicit in the lease is not known. The weighted average discount rate for leases was 3.01% as of March 31, 2021.
Total operating lease expense was $0.7 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. The right-of-use assets and lease liabilities were $16.9 million and $17.4 million as of March 31, 2021, respectively, and were $17.5 million and $17.9 million as of December 31, 2020, respectively.
Future undiscounted lease payments for operating leases with initial terms of one year or more as of March 31, 2021 are as follows.
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| ($ in thousands) | |||||
| April 1, 2021 to December 31, 2021 | $ | 1,492 | |||
| 2022 | 1,742 | ||||
| 2023 | 1,640 | ||||
| 2024 | 1,503 | ||||
| 2025 | 1,318 | ||||
| Thereafter | 18,380 | ||||
| Total undiscounted lease payments | 26,075 | ||||
| Less effect of discounting | (8,721) | ||||
| Present value of estimated lease payments (lease liability) | $ | 17,354 | |||
Note 13 - Shareholders' Equity
Stock Repurchases
During the first three months months of 2021, the Company repurchased approximately 106,744 shares of the Company's common stock at an average stock price of $37.81 per share, which totaled $4 million, under a $20 million repurchase authorization publicly announced in January 2021.
During the first three months months of 2020, the Company repurchased approximately 576,406 shares of the Company's common stock at an average stock price of $34.70 per share, which totaled $20 million.
Note 14 - Borrowings
The following tables present information regarding the Company’s outstanding borrowings at March 31, 2021 and December 31, 2020 - dollars are in thousands:
| Description | Due date | Call Feature | March 31, 2021 | Interest Rate | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 7/24/2023 | None | $ | 113 | 1.00% fixed | |||||||||||||||||||||
| FHLB Principal Reducing Credit | 12/22/2023 | None | 982 | 1.25% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 1/15/2026 | None | 5,000 | 1.98% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 6/26/2028 | None | 232 | 0.25% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 7/17/2028 | None | 48 | 0.00% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 8/18/2028 | None | 172 | 1.00% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 8/22/2028 | None | 172 | 1.00% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 12/20/2028 | None | 352 | 0.50% fixed | ||||||||||||||||||||||
| Other Borrowing | 4/7/2022 | None | 103 | 1.00% fixed | ||||||||||||||||||||||
| Trust Preferred Securities | 1/23/2034 | Quarterly by Company beginning 1/23/2009 | 20,620 | 2.91% at 3/31/21 adjustable rate 3 month LIBOR + 2.70% | ||||||||||||||||||||||
| Trust Preferred Securities | 6/15/2036 | Quarterly by Company beginning 6/15/2011 | 25,774 | 1.57% at 3/31/21 adjustable rate 3 month LIBOR + 1.39% | ||||||||||||||||||||||
| Trust Preferred Securities | 1/7/2035 | Quarterly by Company beginning 1/7/2010 | 10,310 | 2.24% at 3/31/21 adjustable rate 3 month LIBOR + 2.00% | ||||||||||||||||||||||
| Total borrowings/ weighted average rate as of | March 31, 2021 | $ | 63,878 | 2.21% | ||||||||||||||||||||||
| Unamortized discount on acquired borrowings | (2,536) | |||||||||||||||||||||||||
| Total borrowings | $ | 61,342 | ||||||||||||||||||||||||
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| Description | Due date | Call Feature | December 31, 2020 | Interest Rate | ||||||||||||||||||||||
| FHLB Term Note | 7/24/2023 | None | 124 | 1.00% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 12/22/2023 | None | 991 | 1.25% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 1/15/2026 | None | 5,500 | 1.98% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 6/26/2028 | None | 235 | 0.25% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 7/17/2028 | None | 49 | 0.00% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 8/18/2028 | None | 174 | 1.00% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 8/22/2028 | None | 174 | 1.00% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 12/20/2028 | None | 355 | 0.50% fixed | ||||||||||||||||||||||
| FHLB Principal Reducing Credit | 4/7/2022 | None | 103 | 1.00% fixed | ||||||||||||||||||||||
| Trust Preferred Securities | 1/23/2034 | Quarterly by Company beginning 1/23/2009 | 20,620 | 2.91% at 12/31/2020 adjustable rate 3 month LIBOR + 2.70% | ||||||||||||||||||||||
| Trust Preferred Securities | 6/15/2036 | Quarterly by Company beginning 6/15/2011 | 25,774 | 1.61% at 12/31/2020 adjustable rate 3 month LIBOR + 1.39% | ||||||||||||||||||||||
| Trust Preferred Securities | 1/7/2035 | Quarterly by Company beginning 1/7/2010 | 10,310 | 2.24% at 12/31/2020 adjustable rate 3 month LIBOR + 2.00% | ||||||||||||||||||||||
| Total borrowings / weighted average rate as of December 31, 2020 | $ | 64,409 | 2.22% | |||||||||||||||||||||||
| Unamortized discount on acquired borrowings | (2,580) | |||||||||||||||||||||||||
| Total borrowings | $ | 61,829 | ||||||||||||||||||||||||
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Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition
Critical Accounting Policies
The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for 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. For SBA Complete, the consulting firm we acquired in 2016, the identifiable intangible asset related to the customer list was determined to have a life of approximately seven years, with amortization occurring on a straight-line basis.
At March 31, 2021, we had three reporting units – 1) First Bank with $227.6 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we
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would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.
Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, we test goodwill for impairment annually on October 31 or on an interim basis if an event triggering impairment may have occurred, by comparing the fair value of our reporting units to their related carrying value, including goodwill. The 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
See Note 1 to the Consolidated Financial Statements.
FINANCIAL OVERVIEW
Net income amounted to $28.2 million, or $0.99 per diluted common share, for the three months ended March 31, 2021, an increase of 59.7% on a per share basis, compared to $18.2 million, or $0.62 per diluted common share, recorded in the first quarter of 2020. The increase in earnings was driven by lower credit costs and higher noninterest income.
Net Interest Income and Net Interest Margin
Net interest income for the first quarter of 2021 was $55.2 million, a 0.9% increase from the $54.8 million recorded in the first quarter of 2020. The increase in net interest income was due to higher levels of interest-earning assets and the recognition of PPP loan fees, the effects of which were mostly offset by a lower net interest margin.
Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) for the first quarter of 2021 was 3.27%, which was 69 basis points lower than the 3.96% realized in the first quarter of 2020. The decline was primarily due to the impact of lower interest rates and the lower incremental reinvestment rates realized from funds provided by the high deposit growth.
Driven by high deposit growth, average interest-earning assets increased by 23.3% in the first quarter of 2021 compared to the first quarter of 2020. The funds provided by the in-flow of deposits were used primarily to either purchase investment securities or were held in our account at the Federal Reserve Bank, each of which increased net interest income but negatively impacted our net interest margin. Additionally, in March 2020, the Federal Reserve Bank decreased interest rates by 150 basis points, which negatively impacted our net interest margin beginning in the second quarter of 2020.
In the first quarter of 2021, we processed $111 million in PPP loan forgiveness payments related to 2020 originations and also originated approximately $111 million in new PPP loans, which resulted in an unchanged balance of total PPP loans of $241 million from December 31, 2020. Including accelerated amortization of deferred PPP loan fees, we recorded a total of $3.0 million in PPP fee-related interest income during the first quarter of 2021, which, when combined with the note rate of 1.00%, resulted in a total yield on PPP loans of 6.16% for the quarter. We have $9.0 million in remaining deferred PPP loan fees, of which $3.1 million relates to 2020 originations and $5.9 million relates to 2021 originations.
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Allowance for Credit Losses, Provision for Credit Losses and Asset Quality
On January 1, 2021, we adopted the Current Expected Credit Loss (CECL) methodology 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. The tax-effected impact of those two items amounted to $17.1 million and was recorded as an adjustment to our retained earnings as of January 1, 2021.
We recorded no provision for credit losses in the first quarter of 2021 compared to $5.6 million in the first quarter of 2020. The higher provision in 2020 was primarily related to estimated incurred loan losses associated with the pandemic that was emerging at the time. Under the CECL methodology for recording expected credit losses adopted at January 1, 2021, which resulted in the increases to the allowance for credit losses noted above, we determined that no further adjustments were necessary for the first quarter of 2021. See additional discussion below in the section "Allowance for Credit Losses and Provision for Credit Losses."
Total net loan charge-offs for the first quarters of 2021 and 2020 amounted to $1.1 million and $2.5 million, respectively, or 0.10% and 0.22% of average loans on an annualized basis, respectively.
Total nonperforming assets amounted to $50 million at March 31, 2021, or 0.65% of total assets, compared to $37.0 million at December 31, 2020, or 0.64% of total assets. At March 31, 2021, loans on deferral status associated with the pandemic amounted to $5.9 million.
Noninterest Income
Total noninterest income for the first quarter of 2021 was $20.7 million, a 50.8% increase from the $13.7 million recorded for the first quarter of 2020. The increases in noninterest income in 2021 are primarily due to 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. See additional discussion below.
Noninterest Expenses
Noninterest expenses amounted to $40.1 million in each of the first quarters of 2021 and 2020 with no significant variances in individual line items. See additional discussion below.
Income Taxes
Our effective tax rate was 21.3% and 20.3% for the three months ended March 31, 2021 and 2020, respectively, with the 2021 increase being due to a higher proportion of fully-taxable income.
Balance Sheet and Capital
We continued to experience high balance sheet growth during the first quarter of 2021, with total assets increasing by $447 million, or 24.8% annualized. Total assets at March 31, 2021 amounted to $7.7 billion compared to $7.3 billion at December 31, 2020.
This growth was driven by a $460 million, or 29.7% annualized, increase in deposits from December 31, 2020. The high deposit growth is believed to be due to a combination of stimulus funds and changes in customer behaviors during the pandemic, as well as ongoing growth initiatives by the Company.
Total loans amounted to $4.6 billion at March 31, 2021 compared to $4.7 billion at December 31, 2020. Our level of outstanding loans has been negatively impacted by high mortgage loan refinancing activity, commercial loan payoffs, and soft demand arising from the pandemic.
We remain well-capitalized by all regulatory standards, with an estimated Total Risk-Based Capital Ratio at March 31, 2021 of 15.49%, an increase from the 15.37% reported at December 31, 2020.
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.
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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 three month period ended March 31, 2021 amounted to $55.2 million, an increase of $0.5 million, or 0.9%, from the $54.8 million recorded in the first quarter of 2020. Net interest income on a tax-equivalent basis for the three month period ended March 31, 2021 amounted to $55.7 million, an increase of $0.6 million, or 1.1%, from the $55.1 million recorded in the first quarter of 2020.
| ($ in thousands) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Net interest income, as reported | $ | 55,238 | 54,759 | ||||||||
| Tax-equivalent adjustment | 443 | 334 | |||||||||
| Net interest income, tax-equivalent | $ | 55,681 | 55,093 | ||||||||
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 months ended March 31, 2021, the higher net interest income compared to the same period of 2020 was primarily due to higher levels of interest-earning assets and the recognition of PPP fees, which were mostly offset by a lower net interest margin.
The following table presents an analysis of net interest income.
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| For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| ($ in thousands) | Average Volume | Average Rate | Interest Earned or Paid | Average Volume | Average Rate | Interest Earned or Paid | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Loans (1) (2) | $ | 4,684,143 | 4.42 | % | $ | 51,073 | $ | 4,512,893 | 4.93 | % | $ | 55,297 | |||||||||||||||||||||||
| Taxable securities | 1,652,834 | 1.45 | % | 5,913 | 834,528 | 2.64 | % | 5,474 | |||||||||||||||||||||||||||
| Non-taxable securities | 67,196 | 1.95 | % | 323 | 21,719 | 3.04 | % | 164 | |||||||||||||||||||||||||||
| Short-term investments, primarily interest-bearing cash | 494,233 | 0.57 | % | 700 | 226,797 | 1.95 | % | 1,098 | |||||||||||||||||||||||||||
| Total interest-earning assets | 6,898,406 | 3.41 | % | 58,009 | 5,595,937 | 4.46 | % | 62,033 | |||||||||||||||||||||||||||
| Cash and due from banks | 80,898 | 63,218 | |||||||||||||||||||||||||||||||||
| Premises and equipment | 121,798 | 114,323 | |||||||||||||||||||||||||||||||||
| Other assets | 376,724 | 409,620 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 7,477,826 | $ | 6,183,098 | |||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Interest bearing checking | $ | 1,203,942 | 0.09 | % | $ | 266 | $ | 899,004 | 0.18 | % | $ | 408 | |||||||||||||||||||||||
| Money market deposits | 1,650,387 | 0.23 | % | 918 | 1,203,129 | 0.56 | % | 1,683 | |||||||||||||||||||||||||||
| Savings deposits | 538,781 | 0.10 | % | 130 | 426,225 | 0.25 | % | 269 | |||||||||||||||||||||||||||
| Time deposits >$100,000 | 555,180 | 0.63 | % | 858 | 644,113 | 1.83 | % | 2,924 | |||||||||||||||||||||||||||
| Other time deposits | 224,045 | 0.39 | % | 216 | 250,860 | 0.78 | % | 489 | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 4,172,335 | 0.23 | % | 2,388 | 3,423,331 | 0.68 | % | 5,773 | |||||||||||||||||||||||||||
| Borrowings | 61,405 | 2.53 | % | 383 | 316,136 | 1.91 | % | 1,501 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 4,233,740 | 0.27 | % | 2,771 | 3,739,467 | 0.78 | % | 7,274 | |||||||||||||||||||||||||||
| Noninterest bearing checking | 2,301,780 | 1,526,868 | |||||||||||||||||||||||||||||||||
| Other liabilities | 57,116 | 58,171 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 885,190 | 858,592 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 7,477,826 | $ | 6,183,098 | |||||||||||||||||||||||||||||||
| Net yield on interest-earning assets and net interest income | 3.25 | % | $ | 55,238 | 3.94 | % | $ | 54,759 | |||||||||||||||||||||||||||
| Net yield on interest-earning assets and net interest income – tax-equivalent (3) | 3.27 | % | $ | 55,681 | 3.96 | % | $ | 55,093 | |||||||||||||||||||||||||||
| Interest rate spread | 3.14 | % | 3.68 | % | |||||||||||||||||||||||||||||||
| Average prime rate | 3.25 | % | 4.42 | % | |||||||||||||||||||||||||||||||
(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 $3,395, and $345 for the three months ended March 31, 2021 and 2020, respectively.
(2) Includes accretion of discount on acquired and SBA loans of $1,341 and $1,841 for the three months ended March 31, 2021 and 2020, respectively.
(3) Includes tax-equivalent adjustments of $443 and $334 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.
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Average loans outstanding for the first quarter of 2021 were $4.684 billion, which was $171 million, or 3.8%, higher than the average loans outstanding for the first quarter of 2020 ($4.513 billion). The higher amount of average loans outstanding in 2021 was primarily due to the origination of PPP loans since March 31, 2020. We had $241 million in outstanding PPP loans as of March 31, 2021, with an average balance of $237 million. Excluding PPP loan balances, average loans outstanding were approximately 1.5% lower for the three months ended March 31, 2021, respectively, compared to the first quarter of 2020.
As derived from the tables above, our average balance of total securities grew by $864 million, or 100.9%, when comparing the first quarter of 2021 to the first quarter of 2020. This increase was due to higher levels of investment purchases arising from the cash provided by the high deposit growth experienced in recent periods.
For the first quarter of 2021, average short-term investments, primarily interest-bearing cash, amounted to $494 million, which was $267 million, or 117.9%, higher than for the first quarter of 2020 ($227million). The higher level of short-term investments in 2021 was also due to the high deposit growth experienced, as discussed in the following paragraph.
Average total deposits outstanding for the first quarter of 2021 were $6.474 billion, which was $1.524 billion, or 30.8%, higher than the average deposits outstanding for the first quarter of 2020 ($4.950 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 due to a combination of factors including: 1) the deposit of PPP funds into customer checking accounts, 2) the government’s stimulus payments, 3) consumer savings habits, and 4) positive results from our deposit account growth initiatives.
We also utilized funds provided by our high deposit growth to pay down a substantial portion of our borrowings since March 31, 2020. Average borrowings decreased $255 million, or 80.6%, when comparing the first quarter of 2021 to the first quarter of 2020.
The net result of the balance sheet growth discussed above was that our average interest-earning assets for the three months ended March 31, 2021 were 23.3% higher than for the comparable period in 2020, which, as it relates to the net interest income we recorded, slightly 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 first quarter of 2021 was 3.27%, which was 69 basis points lower than the 3.96% realized in the first quarter of 2020. The lower margin was primarily due to the impact of lower interest rates, as discussed in the following paragraph, and the lower incremental reinvestment rates from realized from funds provided by the high deposit growth,
From August 2019 to March 2020, the Federal 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 quarter of 2021 to the first quarter of 2020, our yield on interest-earning assets declined by 105 basis points compared to a 51 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. Short-term investments and securities comprised 32% of average interest-earning assets for the first quarter of 2021 compared to 19% in the first quarter of 2020.
Our PPP loans outstanding totaled $241 million at both March 31, 2021 and December 31, 2020, while no PPP loans were outstanding at March 31, 2020. Including accelerated amortization of deferred PPP loan fees, we recorded a total of $3.0 million in PPP fee-related interest income during the first quarter of 2021, which, when combined with the note rate of 1.00%, resulted in a total yield on PPP loans of 6.16% for the quarter. We have $9.0 million in remaining deferred PPP loan fees, of which $3.1 million relates to 2020 originations and $5.9 million relates to 2021 originations
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We recorded loan discount accretion of $1.3 million in the first quarter of 2021, compared to $1.8 million in the first quarter of 2020. The lower loan discount accretion was primarily attributable to lower accretion on acquired loans due to the natural paydowns in our acquired loan portfolios.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”
We recorded no provision for credit losses in the first quarter of 2021 compared to $5.6 million in the first quarter of 2020. The higher provision in 2020 was primarily related to estimated incurred loan losses associated with the pandemic that was emerging at the time. Under the CECL methodology for recording expected credit losses adopted at January 1, 2021, for the first quarter of 2021, we determined that no provisions for credit losses were necessary as it relates to loans, unfunded commitments or held to maturity securities. See additional discussion below in the section "Allowance for Credit Losses and Provision for Credit Losses."
Total noninterest income for the first quarter of 2021 was $20.7 million, a 50.8% increase from the $13.7 million recorded for the first quarter of 2020. The increases in noninterest income in 2021 are primarily due to 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, as discussed below.
Service charges on deposit accounts amounted to $2.7 million for the first quarter of 2021, an 18.1% decrease compared to $3.3 million in the first quarter of 2020. The decline was primarily due to fewer instances of customer overdrafts.
Other service charges, commissions and fees amounted to $5.5 million for the first quarter of 2021, an increase of 35.7% from the $4.1 million for the first quarter of 2020. The increase was primarily due to a $0.9 million increase in bankcard revenue. Additionally, the first quarter of 2020 included a $0.5 million charge related to impairment of our SBA servicing asset.
Fees from presold mortgages amounted to $4.5 million for the first quarter of 2021, an increase of 146.8%, compared to $1.8 million in the first quarter of 2020. The increase in 2021 was primarily due to higher mortgage loan origination volume arising from low mortgage loan interest rates.
Commissions from sales of insurance and financial products did not vary significantly for the period presented, amounting to approximately $2.2 million and $2.1 million for the first quarters of 2021 and 2020, respectively.
SBA consulting fees amounted to $2.8 million for the first quarter, an increase of 169.1%, compared to $1.0 million for the first quarter of 2020. The increase was due to fees earned by the Company's SBA subsidiary, SBA Complete, primarily related to assisting its third-party client banks with the PPP loan program. SBA Complete recorded approximately $1.6 million in PPP-related fees for the three months ended March 31, 2021. At March 31, 2021, SBA Complete had $0.6 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 $2.3 million for the first quarter of 2021 compared to $0.6 million in the first quarter of 2020. The first quarter of 2020 was significantly impacted by temporary pandemic-related market conditions. The first quarter of 2021 was favorably impacted by the SBA increasing the guarantee percentage on most loans from 75% to 90% as part of the economic relief package.
Noninterest expenses amounted to $40.1 million in each of the first quarters of 2021 and 2020.
Personnel expense, which includes salaries expense and employee benefit expense, was unchanged at $24.7 million for each of the first quarters of 2021 and 2020.
The combined amount of occupancy and equipment expense did not vary significantly among the periods presented, amounting to $3.9 million and $4.1 million for three month periods ending March 31, 2021 and 2020, respectively.
Intangibles amortization expense decreased from $1.1 million in the first quarter of 2020 to $0.9 million in the first quarter 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.
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Foreclosed property losses were $0.2 million for each of the three months ending March 31, 2021 and 2020.
Other operating expenses amounted to $10.4 million for the first quarter of 2021 compared to $10.1 million in the first quarter of 2020, an increase of 2.5%. The increase in 2021 was primarily a result of higher FDIC insurance expense in 2021 and increased technology costs.
For the three months ended March 31, 2021 and 2020, the provision for income taxes was $7.6 million, an effective tax rate of 21.3%, and $4.6 million, an effective tax rate of 20.3%, 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 loss of $18.5 million during the first quarter of 2021 compared to other comprehensive income of $16.1 million during the first quarter 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. Longer term interest rates increased late in the first quarter of 2021, which decreased the value of our fixed rate securities, while in the first quarter of 2020, longer term interest rates decreased, which increased the value of our fixed rate securities. 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 at March 31, 2021 amounted to $7.7 billion, a 6.1% increase from December 31, 2020. Total loans at March 31, 2021 amounted to $4.6 billion, a 2.3% decrease from December 31, 2020, and total deposits amounted to $6.7 billion, a 7.3% increase from December 31, 2020.
The following table presents information regarding the nature of changes in our levels of loans and deposits for the first three months of 2021.
| $ in thousands | ||||||||||||||||||||||||||||||||
| January 1, 2021 to March 31, 2021 | Balance at beginning of period | Internal Growth, net | Growth from Acquisitions | Balance at end of period | Total percentage growth | |||||||||||||||||||||||||||
| Total loans | $ | 4,731,315 | (107,261) | — | 4,624,054 | (2.3) | % | |||||||||||||||||||||||||
| Deposits – Noninterest bearing checking | 2,210,012 | 220,186 | — | 2,430,198 | 10.0 | % | ||||||||||||||||||||||||||
| Deposits – Interest bearing checking | 1,172,022 | 86,478 | — | 1,258,500 | 7.4 | % | ||||||||||||||||||||||||||
| Deposits – Money market | 1,581,364 | 139,866 | — | 1,721,230 | 8.8 | % | ||||||||||||||||||||||||||
| Deposits – Savings | 519,266 | 48,449 | — | 567,715 | 9.3 | % | ||||||||||||||||||||||||||
| Deposits – Brokered | 20,222 | (10,761) | — | 9,461 | (53.2) | % | ||||||||||||||||||||||||||
| Deposits – Internet time | 249 | — | — | 249 | — | % | ||||||||||||||||||||||||||
| Deposits – Time>$100,000 | 543,894 | (18,085) | — | 525,809 | (3.3) | % | ||||||||||||||||||||||||||
| Deposits – Time<$100,000 | 226,567 | (6,242) | — | 220,325 | (2.8) | % | ||||||||||||||||||||||||||
| Total deposits | $ | 6,273,596 | 459,891 | — | 6,733,487 | 7.3 | % | |||||||||||||||||||||||||
As derived from the table above, for the first three months of 2021, loans declined $107.3 million, or 2.3%. Our level of outstanding loans has been negatively impacted by high mortgage loan refinancing activity, commercial loan payoffs, and soft demand arising from the pandemic. PPP loans amounted to $241 million at both March 31, 2021 and December 31, 2020, with $111 million in new PPP loans, which was offset by $111 million in PPP forgiveness payments. We generally believe that our market area is beginning to emerge from the pandemic, and thus, we expect economic activity to increase. Accordingly, excluding the impact of PPP loan forgiveness, we expect to experience organic loan growth during the remainder of 2021.
The mix of our loan portfolio remains substantially the same at March 31, 2021 compared to December 31, 2020. Also, the majority of our real estate loans are personal and commercial loans where real estate provides additional
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security for the loan. Note 6 to the consolidated financial statements presents additional detailed information regarding our mix of loans.
For the three month period ended March 31, 2021, we experienced strong growth in our deposit base, with total deposits increasing by $460 million, or 7.3% from December 31, 2020. Deposit growth in our transaction accounts (checking, money market and savings), was especially strong, ranging from 7-10% growth for the three month period. We believe this high deposit growth is due to a combination of stimulus funds and changes in customer behaviors during the pandemic, as well as our ongoing deposit growth initiatives. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.
Our liquidity levels have increased over the period. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 31.4% at December 31, 2020 to 37.5% at March 31, 2021.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, TDRs, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows:
ASSET QUALITY DATA ($ in thousands) | As of/for the quarter ended March 31, 2021 | As of/for the quarter ended December 31, 2020 | ||||||||||||
| Nonperforming assets | ||||||||||||||
| Nonaccrual loans | $ | 39,566 | 35,076 | |||||||||||
| TDRs – accruing | 8,601 | 9,497 | ||||||||||||
| Accruing loans >90 days past due | — | — | ||||||||||||
| Total nonperforming loans | 48,167 | 44,573 | ||||||||||||
| Foreclosed real estate | 1,811 | 2,424 | ||||||||||||
| Total nonperforming assets | $ | 49,978 | 46,997 | |||||||||||
| Asset Quality Ratios – All Assets | ||||||||||||||
| Net charge-offs to average loans - annualized | 0.10 | % | 0.07 | % | ||||||||||
| Nonperforming loans to total loans | 1.04 | % | 0.94 | % | ||||||||||
| Nonperforming assets to total assets | 0.65 | % | 0.64 | % | ||||||||||
| Allowance for loan losses to total loans | 1.42 | % | 1.11 | % | ||||||||||
| Allowance for loan losses to nonperforming loans | 136.71 | % | 117.53 | % | ||||||||||
As shown in the table above, nonperforming assets increased from December 31, 2020 to March 31, 2021, which was primarily driven by one borrower relationship amounting to $5.5 million being placed on nonaccrual status in the first quarter of 2021 and which was not directly related to the impact of the pandemic. Due primarily to government stimulus and relief programs, the nonperforming asset level at March 31, 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.
At March 31, 2021, total nonaccrual loans amounted to $39.6 million, compared to $35.1 million at December 31, 2021. As noted above, the increase was primarily driven by one borrower relationship.
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The following is the composition, by loan type, of all of our nonaccrual loans at each period end.
| ($ in thousands) | At March 31, 2021 | At December 31, 2020 | |||||||||
| Commercial, financial, and agricultural | $ | 10,330 | 9,681 | ||||||||
| Real estate – construction, land development, and other land loans | 540 | 643 | |||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 6,207 | 6,048 | |||||||||
| Real estate – mortgage – home equity loans/lines of credit | 1,676 | 1,333 | |||||||||
| Real estate – mortgage – commercial and other | 20,654 | 17,191 | |||||||||
| Consumer loans | 159 | 180 | |||||||||
| Total nonaccrual loans | $ | 39,566 | 35,076 | ||||||||
TDRs are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At March 31, 2021, total accruing TDRs amounted to $8.6 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 $5.9 million at March 31, 2021, are excluded from TDR consideration at March 31, 2021.
The following table presents geographic information regarding our nonperforming loans (nonaccrual loans and TDRs) at March 31, 2021.
| As of March 31, 2021 | |||||||||||||||||||||||
| ($ in thousands) | Total Nonperforming Loans | Total Loans | Nonperforming Loans to Total Loans | Total Foreclosed Real Estate | |||||||||||||||||||
| Region (1) | |||||||||||||||||||||||
| Eastern Region (NC) | $ | 5,167 | 1,044,774 | 0.49 | % | $ | 382 | ||||||||||||||||
| Triangle Region (NC) | 10,663 | 985,508 | 1.08 | % | 252 | ||||||||||||||||||
| Triad Region (NC) | 6,418 | 750,682 | 0.85 | % | 91 | ||||||||||||||||||
| Charlotte Region (NC) | 1,261 | 358,445 | 0.35 | % | — | ||||||||||||||||||
| Southern Piedmont Region (NC) | 2,872 | 269,544 | 1.07 | % | 65 | ||||||||||||||||||
| Western Region (NC) | 3,383 | 581,433 | 0.58 | % | 21 | ||||||||||||||||||
| South Carolina Region | 763 | 202,007 | 0.38 | % | 40 | ||||||||||||||||||
| Former Virginia Region | 81 | 336 | 24.11 | % | 209 | ||||||||||||||||||
| Other | 17,559 | 431,325 | 4.07 | % | 751 | ||||||||||||||||||
| Total | $ | 48,167 | 4,624,054 | 1.04 | % | $ | 1,811 | ||||||||||||||||
(1)The counties comprising each region are as follows:
Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret
Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake
Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly, Forsyth, Alamance
Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg
Southern Piedmont North Carolina Region - Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland
Western North Carolina Region – Buncombe, Henderson, McDowell, Madison, Transylvania
South Carolina Region - Chesterfield, Dillon, Florence
Former Virginia Region - Wythe, Washington, Montgomery, Roanoke
Other includes loans originated on a national basis through the Company’s SBA Lending Division and through the Company's Credit Card Division
As reflected in Note 6 to the financial statements, total classified loans were $63.1 million at March 31, 2021 compared to $60.5 million at December 31, 2020. Special mention loans decreased from $61.3 million at December 31, 2020 to $52.3 million at March 31, 2021.
Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $1.8 million at March 31, 2021 and $2.4 million at December 31, 2020. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and favorable overall asset quality.
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We believe that the fair values of the items of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. The following table presents the detail of all of our foreclosed real estate at each period end:
| ($ in thousands) | At March 31, 2021 | At December 31, 2020 | |||||||||
| Vacant land and farmland | $ | 610 | 753 | ||||||||
| 1-4 family residential properties | 214 | 517 | |||||||||
| Commercial real estate | 987 | 1,154 | |||||||||
| Total foreclosed real estate | $ | 1,811 | 2,424 | ||||||||
Allowance for Credit Losses and Provision for Credit Losses
On January 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 of January 1, 2021.
The allowance for loan loss accounting in effect at December 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 quarter of 2021 compared to $5.6 million in the first quarter of 2020. The higher provision in 2020 was primarily related to our estimate of probable incurred losses associated with the pandemic that was emerging at the time. Under the CECL methodology for recording expected credit losses on loans adopted as of January 1, 2021, which resulted in the increase to the allowance for credit losses on loans noted above, we determined that no further adjustment was necessary for the first quarter of 2021, and thus no provisions for credit losses recorded. The primary factors that resulted in this determination were an immaterial change in loan balances outstanding, the immaterial change in the level of the Company's past due and classified loans, and the relatively consistent economic projections in the forecasts utilized. See Note 2 to the consolidated financial statements for additional information, which includes discussion noting that a more negative forecast scenario was utilized at March 31, 2021 compared to the scenario used on the January 1, 2021 CECL adoption date.
We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area.
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For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense.
| ($ in thousands) | Three Months Ended March 31, 2021 | Twelve Months Ended December 31, 2020 | Three Months Ended March 31, 2020 | ||||||||||||||
| Loans outstanding at end of period | $ | 4,624,054 | 4,731,315 | 4,552,708 | |||||||||||||
| Average amount of loans outstanding | $ | 4,684,143 | 4,702,743 | 4,512,893 | |||||||||||||
| Allowance for loan losses, at beginning of year | $ | 52,388 | 21,398 | 21,398 | |||||||||||||
| Adoption of CECL | 14,575 | — | — | ||||||||||||||
| Provision (reversal) for loan losses | — | 35,039 | 5,590 | ||||||||||||||
| 66,963 | 56,437 | 26,988 | |||||||||||||||
| Loans charged off: | |||||||||||||||||
| Commercial, financial, and agricultural | (1,438) | (5,608) | (2,460) | ||||||||||||||
| Real estate – construction, land development & other land loans | (66) | (51) | (40) | ||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | (38) | (478) | (195) | ||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | (131) | (524) | (68) | ||||||||||||||
| Real estate – mortgage – commercial and other | (510) | (968) | (263) | ||||||||||||||
| Consumer loans | (134) | (873) | (287) | ||||||||||||||
| Total charge-offs | (2,317) | (8,502) | (3,313) | ||||||||||||||
| Recoveries of loans previously charged-off: | |||||||||||||||||
| Commercial, financial, and agricultural | 514 | 745 | 217 | ||||||||||||||
| Real estate – construction, land development & other land loans | 294 | 1,552 | 290 | ||||||||||||||
| Real estate – mortgage – residential (1-4 family) first mortgages | 87 | 754 | 91 | ||||||||||||||
| Real estate – mortgage – home equity loans / lines of credit | 11 | 487 | 83 | ||||||||||||||
| Real estate – mortgage – commercial and other | 262 | 621 | 47 | ||||||||||||||
| Consumer loans | 35 | 294 | 95 | ||||||||||||||
| Total recoveries | 1,203 | 4,453 | 823 | ||||||||||||||
| Net (charge-offs) recoveries | (1,114) | (4,049) | (2,490) | ||||||||||||||
| Allowance for credit losses on loans, at end of period | $ | 65,849 | 52,388 | 24,498 | |||||||||||||
| Ratios: | |||||||||||||||||
| Net charge-offs (recoveries) as a percent of average loans (annualized) | 0.10 | % | 0.09 | % | 0.22 | % | |||||||||||
| Allowance for loan losses as a percent of loans at end of period | 1.42 | % | 1.11 | % | 0.54 | % | |||||||||||
As previously discussed, as of March 31, 2021, we have granted approximately $5.9 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 1.42% and 1.11% at March 31, 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 lending-related 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 lending-related 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. Methodology is based on a loss rate approach that starts with the probability of funding based on historical experience. Similar to methodology
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discussed above related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecast. The allowance for lending-related commitments of $8.1 million and $0.6 million at March 31, 2021 and December 31, 2020, respectively, is separately classified on the balance sheet within Other Liabilities. We recorded no provision for credit losses on unfunded commitments during the first quarter of 2021 for primarily the same reasons noted above related to loans.
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 $969 million line of credit with the FHLB (of which $7 million and $8 million were outstanding at March 31, 2021 and December 31, 2020, respectively), 2) a $100 million federal funds line with a correspondent bank (of which none was outstanding at March 31, 2021 or December 31, 2020), and 3) an approximately $135 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at March 31, 2021 or December 31, 2020). Unused and available lines of credit amounted to $1.2 billion at March 31, 2021.
Our overall liquidity has increased since December 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% at December 31, 2020 to 37.5% at March 31, 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 since December 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 sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities.
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Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through March 31, 2021, and have no current plans to do so.
Capital Resources
The Company is regulated by the Board of Governors of the Federal Reserve Board (“FRB”) and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. Our banking subsidiary, First Bank, is also regulated by the FRB and the North Carolina Office of the Commissioner of Banks. We must comply with regulatory capital requirements established by the FRB. 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 and FDIC regulations.
The capital conservation buffer requirement began to be phased in on January 1, 2016, at 0.625% of risk weighted assets, and increased each year until fully implemented at 2.5% on January 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.
At March 31, 2021, our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.
| March 31, 2021 | December 31, 2020 | ||||||||||
| Risk-based capital ratios: | |||||||||||
| Common equity Tier 1 to Tier 1 risk weighted assets | 13.16 | % | 13.19 | % | |||||||
| Minimum required Common Equity Tier 1 capital | 7.00 | % | 7.00 | % | |||||||
| Tier I capital to Tier 1 risk weighted assets | 14.24 | % | 14.28 | % | |||||||
| Minimum required Tier 1 capital | 8.50 | % | 8.50 | % | |||||||
| Total risk-based capital to Tier II risk weighted assets | 15.49 | % | 15.37 | % | |||||||
| Minimum required total risk-based capital | 10.50 | % | 10.50 | % | |||||||
| Leverage capital ratios: | |||||||||||
| Tier 1 capital to quarterly average total assets | 9.60 | % | 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 March 31, 2021, First Bank significantly exceeded the minimum ratios established by the
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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 three months of 2021, resulting primarily from a strong increase in deposits.
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 March 15, 2021, the Company announced a quarterly cash dividend of $0.20 per share payable on April 25, 2021 to shareholders of record on March 31, 2021. This dividend rate represents an 11% increase over the dividend rate declared in the first quarter of 2020.
SHARE REPURCHASES
For the three months ended March 31, 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 March 31, 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 the net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At March 31, 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), at March 31, 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 at March 31, 2021 were deposits totaling $4.3 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
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interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. In the short-term (less than twelve months), this generally results in us being asset-sensitive, meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates, which is what we experienced following the March 2020 interest rate cuts. However, in the twelve-month and longer horizon, the impact of having a higher level of interest-sensitive liabilities generally lessens the short-term effects of changes in interest rates.
The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-term interest rates are substantially the same as long-term interest rates. Due to actions taken by the Federal 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 the Federal Reserve cut interest rates by 75 basis points in the second half of 2019. And in March 2020, the Federal Reserve cut interest rates by an additional 150 basis points in response to the COVID-19 pandemic. Our interest-bearing cash balances and most of our variable rate loans, generally reset to lower rates soon after these interest rate cuts. We reduced our offering rates on most deposit products 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 $356 million in PPP loans, of which $241 million were outstanding at both December 31, 2020 and March 31, 2021. 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 amount 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 three months of 2021, we amortized $3.0 million of the PPP loan fees as interest income. The Company has $9.0 million in remaining deferred PPP loan fees, of which $3.1 million relates to 2020 originations and $5.9 million relates to 2021 originations. We expected the fees associated with the 2020 originations to be substantially realized during 2021, while we expect the fees associated with the 2021 originations to be recognized at a rate of approximately $150 thousand per quarter for the remainder of 2021, and accelerated amortization occurring in 2022 upon the forgiveness process.
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 $1.3 million and $1.8 million for the first three 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
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remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and susceptible to volatility. The remaining loan discount on acquired loans amounted to $8.2 million at March 31, 2021 compared to $8.9 million at December 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 the SEC 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 the SEC. 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.
Item 1A – Risk Factors
Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Forward-Looking Statements” set forth in the forepart of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q and in our other filings with the SEC. There are no material changes from the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
| Issuer Purchases of Equity Securities | ||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| January 1, 2021 to January 31, 2021 | — | $ | — | — | $ | 20,000,000 | ||||||||||||||||||||
| February 1, 2021 to February 28, 2021 | 106,744 | 37.81 | 106,744 | $ | 15,964,472 | |||||||||||||||||||||
| March 1, 2021 to March 31, 2021 | — | — | — | $ | 15,964,472 | |||||||||||||||||||||
| Total | 106,744 | 23.32 | 106,744 | $ | 15,964,472 | |||||||||||||||||||||
Footnotes to the Above Table
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(1)All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. On January 27, 2021, the Company reported the authorization of a new $20 million repurchase program with an expiration date of December 31, 2021. As of March 31, 2021, the Company had the remaining authorization to repurchase up to $16.0 million of the Company's stock.
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Item 6 - Exhibits
The following exhibits are filed with this report or, as noted, are incorporated by reference. Except as noted below the exhibits identified have Securities and Exchange Commission File No. 000-15572. Management contracts, compensatory plans and arrangements are marked with an asterisk (*).
| 2.a | |||||
| 2.b | |||||
| 2.c | |||||
| 2.d | |||||
| 3.a | Articles of Incorporation of the Company and amendments thereto were filed as Exhibits 3.a.i through 3.a.v to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1.b to the Company’s Registration Statement on Form S-3D filed on June 29, 2010 (Commission File No. 333-167856), and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and are incorporated herein by reference. | ||||
| 3.b | |||||
| 4.a | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. | ||||
Copies of exhibits are available upon written request to: First Bancorp, Elizabeth B. Bostian, Secretary, 300 SW Broad Street, Southern Pines, North Carolina, 28387
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FIRST BANCORP | |||||
| May 10, 2021 | BY:/s/ Richard H. Moore | ||||
| Richard H. Moore Chief Executive Officer (Principal Executive Officer), and Director | |||||
| May 10, 2021 | BY:/s/ Eric P. Credle | ||||
| Eric P. Credle Executive Vice President and Chief Financial Officer | |||||
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