UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,

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 SeptemberJune 30, 2017

2020

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(I.R.S. Employer
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 classTrading SymbolName of each exchange on which registered:
Common Stock, No Par ValueFBNCThe 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.xYESoNO

☒Yes☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).xYESoNO

☒Yes☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

oLarge Accelerated Filer  xAccelerated Filer  oNon-Accelerated Filer  oSmaller Reporting Company

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter.oEmerging growth company

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.o

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).oYESxNO

☐ Yes ☒ No

The number of shares of the registrant's Common Stock outstanding on OctoberJuly 31, 20172020 was 29,643,990.

28,976,681.



INDEX

FIRST BANCORP AND SUBSIDIARIES

 Page
  
Part I.  Financial Information
 
  
Item 1 - Financial Statements
 
Consolidated Balance Sheets - SeptemberJune 30, 20172020 and September 30, 2016  (With Comparative Amounts at December 31, 2016)2019
4
Consolidated Statements of Income - For the PeriodsThree and Six Months Ended SeptemberJune 30, 20172020 and 20162019
5
Consolidated Statements of Comprehensive Income - For the PeriodsThree and Six Months Ended SeptemberJune 30, 20172020 and 20162019
6
Consolidated Statements of Shareholders’ Equity - For the PeriodsThree and Six Months Ended SeptemberJune 30, 20172020 and 20162019
7
Consolidated Statements of Cash Flows - For the PeriodsSix Months Ended SeptemberJune 30, 20172020 and 20162019
8
9
Notes to Consolidated Financial Statements
9
10
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition
40
41
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
57
62
Item 4 – Controls and Procedures
64
  
Item 4 – Controls and Procedures
59
Part II.  Other Information 
  
Item 1 – Legal Proceedings
59
64
Item 1A – Risk Factors
59
64
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
60
65
Item 6 – Exhibits
60
67
Signatures
Signatures68
62



Page 2

Index


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.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 20162019 Annual Report on Form 10-K.

10-K and Item 1A of Part II of this report.



Page 3

Index


Part I. Financial Information

Item 1 - Financial Statements

First Bancorp and Subsidiaries

Consolidated Balance Sheets

($ in thousands-unaudited) September 30,
2017		  December 31,
2016 (audited)		  September 30,
2016		 
ASSETS            
Cash and due from banks, noninterest-bearing $82,758   71,645   64,145 
Due from banks, interest-bearing  326,089   234,348   217,188 
     Total cash and cash equivalents  408,847   305,993   281,333 
             
Securities available for sale  198,924   199,329   199,156 
Securities held to maturity (fair values of $124,878, $130,195, and $139,514)  123,156   129,713   135,808 
             
Presold mortgages in process of settlement  17,426   2,116   4,094 
             
Loans  3,429,755   2,710,712   2,651,459 
Allowance for loan losses  (24,593)  (23,781)  (24,575)
Net loans  3,405,162   2,686,931   2,626,884 
             
Premises and equipment  95,762   75,351   76,731 
Accrued interest receivable  11,445   9,286   8,785 
Goodwill  144,667   75,042   75,392 
Other intangible assets  15,634   4,433   4,603 
Foreclosed real estate  9,356   9,532   10,103 
Bank-owned life insurance  88,081   74,138   73,613 
Other assets  72,687   42,998   40,978 
        Total assets $4,591,147   3,614,862   3,537,480 
             
LIABILITIES            
Deposits:   Noninterest bearing checking accounts $1,016,947   756,003   749,256 
Interest bearing checking accounts  683,113   635,431   593,065 
Money market accounts  795,572   685,331   659,741 
Savings accounts  396,192   209,074   207,494 
Time deposits of $100,000 or more  517,770   422,687   451,622 
Other time deposits  241,647   238,827   249,662 
     Total deposits  3,651,241   2,947,353   2,910,840 
Borrowings  397,525   271,394   236,394 
Accrued interest payable  1,143   539   523 
Other liabilities  28,737   27,475   24,775 
     Total liabilities  4,078,646   3,246,761   3,172,532 
             
Commitments and contingencies            
             
SHAREHOLDERS’ EQUITY            
Preferred stock, no par value per share.  Authorized: 5,000,000 shares            
     Series C, convertible, issued & outstanding:  none, none, and 728,706 shares  —   —   7,287 
Common stock, no par value per share.  Authorized: 40,000,000 shares            
     Issued & outstanding:  24,723,929, 20,844,505, and 20,119,411 shares  263,493   147,287   139,979 
Retained earnings  251,790   225,921   219,233 
Stock in rabbi trust assumed in acquisition  (3,571)  —   — 
Rabbi trust obligation  3,571   —   — 
Accumulated other comprehensive income (loss)  (2,782)  (5,107)  (1,551)
     Total shareholders’ equity  512,501   368,101   364,948 
          Total liabilities and shareholders’ equity $4,591,147   3,614,862   3,537,480 

($ in thousands)June 30,
2020 (unaudited)		 December 31,
2019
ASSETS 
  
Cash and due from banks, noninterest-bearing$94,684
 64,519
Due from banks, interest-bearing584,830
 166,783
Total cash and cash equivalents679,514
 231,302
    
Securities available for sale784,832
 821,945
Securities held to maturity (fair values of $96,318 and $68,333)94,924
 67,932
    
Presold mortgages in process of settlement31,015
 19,712
SBA Loans held for sale3,382
 —
    
Loans4,770,063
 4,453,466
Allowance for loan losses(42,342) (21,398)
Net loans4,727,721
 4,432,068
    
Premises and equipment115,373
 114,859
Operating right-of-use lease assets18,833
 19,669
Accrued interest receivable19,943
 16,648
Goodwill234,368
 234,368
Other intangible assets14,472
 17,217
Foreclosed properties2,987
 3,873
Bank-owned life insurance105,712
 104,441
Other assets55,519
 59,605
Total assets$6,888,595
 6,143,639
    
LIABILITIES   
Deposits:      Noninterest bearing checking accounts$2,041,778
 1,515,977
Interest bearing checking accounts1,112,625
 912,784
Money market accounts1,353,053
 1,173,107
Savings accounts474,455
 424,415
Time deposits of $100,000 or more610,137
 649,947
Other time deposits239,090
 255,125
Total deposits5,831,138
 4,931,355
Borrowings112,199
 300,671
Accrued interest payable1,525
 2,154
Operating lease liabilities19,109
 19,855
Other liabilities56,733
 37,203
Total liabilities6,020,704
 5,291,238
    
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:  28,976,681 and 29,601,264 shares408,699
 429,514
Retained earnings441,846
 417,764
Stock in rabbi trust assumed in acquisition(2,217) (2,587)
Rabbi trust obligation2,217
 2,587
Accumulated other comprehensive income (loss)17,346
 5,123
Total shareholders’ equity867,891
 852,401
Total liabilities and shareholders’ equity$6,888,595
 6,143,639
See accompanying notes to unaudited consolidated financial statements.


Page 4
Index

First Bancorp and Subsidiaries
Consolidated Statements of Income
($ in thousands, except share data-unaudited)Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
INTEREST INCOME       
Interest and fees on loans$51,964
 55,652
 107,261
 109,612
Interest on investment securities:    

 

Taxable interest income4,771
 4,993
 10,245
 9,730
Tax-exempt interest income117
 271
 281
 608
Other, principally overnight investments788
 2,106
 1,886
 4,807
Total interest income57,640
 63,022
 119,673
 124,757
        
INTEREST EXPENSE       
Savings, checking and money market accounts1,333
 2,335
 3,692
 4,344
Time deposits of $100,000 or more2,323
 3,522
 5,247
 6,700
Other time deposits418
 467
 908
 857
Borrowings942
 2,289
 2,443
 5,086
Total interest expense5,016
 8,613
 12,290
 16,987
        
Net interest income52,624
 54,409
 107,383
 107,770
Provision for loan losses19,298
 (308) 24,888
 192
Net interest income after provision for loan losses33,326
 54,717
 82,495
 107,578
        
NONINTEREST INCOME       
Service charges on deposit accounts2,289
 3,210
 5,626
 6,155
Other service charges, commissions and fees4,624
 5,050
 8,693
 9,556
Fees from presold mortgage loans3,020
 857
 4,861
 1,402
Commissions from sales of insurance and financial products2,090
 2,204
 4,158
 4,233
SBA consulting fees3,739
 921
 4,766
 2,184
SBA loan sale gains1,965
 3,069
 2,612
 5,131
Bank-owned life insurance income629
 631
 1,271
 1,277
Securities gains (losses), net8,024
 —
 8,024
 —
Other gains (losses), net(187) (308) (113) (226)
Total noninterest income26,193
 15,634
 39,898
 29,712
        
NONINTEREST EXPENSES       
Salaries expense20,606
 19,732
 40,716
 38,697
Employee benefits expense3,847
 4,418
 8,394
 9,006
Total personnel expense24,453
 24,150
 49,110
 47,703
Occupancy expense2,724
 2,729
 5,682
 5,483
Equipment related expenses1,020
 1,183
 2,165
 2,552
Merger and acquisition expenses—
 103
 —
 213
Intangibles amortization expense978
 1,242
 2,033
 2,574
Foreclosed property losses, net35
 381
 194
 626
Other operating expenses9,691
 10,296
 19,793
 19,707
Total noninterest expenses38,901
 40,084
 78,977
 78,858
        
Income before income taxes20,618
 30,267
 43,416
 58,432
Income tax expense4,266
 6,408
 8,884
 12,288
        
Net income$16,352
 23,859
 34,532
 46,144
        
Earnings per common share:       
Basic$0.56
 0.80
 1.18
 1.55
Diluted0.56
 0.80
 1.18
 1.55
        
Dividends declared per common share$0.18
 0.12
 0.36
 0.24
        
Weighted average common shares outstanding:       
Basic28,799,828
 29,626,931
 29,015,308
 29,607,074
Diluted28,969,728
 29,796,941
 29,184,421
 29,808,859
See accompanying notes to unaudited consolidated financial statements.


Page 5
Index

First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
($ in thousands-unaudited)Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
Net income$16,352
 23,859
 34,532
 46,144
Other comprehensive income (loss):       
Unrealized gains (losses) on securities available for sale:       
Unrealized holding gains (losses) arising during the period, pretax2,772
 11,701
 23,537
 17,604
Tax (expense) benefit(637) (2,714) (5,409) (4,094)
      Reclassification to realized (gains) losses(8,024) —
 (8,024) —
Tax expense (benefit)1,844
 —
 1,844
 —
Postretirement Plans:       
Amortization of unrecognized net actuarial loss180
 228
 358
 456
Tax benefit(42) (63) (83) (117)
Other comprehensive income (loss)(3,907) 9,152
 12,223
 13,849
Comprehensive income$12,445
 33,011
 46,755
 59,993
See accompanying notes to unaudited consolidated financial statements.


Page 6
Index

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 June 30, 2019          
Balances, April 1, 201929,746
 $434,948
 360,455
 (3,245) 3,245
 (7,264) 788,139
              
Net income    23,859
       23,859
Cash dividends declared ($0.12 per common share)    (3,566)       (3,566)
Change in Rabbi Trust Obligation      379
 (379)   —
Equity issued related to acquisition earnout78
 3,070
         3,070
Stock repurchases(182) (6,524)         (6,524)
Stock option exercises9
 129
         129
Stock withheld for payment of taxes—
 —
         —
Stock-based compensation66
 910
         910
Other comprehensive income (loss)          9,152
 9,152
              
Balances, June 30, 201929,717
 $432,533
 380,748
 (2,866) 2,866
 1,888
 815,169
              
              
Three Months Ended June 30, 2020          
Balances, April 1, 202029,041
 $410,236
 430,709
 (2,602) 2,602
 21,253
 862,198
              
Net income  

 16,352
 

 

 

 16,352
Cash dividends declared ($0.18 per common share)  

 (5,215) 

 

 

 (5,215)
Change in Rabbi Trust Obligation  

 

 385
 (385) 

 —
Stock repurchases(104) (2,432)         (2,432)
Stock-based compensation40
 895
         895
Other comprehensive income (loss)          (3,907) (3,907)
              
Balances, June 30, 202028,977
 $408,699
 441,846
 (2,217) 2,217
 17,346
 867,891

See accompanying notes to unaudited consolidated financial statements.








Page 7
Index

($ 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     
Six Months Ended June 30, 2019          
Balances, January 1, 201929,725
 $434,453
 341,738
 (3,235) 3,235
 (11,961) 764,230
              
Net income    46,144
       46,144
Cash dividends declared ($0.24 per common share)    (7,134)       (7,134)
Change in Rabbi Trust Obligation      369
 (369)   —
Equity issued related to acquisition earnout78
 3,070
         3,070
Stock repurchases(182) (6,524)         (6,524)
Stock option exercises9
 129
         129
Stock withheld for payment of taxes(2) (91)         (91)
Stock-based compensation89
 1,496
         1,496
Other comprehensive income (loss)          13,849
 13,849
              
Balances, June 30, 201929,717
 $432,533
 380,748
 (2,866) 2,866
 1,888
 815,169
              
              
Six Months Ended June 30, 2020          
Balances, January 1, 202029,601
 429,514
 417,764
 (2,587) 2,587
 5,123
 852,401
              
Net income    34,532
       34,532
Cash dividends declared ($0.36 per common share)    (10,450)       (10,450)
Change in Rabbi Trust Obligation      370
 (370)   —
Stock repurchases(680) (22,432)         (22,432)
Stock-based compensation56
 1,617
         1,617
Other comprehensive income (loss)          12,223
 12,223
              
Balances, June 30, 202028,977
 $408,699
 441,846
 (2,217) 2,217
 17,346
 867,891

See accompanying notes to unaudited consolidated financial statements.



Page 8
Index

First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands-unaudited)Six Months Ended
June 30,
 2020 2019
Cash Flows From Operating Activities   
Net income$34,532
 46,144
Reconciliation of net income to net cash provided by operating activities:   
Provision for loan losses24,888
 192
Net security premium amortization1,605
 1,104
Loan discount accretion(3,234) (3,149)
Other purchase accounting accretion and amortization, net32
 (18)
Foreclosed property losses and write-downs, net194
 626
Gains on securities available for sale(8,024) —
Other losses113
 226
Decrease (increase) in net deferred loan costs8,789
 (485)
Depreciation of premises and equipment2,963
 2,886
Amortization of operating lease right-of-use assets1,010
 911
Repayments of lease obligations(920) (1,198)
Stock-based compensation expense1,408
 1,202
Amortization of intangible assets2,033
 2,574
Amortization of SBA servicing assets1,416
 621
Fees/gains from sale of presold mortgages and SBA loans(7,473) (6,533)
Origination of presold mortgage loans in process of settlement(170,961) (53,390)
Proceeds from sales of presold mortgage loans in process of settlement165,223
 52,878
Origination of SBA loans for sale(58,396) (91,323)
Proceeds from sales of SBA loans45,306
 73,313
Increase in accrued interest receivable(3,295) (905)
(Increase) decrease in other assets(8,206) 80
(Decrease) increase in accrued interest payable(629) 282
Increase (decrease) in other liabilities16,123
 (1,382)
Net cash provided by operating activities44,497
 24,656
    
Cash Flows From Investing Activities   
Purchases of securities available for sale(252,256) (256,609)
Purchases of securities held to maturity(50,272) —
Proceeds from maturities/issuer calls of securities available for sale91,976
 82,952
Proceeds from maturities/issuer calls of securities held to maturity22,907
 21,725
Proceeds from sales of securities available for sale219,697
 —
Redemptions of FRB and FHLB stock, net7,754
 4,207
Net increase in loans(311,493) (67,139)
Proceeds from sales of foreclosed properties1,354
 3,262
Purchases of premises and equipment(4,428) (1,968)
Proceeds from sales of premises and equipment192
 240
Net cash used by investing activities(274,569) (213,330)
    
Cash Flows From Financing Activities   
Net increase in deposits899,841
 183,823
        Net increase (decrease) in short-term borrowings(98,000) (55,000)
        Proceeds from long-term borrowings150,000
 —
        Payments on long-term borrowings(240,562) (50,559)
Cash dividends paid – common stock(10,563) (6,542)
Repurchases of common stock(22,432) (6,524)
Proceeds from stock option exercises—
 129
Payment of taxes related to stock withheld—
 (91)
Net cash provided by financing activities678,284
 65,236
    
Increase (decrease) in cash and cash equivalents448,212
 (123,438)
Cash and cash equivalents, beginning of period231,302
 462,898
    
Cash and cash equivalents, end of period$679,514
 339,460
    
Supplemental Disclosures of Cash Flow Information:   
Cash paid during the period for interest$12,919
 16,705
Cash paid during the period for income taxes1,110
 13,196
Non-cash: Unrealized gain (loss) on securities available for sale, net of taxes18,128
 13,510
Non-cash: Foreclosed loans transferred to other real estate662
 1,555
Non-cash: Initial recognition of operating lease right-of-use assets—
 19,406
Non-cash: Initial recognition of operating lease liabilities—
 19,406
Non-cash: Equity issued related to acquisition earn-out—
 3,070
See accompanying notes to consolidated financial statements.



Page 4

9
Index


First Bancorp and Subsidiaries

Consolidated Statements of Income

($ in thousands, except share data-unaudited) Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2017  2016  2017  2016 
INTEREST INCOME                
Interest and fees on loans $41,549   29,919   114,908   90,301 
Interest on investment securities:                
     Taxable interest income  2,004   1,688   5,830   5,472 
     Tax-exempt interest income  399   435   1,269   1,312 
Other, principally overnight investments  1,059   213   2,299   612 
     Total interest income  45,011   32,255   124,306   97,697 
                 
INTEREST EXPENSE                
Savings, checking and money market accounts  685   401   1,892   1,204 
Time deposits of $100,000 or more  1,053   657   2,641   1,931 
Other time deposits  172   196   511   725 
Borrowings  1,462   647   3,411   1,750 
     Total interest expense  3,372   1,901   8,455   5,610 
                 
Net interest income  41,639   30,354   115,851   92,087 
Provision (reversal) for loan losses  —   —   723   (23)
Net interest income after provision (reversal) for loan losses  41,639   30,354   115,128   92,110 
                 
NONINTEREST INCOME                
Service charges on deposit accounts  2,945   2,710   8,525   7,960 
Other service charges, commissions and fees  3,468   2,996   10,195   8,869 
Fees from presold mortgage loans  1,842   710   4,121   1,491 
Commissions from sales of insurance and financial products  1,426   969   3,304   2,844 
SBA consulting fees  864   1,178   3,174   1,898 
SBA loan sale gains  1,692   694   3,241   694 
Bank-owned life insurance income  579   514   1,667   1,526 
Foreclosed property gains (losses), net  (216)  (266)  (439)  (189)
FDIC indemnification asset income (expense), net  —   (5,711)  —   (10,255)
Securities gains (losses), net  —   —   (235)  3 
Other gains (losses), net  (238)  1,363   493   1,237 
     Total noninterest income  12,362   5,157   34,046   16,078 
                 
NONINTEREST EXPENSES                
Salaries  16,550   13,430   46,799   37,465 
Employee benefits expense  3,375   2,608   10,709   7,892 
   Total personnel expense  19,925   16,038   57,508   45,357 
Net occupancy expense  2,439   2,005   6,981   5,791 
Equipment related expenses  1,070   904   3,277   2,693 
Merger and acquisition expenses  1,329   600   4,824   1,286 
Intangibles amortization expense  902   387   2,509   834 
Other operating expenses  8,719   7,784   26,441   22,677 
     Total noninterest expenses  34,384   27,718   101,540   78,638 
                 
Income before income taxes  19,617   7,793   47,634   29,550 
Income tax expense  6,531   3,115   15,839   10,396 
                 
Net income  13,086   4,678   31,795   19,154 
                 
Preferred stock dividends  —   (58)  —   (175)
                 
Net income available to common shareholders $13,086   4,620   31,795   18,979 
                 
Earnings per common share:                
     Basic $0.53   0.23   1.34   0.95 
     Diluted  0.53   0.23   1.33   0.93 
                 
Dividends declared per common share $0.08   0.08   0.24   0.24 
                 
Weighted average common shares outstanding:                
     Basic  24,607,516   20,007,518   23,728,262   19,904,226 
     Diluted  24,695,295   20,785,689   23,827,011   20,697,125 

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
($ in thousands-unaudited) 2017  2016  2017  2016 
             
Net income $13,086   4,678   31,795   19,154 
Other comprehensive income (loss):                
   Unrealized gains (losses) on securities available for sale:                
Unrealized holding gains (losses) arising during the period, pretax  186   241   3,288   3,131 
      Tax (expense) benefit  (69)  (94)  (1,213)  (1,223)
Reclassification to realized (gains) losses  —   —   235   (3)
      Tax expense (benefit)  —   —   (87)  1 
Postretirement Plans:                
Amortization of unrecognized net actuarial (gain) loss  53   50   158   152 
       Tax expense (benefit)  (20)  (20)  (56)  (59)
Other comprehensive income (loss)  150   177   2,325   1,999 
                 
Comprehensive income $13,236   4,855   34,120   21,153 
                 

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In thousands, except per share -
unaudited)		 Preferred  Common Stock  Retained  Stock in
Directors’		  Directors’
Deferred
Fees		  Accumulated
Other
Compre-
hensive
Income		  Total
Share-
holders’		 
  Stock  Shares  Amount  Earnings  Rabbi Trust  Obligation  (Loss)  Equity 
                         
                         
Balances, January 1, 2016 $7,287   19,748  $133,393   205,060   —   —   (3,550)  342,190 
                                 
Net income              19,154               19,154 
Cash dividends declared ($0.24 per common share)              (4,806)              (4,806)
Preferred stock dividends              (175)              (175)
Equity issued pursuant to acquisitions      279   5,509                   5,509 
Stock option exercises      23   375                   375 
Stock-based compensation      69   702                   702 
Other comprehensive income (loss)                          1,999   1,999 
                                 
Balances, September 30, 2016 $7,287   20,119  $139,979   219,233   —   —   (1,551)  364,948 
                                 
                                 
Balances, January 1, 2017 $—   20,845  $147,287   225,921   —   —   (5,107)  368,101 
                                 
Net income              31,795               31,795 
Cash dividends declared ($0.24 per common share)              (5,926)              (5,926)
Equity issued pursuant to acquisitions      3,813   114,893       (7,688)  7,688       114,893 
Payment of deferred fees                  4,117   (4,117)      — 
Stock option exercises      16   287                   287 
Stock-based compensation      50   1,026                   1,026 
Other comprehensive income (loss)                          2,325   2,325 
                                 
Balances, September 30, 2017 $—   24,724  $263,493   251,790   (3,571)  3,571   (2,782)  512,501 

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

  Nine Months Ended
September 30,		 
($ in thousands-unaudited) 2017  2016 
Cash Flows From Operating Activities        
Net income $31,795   19,154 
Reconciliation of net income to net cash provided (used) by operating activities:        
     Provision (reversal) for loan losses  723   (23)
     Net security premium amortization  2,165   2,418 
     Loan discount accretion  (5,073)  (3,553)
     Purchase accounting accretion and amortization, net  (142)  9,993 
     Foreclosed property losses and write-downs (gains), net  439   189 
     Loss (gain) on securities available for sale, net  235   (3)
     Other losses (gains), net  (493)  126 
     Decrease (increase) in net deferred loan costs  388   675 
     Depreciation of premises and equipment  4,023   3,405 
     Stock-based compensation expense  860   527 
     Amortization of intangible assets  2,509   834 
     Fees/gains from sale of presold mortgage and SBA loans  (7,362)  (2,185)
     Origination of presold mortgages in process of settlement  (169,021)  (56,260)
     Proceeds from sales of presold mortgages in process of settlement  165,341   58,015 
     Origination of SBA loans  (54,714)  (8,471)
     Proceeds from sales of SBA loans  44,259   9,165 
     Gain on sale of branches  —   (1,356)
     Decrease (increase) in accrued interest receivable  (642)  381 
     Increase in other assets  (13,112)  (1,530)
     Increase (decrease) in accrued interest payable  340   (20)
     Increase (decrease) in other liabilities  (12,377)  185 
          Net cash provided (used) by operating activities  (9,859)  31,666 
         
Cash Flows From Investing Activities        
     Purchases of securities available for sale  (35,034)  (99,896)
     Purchases of securities held to maturity  (291)  — 
     Proceeds from maturities/issuer calls of securities available for sale  29,156   68,206 
     Proceeds from maturities/issuer calls of securities held to maturity  18,021   17,652 
     Proceeds from sales of securities available for sale  45,601   8 
     Purchases of Federal Reserve and Federal Home Loan Bank stock, net  (10,372)  (2,263)
     Net increase in loans  (206,948)  (138,044)
     Payments related to FDIC loss share agreements  —   (1,554)
     Payment to FDIC for termination of loss share agreements  —   (2,012)
     Proceeds from sales of foreclosed real estate  6,468   6,670 
     Purchases of premises and equipment  (3,040)  (6,876)
     Proceeds from sales of premises and equipment  114   21 
     Proceeds from branch sale  —   26,211 
     Net cash received (paid) in acquisitions  48,636   (53,640)
          Net cash used by investing activities  (107,689)  (185,517)
         
Cash Flows From Financing Activities        
     Net increase in deposits  118,752   122,476 
     Net increase in borrowings  106,980   50,000 
     Cash dividends paid – common stock  (5,617)  (4,760)
     Cash dividends paid – preferred stock  —   (175)
     Proceeds from stock option exercises  287   375 
          Net cash provided by financing activities  220,402   167,916 
         
Increase in cash and cash equivalents  102,854   14,065 
Cash and cash equivalents, beginning of period  305,993   267,268 
         
Cash and cash equivalents, end of period $408,847   281,333 
         
Supplemental Disclosures of Cash Flow Information:        
Cash paid during the period for:        
     Interest $8,115   5,672 
     Income taxes  15,275   10,511 
Non-cash transactions:        
     Unrealized gain (loss) on securities available for sale, net of taxes  2,223   1,906 
     Foreclosed loans transferred to other real estate  3,897   6,968 

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)
(unaudited)For the PeriodsPeriod Ended SeptemberJune 30, 2017 and 20162020 

Note 1 - Basis of Presentation

and Risks and Uncertainties

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 SeptemberJune 30, 2017 and 2016 and2020, the consolidated results of operations for the three and six months ended June 30, 2020 and 2019, and the consolidated cash flows for the periodssix months ended SeptemberJune 30, 20172020 and 2016.2019. All such adjustments were of a normal, recurring nature. Reference is made to the 20162019 Annual Report on Form 10-K filed with the SECSecurities 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 SeptemberJune 30, 20172020 and 20162019 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.

Risks and Uncertainties
The coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies have impacted and may continue to impact many of the Company’s customers. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time. The Company has given hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encourages customers to reach out for assistance to support their individual circumstances.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, which the Company has applied, modifications deemed to be COVID-19-related would not be considered a troubled debt restructuring (“TDR”) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification would not meet the requirements under accounting principles generally accepted in the United States of America to be a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. Under these terms, as of June 30, 2020, the Company has payment deferrals for 1,483 loans with an aggregate loan balance of $774 million. These deferrals are generally no more than 90 days in duration. As the initial 90 day deferrals expire, the Company is approving second deferral requests based on the circumstances of each borrower. Thus a portion of the deferrals at June 30, 2020 represent grants of second deferrals for those borrowers whose initial deferrals were on or prior to April 1, 2020.
Additionally, the Company is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs were new and their effects on the Company’s business remain uncertain. Through June 30, 2020, the Company approved and funded 2,810 PPP loans totaling approximately $244.9 million under the allocation approved by Congress.

In a period of economic contraction, elevated levels of loan losses and lost interest income may occur.  The Company continues to accrue interest on loans modified in accordance with the CARES Act.  To the extent those borrowers are unable to resume normal contractual payments, the Company could experience additional losses of principal and interest.

Note 2 – Accounting Policies

Accounting Standards:


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Note 1 to the 20162019 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.

In May 2014,

SBA Loans Held for Sale - SBA Loans Held for Sale represent the Financial guaranteed portion of SBA loans that the Company intends to sell in the near future. These loans are carried at the lower of cost or market as determined on an individual loan basis.
Accounting Standards Board (“FASB”) issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customersAdopted in an amount equal to the consideration the entity receives or expects to receive. The Company can apply the guidance using a full retrospective approach or a modified retrospective approach. The Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues will not be affected. The guidance will be effective for the Company for reporting periods beginning after December 31, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This update is intended to improve the recognition and measurement of financial instruments and it requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. The guidance also provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes and requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2016, the FASB issued new guidance on accounting for leases, which generally requires all leases to be recognized in the statement of financial position by recording an asset representing its right to use the underlying asset and recording a liability, which represents the Company’s obligation to make lease payments. The provisions of this guidance are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

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In March 2016, the FASB amended the Liabilities topic of the Accounting Standards Codification to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective to each period presented. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB amended the Investments—Equity Method and Joint Ventures topic of the Accounting Standards Codification to eliminate the requirement to retroactively adopt the equity method of accounting and instead apply the equity method of accounting starting with the date it qualifies for that method. The amendments were effective for the Company on January 1, 2017. The Company will apply the guidance prospectively to any increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The Company’s adoption of this amendment did not have a material effect on its financial statements.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments were effective for the Company on January 1, 2017 and the adoption of this amendment did not have a material effect on its financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses. The guidance requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.  The CECL model is expected to result in earlier recognition of credit losses.  The guidance also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The Company will apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, the Company does not expect to elect that option. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of this guidance on its consolidated financial statements, however, the Company expects the adoption of this guidance to result in an increase in the recorded allowance for loan losses.

In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2016, the FASB amended the Consolidation topic of the Accounting Standards Codification to revise the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments were effective for the Company on January 1, 2017 and the Company’s adoption of this amendment did not have a material effect on its financial statements.

In November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how restricted cash is presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2017, the FASB issued guidance to clarify the definition of a business in the Business Combinations topic of the Accounting Standards Codification with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017.Early adoption is permitted. The Company does not expect this amendment to have a material effect on its financial statements.

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In January 2017, the FASB issued amended the Goodwill and Other Intangibles topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. The amount of goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will bewere effective for the Company on January 1, 2020 and the adoption of this amendment did not have a material effect on the Company's financial statements. The Company's policy is to test goodwill for impairment annually on October 31 or on an interim basis if an event triggering impairment may have occurred. 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. The results of the March 31, 2020 determined that none of the Company's goodwill was impaired as of March 31, 2020. The Company reviewed and updated this analysis as of June 30, 2020 and again determined that there was no impairment of its goodwill. Management will continue to evaluate the economic conditions at future reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performedapplicable changes.

In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on testing dates afterthe concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments were effective on January 1, 2017.2020. These amendments did not have a material effect on the Company's financial statements.
In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments were effective for the Company doeson January 1, 2020 and their adoption did not expect this amendment to have a material effect on its financial statements.

Accounting Standards Pending Adoption
In March 2017,June 2016, the FASB issued guidance to change the accounting for credit losses. The guidance requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit losses" and record an allowance that, when deducted from the amortized cost basis of the financial assets, presents the net amount expected to be collected on the financial assets.  In May 2019, the FASB issued additional guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of the CECL model. The Company does not expect to elect this option. The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecasts. Except as discussed below, the Company would have applied the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, which, for the Company, is January 1, 2020, with future adjustments to credit loss expectations recorded through the income statement as charges or credits to earnings. In the first quarter of 2020, in response to the COVID-19 pandemic, the CARES Act was enacted by the United States Congress and signed by the President. This CARES Act included an election to defer the implementation of CECL until the earlier of the cessation of the national emergency or December 31, 2020. The Company is prepared for CECL implementation but elected to defer its effective date, as permitted by the CARES Act, because of the challenges associated with developing a reliable forecast of losses that may result from the unprecedented COVID-19 pandemic. Upon the adoption of CECL, the Company expects its allowance for credit losses related to all financial assets will increase to approximately $40-$44 million as of January 1, 2020 compared to its allowance for loan losses at December 31,


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2019 of approximately $21 million. As noted above, this initial impact will be reflected as a cumulative-effect adjustment to retained earnings.
In August 2018, the FASB amended the requirements in the Compensation—Compensation - Retirement Benefits topic– Defined Benefit Plans Topic of the Accounting Standards Codification related to the income statement presentation of the components of net periodic benefit costimprove disclosure requirements for an entity’s sponsoredemployers that sponsor defined benefit pension and other postretirement plans. The amendments requireguidance removes disclosures that an employer reportare no longer considered cost-beneficial, clarifies the service cost component in the same line item or itemsspecific requirements of disclosures, and adds disclosure requirements identified as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component.relevant. The amendments will beare effective for the Company forfiscal years, and interim and annual periods within those fiscal years, beginning after December 15, 2017.2020. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2017,2020, the FASB amendedissued guidance to provide temporary optional guidance to ease the requirementspotential burden in the Receivables—Nonrefundable Fees and Other Costs topic of the Accounting Standards Codification related to the amortization periodaccounting for certain purchased callable debt securities held at a premium.reference rate reform. The amendments shorten the amortization period for the premium to the earliest call date. The amendments will beare effective for the Company for interim and annual periods beginning afteras of March 12, 2020 through December 15, 2018. Early adoption is permitted.31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation topic of the Accounting Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

See Note 1 regarding temporary provisions of the Coronavirus Aid Relief, and Economic Security Act (CARES Act) related to loans.

Note 3 – Reclassifications

Certain amounts reported in the periodperiods ended SeptemberJune 30, 20162019 and December 31, 2019 may have been reclassified to conform to the presentation for SeptemberJune 30, 2017. These2020. Any reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

Note 4 – Acquisitions

Since January 1, 2016, the Company completed the acquisitions described below. The results of each acquired company/branch are included in the Company’s results beginning on its respective acquisition date.

(1)On January 1, 2016, First Bank Insurance completed the acquisition of Bankingport, Inc. (“Bankingport”). The results of Bankingport are included in the Company’s results beginning on the January 1, 2016 acquisition date.

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Bankingport was an insurance agency based in Sanford, North Carolina. This acquisition represented an opportunity to expand the insurance agency operations into a contiguous and significant banking market for the Company. Also, this acquisition provided the Company with a larger platform for leveraging insurance services throughout the Company’s bank branch network. The deal value was $2.2 million and the transaction was completed on January 1, 2016 with the Company paying $0.7 million in cash and issuing 79,012 shares of its common stock, which had a value of approximately $1.5 million. In connection with the acquisition, the Company also paid $1.1 million to purchase the office space previously leased by Bankingport.

This acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Bankingport were recorded based on estimates of fair values as of January 1, 2016. In connection with this transaction, the Company recorded $1.7 million in goodwill, which is non-deductible for tax purposes, and $0.7 million in other amortizable intangible assets.

(2)On May 5, 2016, the Company completed the acquisition of SBA Complete, Inc. (“SBA Complete”). The results of SBA Complete are included in the Company’s results beginning on the May 5, 2016 acquisition date. SBA Complete is a consulting firm that specializes in consulting with financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. The deal value was approximately $8.5 million with the Company paying $1.5 million in cash and issuing 199,829 shares of its common stock, which had a value of approximately $4.0 million. Per the terms of the agreement, the Company recorded an earn-out liability initially valued at $3.0 million, which will be paid in shares of Company stock in annual distributions over a three-year period if pre-determined goals are met for those three years.

This acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of SBA Complete were recorded based on estimates of fair values, which according to applicable accounting guidance, are subject to change for twelve months following the acquisition. In connection with this transaction, the Company originally recorded $5.6 million in goodwill, which was non-deductible for tax purposes, and $2.0 million in other amortizable intangible assets.

In the second quarter of 2017, the Company recorded a measurement period adjustment to reduce the earn-out liability and goodwill by $1.2 million.

(3)On July 15, 2016, the Company completed a branch exchange with First Community Bank headquartered in Bluefield, Virginia. In the branch exchange transaction, First Bank acquired six of First Community Bank’s branches located in North Carolina, while concurrently selling seven of its branches in the southwestern area of Virginia to First Community Bank.

In connection with the sale, the Company sold $150.6 million in loans, $5.7 million in premises and equipment and $134.3 million in deposits to First Community Bank. In connection with the sale, the Company received a deposit premium of $3.8 million, removed $1.0 million of allowance for loan losses associated with the sold loans, allocated and wrote-off $3.5 million of previously recorded goodwill, and recorded a net gain of $1.5 million in this transaction.

In connection with the purchase transaction, the Company acquired assets with a fair value of $157.2 million, including $152.2 million in loans and $3.4 million in premises and equipment. Additionally, the Company assumed $111.3 million in deposits and $0.2 million in other liabilities. In connection with the purchase, the Company recorded: i) a discount on acquired loans of $1.5 million, ii) a premium on deposits of $0.3 million, iii) a $1.2 million core deposit intangible, and iv) $5.4 million in goodwill.

The branch acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of the acquired branches were recorded on the Company’s balance sheet at their fair values as of July 15, 2016 and were subject to change for twelve months following the acquisition. The related results of operations for the acquired branches have been included in the Company’s consolidated statement of income since that date. The goodwill recorded in the branch exchange is deductible for tax purposes.

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(4)On March 3, 2017, the Company completed the acquisition of Carolina Bank Holdings, Inc. (“Carolina Bank”), headquartered in Greensboro, North Carolina, pursuant to an Agreement and Plan of Merger and Reorganization dated June 21, 2016. The results of Carolina Bank are included in First Bancorp’s results beginning on the March 3, 2017 acquisition date.

Carolina Bank Holdings, Inc. was the parent company of Carolina Bank, a North Carolina state-chartered bank with eight bank branches located in the North Carolina cities of Greensboro, High Point, Burlington, Winston-Salem, and Asheboro, and mortgage offices in Burlington, Hillsborough, and Sanford. The acquisition complements the Company’s recent expansion into several of these high-growth markets and increases its market share in others with facilities, operations and experienced staff already in place. The Company was willing to record goodwill primarily due to the reasons just noted, as well as the positive earnings of Carolina Bank. The total merger consideration consisted of $25.3 million in cash and 3,799,471 million shares of the Company’s common stock, with each share of Carolina Bank common stock being exchanged for either $20.00 in cash or 1.002 shares of the Company’s stock, subject to the total consideration being 75% stock / 25% cash. The issuance of common stock was valued at $114,478,000 and was based on the Company’s closing stock price on March 3, 2017 of $30.13 per share.

This acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Carolina Bank were recorded based on estimates of fair values as of March 3, 2017. The Company may change its valuations of acquired Carolina Bank assets and liabilities for up to one year after the acquisition date. The table below is a condensed balance sheet disclosing the amount assigned to each major asset and liability category of Carolina Bank on March 3, 2017, and the related fair value adjustments recorded by the Company to reflect the acquisition. The $65.5 million in goodwill that resulted from this transaction is non-deductible for tax purposes.

 

($ in thousands)

 

 As
Recorded by
Carolina Bank		  Initial Fair
Value
Adjustments		  Measurement
Period
Adjustments		  As
Recorded by
First Bancorp		 
Assets                
Cash and cash equivalents $81,466   (2)(a) —   81,464 
Securities  49,629   (261)(b) —   49,368 
Loans, gross  505,560   (5,469)(c) 146(l) 497,522 
       (2,715)(d) —     
Allowance for loan losses  (5,746)  5,746(e) —   — 
Premises and equipment  17,967   4,251(f) (319)(m) 21,899 
Core deposit intangible  —   8,790(g) —   8,790 
Other  34,976   (4,804)(h) 2,225(n) 32,397 
   Total  683,852   5,536   2,052   691,440 
                 
Liabilities                
Deposits $584,950   431(i) —   585,381 
Borrowings  21,855   (2,855)(j) (262)(o) 18,738 
Other  12,855   225(k) —   13,080 
   Total  619,660   (2,199)  (262)  617,199 
                 
Net identifiable assets acquired              74,241 
                 
Total cost of acquisition                
   Value of stock issued     $114,478         
   Cash paid in the acquisition      25,279         
       Total cost of acquisition              139,757 
                 
Goodwill recorded related to acquisition of Carolina Bank        $65,516 
                 

Explanation of Fair Value Adjustments

(a)This adjustment was recorded to a short-term investment to its estimated fair value.
(b)This fair value adjustment was recorded to adjust the securities portfolio to its estimated fair value.
(c)This fair value adjustment represents the amount necessary to reduce performing loans to their fair value due to interest rate factors and credit factors. Assuming the loans continue to perform, this amount will be amortized to increase interest income over the remaining lives of the related loans.

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(d)This fair value adjustment was recorded to write-down purchased credit impaired loans assumed in the acquisition to their estimated fair market value.
(e)This fair value adjustment reduced the allowance for loan losses to zero as required by relevant accounting guidance.
(f)This adjustment represents the amount necessary to increase premises and equipment from its book value on the date of acquisition to its estimated fair market value.
(g)This fair value adjustment represents the value of the core deposit base assumed in the acquisition based on a study performed by an independent consulting firm. This amount was recorded by the Company as an identifiable intangible asset and will be amortized as expense on an accelerated basis over seven years.
(h)This fair value adjustment primarily represents the net deferred tax liability associated with the other fair value adjustments made to record the transaction.
(i)This fair value adjustment was recorded because the weighted average interest rate of Carolina Bank’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition. This amount will be amortized to reduce interest expense on an accelerated basis over their remaining five year life.
(j)This fair value adjustment was primarily recorded because the interest rate of Carolina Bank’s trust preferred security was less than the current interest rate on similar instruments. This amount will be amortized on approximately a straight-line basis to increase interest expense over the remaining life of the related borrowing, which is 18 years.
(k)This fair value adjustment represents miscellaneous adjustments needed to record assets and liabilities at their fair value.
(l)This fair value adjustment was a miscellaneous adjustment to increase the initial fair value of gross loans.
(m)This fair value adjustment relates to miscellaneous adjustment to decrease the initial fair value of premises and equipment.
(n)This fair value adjustment relates to changes in the estimate of deferred tax assets/liabilities associated with the acquisition and a miscellaneous adjustment to decrease the initial fair value of foreclosed real estate acquired in the transaction.
(o)This fair value adjustment relates to miscellaneous adjustments to decrease the initial fair value of borrowings.

The following unaudited pro forma financial information presents the combined results of the Company and Carolina Bank as if the acquisition had occurred as of January 1, 2016, after giving effect to certain adjustments, including amortization of the core deposit intangible, and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Carolina Bank constituted a single entity during such period.

($ in thousands, except share data) Pro Forma Combined
Nine Months Ended
September 30, 2017		  Pro Forma Combined
Nine Months Ended
September 30, 2016		 
Net interest income $119,899   109,787 
Noninterest income  35,236   24,818 
Total revenue  155,135   134,605 
         
Net income available to common shareholders  35,176   16,584 
         
Earnings per common share        
     Basic $1.43   0.70 
     Diluted  1.43   0.68 

For purposes of the supplemental pro forma information, merger-related expenses of $4.4 million that were recorded in the Company’s consolidated statements of income for the nine months ended September 30, 2017 and $4.6 million of merger-related expenses that were recorded by Carolina Bank in 2017 prior to the merger date are reflected above in the pro forma presentation for 2016.

(5)On September 1, 2017, First Bank Insurance completed the acquisition of Bear Insurance Service (“Bear Insurance”). The results of Bear Insurance are included in the Company’s results beginning on the September 1, 2017 acquisition date.

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Bear Insurance, an insurance agency based in Albemarle, North Carolina, with four locations in Stanly, Cabarrus, and Montgomery counties and annual commission income of approximately $4 million, represented an opportunity to complement the insurance agency operations in these markets and the surrounding areas. Also, this acquisition provided the Company with a larger platform for leveraging insurance services throughout the Company’s bank branch network. The transaction value was $9.8 million and the transaction was completed on September 1, 2017 with the Company paying $7.9 million in cash and issuing 13,374 shares of its common stock, which had a value of approximately $0.4 million. Per the terms of the agreement, the Company also recorded an earn-out liability valued at $1.2 million, which will be paid as a cash distribution after a four-year period if pre-determined goals are met for the periods.

This acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Bear Insurance were recorded based on estimates of fair values as of September 1, 2017. In connection with this transaction, the Company recorded $5.3 million in goodwill, which is deductible for tax purposes, and $3.9 million in other amortizable intangible assets, which are also deductible for tax purposes.

Note 5 – Equity-Based Compensation Plans

The Company recorded total stock-based compensation expense of $204,000$895,000 and $146,000$801,000 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $860,000$1,408,000 and $527,000$1,202,000 for the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively. Of2019, respectively, which includes the $860,000 in expense that was recorded in 2017, approximately $320,000 relatedvalue of stock grants to the June 1, 2017 director grants, and is classifieddirectors as “other operating expenses” in the Consolidated Statements of Income. The remaining $540,000 in expense relates to the employee grants discussed below and is recorded as “salaries expense.” Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows.below. The Company recognized $318,000$206,000 and $206,000$184,000 of income tax benefits related to stock basedstock-based compensation expense in the income statement for the ninethree months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $324,000 and $246,000 for the six months ended June 30, 2020 and 2019, respectively.

At SeptemberJune 30, 2017,2020, the sole equity-based compensation plan for the Company had the following equity-based compensation plans:is the First Bancorp 2014 Equity Plan and the First Bancorp 2007 Equity Plan. The Company’s shareholders(the "Equity Plan"), which was approved all equity-based compensation plans. The First Bancorp 2014 Equity Plan became effective upon the approval ofby shareholders on May 8, 2014. As of SeptemberJune 30, 2017,2020, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants, and there were 803,946576,614 shares remaining available for grant.

The First Bancorp 2014 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’plans' participants with those of the Company and its shareholders. The First Bancorp 2014 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 grantsawards to employees have either had performance vesting conditions,been made in the form of shares of restricted stock with service vesting conditions or both.only. Compensation expense for these grantsawards is recorded over the variousrequisite service periods based on the estimated number of equity grants that are probable to vest. No compensation cost is recognized for grants that do not vest andperiods. Upon forfeiture, any previously recognized compensation cost will beis reversed. The Company issues new shares of common stock when optionsUpon a change in control (as defined in the plans), unless the awards remain outstanding or substitute equivalent awards are exercised.

provided, the awards become immediately vested.

Certain of the Company’s stock optionequity 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 options and awards that will ultimately vest. Over the past five years, there have only been minimalinsignificant amounts of forfeitures, and therefore the Company assumes that all awards granted without performancewith service conditions only will become vested.

vest. The Company typically grantsissues 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 11 in total) in June of each year. Compensation expense


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Index

associated with these director awards is recognized on the date of award since there are no vesting conditions. On June 1, 2017,2020, the Company granted 11,19014,146 shares of common stock to non-employee directors (1,119(1,286 shares per director), at a fair market value of $28.59$24.87 per share, which was the closing price of the Company’sCompany's common stock on that date, whichand resulted in $320,000$352,000 in expense. On June 1, 2016,2019, the Company granted 6,5849,030 shares of common stock to non-employee directors (823(903 shares per director), at a fair market value of $19.56$35.41 per share, which was the closing price of the Company’sCompany's common stock on that date, whichand resulted in $129,000$320,000 in expense.

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The Company’s senior officers receive their annual bonus earned under the Company’s annual incentive plan in a mix of 50% cash and 50% stock, with the stock being subject to a three year vesting term. In the last three years, a total of 55,648 shares of restricted stock have been granted related to performance in the preceding fiscal years. Total compensation expense associated with thosedirector grants was $758,000 and is being recognized overclassified as "other operating expense" in the respective vesting periods. The Company recorded $66,000 and $55,000 in compensation expense during the three months ended September 30, 2017 and 2016, respectively, and $216,000 and $165,000 for the nine months ended September 30, 2017 and 2016, respectively, related to these grants and expects to record $66,000 in compensation expense during the last remaining quarterConsolidated Statements of 2017.

In the last three years, the Compensation Committee of the Company’s Board of Directors also granted 130,059 shares of stock to various employees of the Company to promote retention. The total value associated with these grants amounted to $2.8 million, and is being recorded as an expense over their three year vesting periods. For the three months ended September 30, 2017 and 2016, total compensation expense related to these grants was $138,000 and $92,000, respectively, and for the nine months ended September 30, 2017 and 2016, total compensation expense was $324,000 and $234,000, respectively. The Company expects to record $167,000 in compensation expense during the fourth quarter of 2017. All grants were issued based on the closing price of the Company’s common stock on the date of the grant.

Income.

The following table presents information regarding the activity for the first ninesix months of 20172020 related to the Company’s outstanding restricted stock:

  Long-Term Restricted Stock 
  Number of Units  Weighted-Average
Grant-Date Fair Value		 
       
Nonvested at January 1, 2017  91,790  $18.65 
         
Granted during the period  48,322   31.05 
Vested during the period  (2,282)  18.27 
Forfeited or expired during the period  (8,535)  18.34 
         
Nonvested at September 30, 2017  129,295  $23.31 

In years prior

  Long-Term Restricted Stock
 Number of Units 
Weighted-Average
Grant-Date Fair Value
Nonvested at January 1, 2020 159,366
 $36.79
Granted during the period 41,966
 28.58
Vested during the period (2,790) 36.26
Forfeited or expired during the period —
 —
     
Nonvested at June 30, 2020 198,542
 $35.06

Total unrecognized compensation expense as of June 30, 2020 amounted to 2009,$3,034,000 with a weighted-average remaining term of 1.9 years. For the nonvested awards that are outstanding at June 30, 2020, the Company expects to record $1,853,000 in compensation expense in the next twelve months, $1,017,000 of which is expected to be recorded in the remaining quarters of 2020.
Prior to 2010, stock options were the primary form of equity grantstock-based compensation utilized by the Company. TheAt June 30, 2020, there were 0 stock options had a term of ten years. In a change in control (as defined in the plans), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.

At September 30, 2017, there were 40,689 stock options outstanding related to the two First Bancorp plans, with exercise prices ranging from $14.35 to $16.81.

The following table presents information regarding the activity for the first nine months of 2017 related to the Company’s stock options outstanding:

  Options Outstanding 
  Number of
Shares		  Weighted-
Average
Exercise
Price		  Weighted-
Average
Contractual
Term (years)		  Aggregate
Intrinsic
Value		 
             
Balance at January 1, 2017  59,948  $17.18         
                 
   Granted  —   —         
   Exercised  (19,259)  19.44      $193,844 
   Forfeited  —   —         
   Expired  —   —         
                 
Outstanding at September 30, 2017  40,689  $16.11   0.9  $744,619 
                 
Exercisable at September 30, 2017  40,689  $16.11   0.9  $744,619 

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outstanding. During both the three and ninesix months ended SeptemberJune 30, 2017, the Company received $0 and $287,000, respectively, as a result of2020, there were 0 stock option exercises. During the three and ninesix months ended SeptemberJune 30, 2016, the Company received $0 and $375,000, respectively, as a result of2019, there were $129,000 in stock option exercises.

Note 65 – Earnings Per Common Share

Basic Earnings Per Common Share is calculated by dividing net income, availableless income allocated to common shareholdersparticipating securities, by the weighted average number of common shares outstanding during the period, excluding unvested shares of restricted stock. For the Company, participating securities include unvested shares of restricted stock. Diluted Earnings Per Common Share is computed by assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period. For the periods presented, the Company’s potentially dilutive common stock issuances related to unvested shares of restricted stock and stock option grants under the Company’s equity-based plans, and the Company’s Series C Preferred stock, which was exchanged for common stock at a one-for-one ratio on December 22, 2016 - see Note 19 of the Company’s 2016 Annual Report on Form 10-K for additional detail.

as well as contingently issuable shares.

In computing Diluted Earnings Per Common Share, adjustments are made to the computation of Basic Earnings Per Common shares, as follows. As it relates to unvested shares of restricted stock, the number of shares added to the denominator is equal to the total number of weighted average unvested shares less the number of shares assumed to be bought back by the Company in the open market at the average market price with the amount of proceeds being equal to the average deferred compensation for the reporting period.outstanding. As it relates to stock options, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is included in the calculation of dilutive securities. As it relates to the preferred stock that was outstanding during the periods in 2016, dividends on the preferred stock were added back to net income and the preferredcontingently issuable shares, assumed to be converted were included in the number of shares outstanding.

that are included in the calculation of dilutive securities is based on the weighted average number of shares that would have been issuable if the end of the reporting period were the end of the contingency period. If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common stock issuance is disregarded.




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Index

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 September 30, 
  2017  2016 

 

($ in thousands except per

share amounts)

 Income
(Numer-
ator)		  Shares
(Denom-
inator)		  Per Share
Amount		  Income
(Numer-
ator)		  Shares
(Denom-
inator)		  Per Share
Amount		 
                   
Basic EPS                        
Net income available to common shareholders $13,086   24,607,516  $0.53  $4,620   20,007,518  $0.23 
                         
Effect of Dilutive Securities  —   87,779       58   778,171     
                         
Diluted EPS per common share $13,086   24,695,295  $0.53  $4,678   20,785,689  $0.23 

  For the Nine Months September 30, 
  2017  2016 

 

($ in thousands except per

share amounts)

 Income
(Numer-
ator)		  Shares
(Denom-
inator)		  Per Share
Amount		  Income
(Numer-
ator)		  Shares
(Denom-
inator)		  Per Share
Amount		 
                   
Basic EPS                        
Net income available to common shareholders $31,795   23,728,262  $1.34  $18,979   19,904,226  $0.95 
                         
Effect of Dilutive Securities  —   98,749       175   792,899     
                         
Diluted EPS per common share $31,795   23,827,011  $1.33  $19,154   20,697,125  $0.93 

 Page 17

  For the Three Months Ended June 30,
  2020 2019
($ in thousands except per
share amounts)
 Per Share
Amount		 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
Basic EPS:            
Net income $16,352
     $23,859
    
Less: income allocated to participating securities (96)     (114)    
Basic EPS per common share $16,256
 28,799,828
 $0.56
 $23,745
 29,626,931
 $0.80
             
Diluted EPS:            
Net income $16,352
 28,799,828
   $23,859
 29,626,931
  
Effect of Dilutive Securities —
 169,900
   —
 170,010
  
Diluted EPS per common share $16,352
 28,969,728
 $0.56
 $23,859
 29,796,941
 $0.80
  For the Six Months Ended June 30,
  2020 2019
($ in thousands except per
share amounts)		 Income
(Numerator)		 Shares
(Denominator)		 Per Share
Amount		 Income
(Numerator)		 Shares
(Denominator)		 Per Share
Amount
Basic EPS:            
Net income $34,532
     $46,144
    
Less: income allocated to participating securities $(200)     $(227)    
Basic EPS per common share $34,332
 29,015,308
 $1.18
 $45,917
 29,607,074
 $1.55
             
Diluted EPS:            
Net income $34,532
 29,015,308
   $46,144
 29,607,074
  
Effect of Dilutive Securities —
 169,113
   —
 201,785
  
Diluted EPS per common share $34,532
 29,184,421
 $1.18
 $46,144
 29,808,859
 $1.55

There were 0 antidilutive options for any of the periods presented.



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For both the three and nine months ended September 30, 2017, there were no options that were antidilutive. For both the three and nine months ended September 30, 2016, there were 16,250 options that were antidilutive because the exercise price exceeded the average market price for the period, and thus are not included in the calculation to determine the effect of dilutive securities.


Note 76 – Securities


The book values and approximate fair values of investment securities at SeptemberJune 30, 20172020 and December 31, 20162019 are summarized as follows:

  September 30, 2017  December 31, 2016 
  Amortized  Fair  Unrealized  Amortized  Fair  Unrealized 
($ in thousands) Cost  Value  Gains  (Losses)  Cost  Value  Gains  (Losses) 
                         
Securities available for sale:                                
  Government-sponsored enterprise securities $9,000   8,992   1   (9)  17,497   17,490   —   (7)
  Mortgage-backed securities  155,684   155,535   713   (862)  151,001   148,065   155   (3,091)
  Corporate bonds  33,802   34,397   660   (65)  33,833   33,600   91   (324)
  Equity securities  —   —   —   —   83   174   96   (5)
Total available for sale $198,486   198,924   1,374   (936)  202,414   199,329   342   (3,427)
                                 
Securities held to maturity:                                
  Mortgage-backed securities $67,708   67,529   15   (194)  80,585   79,283   —   (1,302)
  State and local governments  55,448   57,349   1,908   (7)  49,128   50,912   1,815   (31)
Total held to maturity $123,156   124,878   1,923   (201)  129,713   130,195   1,815   (1,333)

($ in thousands)June 30, 2020 December 31, 2019
Amortized
Cost
 
Fair
Value
 Unrealized 
Amortized
Cost
 
Fair
Value
 Unrealized
  Gains (Losses)   Gains (Losses)
Securities available for sale:               
Government-sponsored enterprise securities$45,024
 45,394
 370
 —
 20,000
 20,009
 17
 (8)
Mortgage-backed securities670,861
 694,299
 23,913
 (475) 758,491
 767,285
 9,463
 (669)
Corporate bonds43,691
 45,139
 1,702
 (254) 33,711
 34,651
 1,025
 (85)
Total available for sale$759,576
 784,832
 25,985
 (729) 812,202
 821,945
 10,505
 (762)
                
Securities held to maturity:               
Mortgage-backed securities$36,387
 37,363
 976
 —
 41,423
 41,542
 125
 (6)
State and local governments58,537
 58,955
 418
 —
 26,509
 26,791
 285
 (3)
Total held to maturity$94,924
 96,318
 1,394
 —
 67,932
 68,333
 410
 (9)


All of the Company’s mortgage-backed securities were issued by government-sponsored corporations, except for one private mortgage-backed securitysecurities with a fair value of $490,000 at September$1.0 million and $1.1 million as of June 30, 2017.

2020 and December 31, 2019, respectively.


The following table presents information regarding securities with unrealized losses at SeptemberJune 30, 2017:

($ 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 $6,491   9   —   —   6,491   9 
  Mortgage-backed securities  110,437   555   24,250   501   134,687   1,056 
  Corporate bonds  —   —   935   65   935   65 
  State and local governments  —   —   813   7   813   7 
      Total temporarily impaired securities $116,928   564   25,998   573   142,926   1,137 

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$—
 —
 —
 —
 —
 —
Mortgage-backed securities67,514
 276
 6,772
 199
 74,286
 475
Corporate bonds13,866
 134
 880
 120
 14,746
 254
State and local governments—
 —
 —
 —
 —
 —
Total temporarily impaired securities$81,380
 410
 7,652
 319
 89,032
 729

The following table presents information regarding securities with unrealized losses at December 31, 2016:

($ 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 $7,990   7   —   —   7,990   7 
  Mortgage-backed securities  196,999   3,841   19,001   552   216,000   4,393 
  Corporate bonds  27,027   259   935   65   27,962   324 
  Equity securities  —   —   7   5   7   5 
  State and local governments  801   31   —   —   801   31 
      Total temporarily impaired securities $232,817   4,138   19,943   622   252,760   4,760 

2019:

($ 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$4,992
 8
 —
 —
 4,992
 8
Mortgage-backed securities77,274
 293
 50,851
 382
 128,125
 675
Corporate bonds—
 —
 915
 85
 915
 85
State and local governments—
 —
 934
 3
 934
 3
Total temporarily impaired securities$82,266
 301
 52,700
 470
 134,966
 771




Page 18

15
Index
Index

In the above tables, all of the non-equity securities that were in an unrealized loss position at SeptemberJune 30, 20172020 and December 31, 2016 are2019 were bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. The Company has evaluated the collectability of each of these bonds and has concluded that there is nowas 0 other-than-temporary 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.

The Company has also concluded

As of June 30, 2020 and December 31, 2019, the Company's security portfolio held 25 securities and 54 securities, respectively, that each of the equity securitieswere in an unrealized loss position at December 31, 2016 was in such a position due to temporary fluctuations in the market prices of the securities. The Company’s policy is to record an impairment charge for any of these equity securities that remains in an unrealized loss position for twelve consecutive months unless the amount is insignificant.

position.

The book values and approximate fair values of investment securities at SeptemberJune 30, 2017,2020, 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 
  Amortized  Fair  Amortized  Fair 
($ in thousands) Cost  Value  Cost  Value 
             
Debt securities                
Due within one year $—   —   1,872   1,883 
Due after one year but within five years  10,008   10,037   23,907   24,681 
Due after five years but within ten years  27,794   28,242   23,979   25,040 
Due after ten years  5,000   5,110   5,690   5,745 
Mortgage-backed securities  155,684   155,535   67,708   67,529 
Total securities $198,486   198,924   123,156   124,878 

 Securities Available for Sale Securities Held to Maturity
($ in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Securities       
Due within one year$—
 —
 1,501
 1,520
Due after one year but within five years28,691
 30,393
 4,856
 4,982
Due after five years but within ten years59,024
 59,260
 3,587
 3,669
Due after ten years1,000
 880
 48,593
 48,784
Mortgage-backed securities670,861
 694,299
 36,387
 37,363
Total securities$759,576
 784,832
 94,924
 96,318

At SeptemberJune 30, 20172020 and December 31, 2016,2019 investment securities with carrying values of $213,825,000$370,522,000 and $147,009,000,$260,826,000, respectively, were pledged as collateral for public deposits.

In the first nine monthssecond quarter of 2017,2020, the Company received proceeds from sales of securities of $45,601,000$219,697,000 and recorded losses of $235,000 from the sales. In the first nine months of 2016, the Company received proceeds from sales of securities of $8,000 and recorded $3,000$8,024,000 in gains from the sales.

The Company sold 0 securities in 2019.

Included in “other assets” in the Consolidated Balance Sheets are cost methodcost-method investments in Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank of Richmond (“FRB”) stock totaling $30,198,000$25,626,000 and $19,826,000$33,380,000 at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively. The FHLB stock had a cost and fair value of $18,507,000$8,003,000 and $12,588,000$15,789,000 at SeptemberJune 30, 20172020 and December 31, 2016,2019, 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 $11,691,000$17,623,000 and $7,238,000$17,591,000 at SeptemberJune 30, 20172020 and December 31, 2016,2019, 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 June 30, 2020 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.



Page 16
Index

Note 87 – Loans and Asset Quality Information

Prior to September 22, 2016,


The following is a summary of the Company’s banking subsidiary, First Bank, had certainmajor categories of total loans outstanding:
($ in thousands)June 30, 2020 December 31, 2019
 Amount Percentage Amount Percentage
All  loans:       
        
Commercial, financial, and agricultural$723,053
 15% $504,271
 11%
Real estate – construction, land development & other land loans648,590
 14% 530,866
 12%
Real estate – mortgage – residential (1-4 family) first mortgages1,076,411
 22% 1,105,014
 25%
Real estate – mortgage – home equity loans / lines of credit318,618
 7% 337,922
 8%
Real estate – mortgage – commercial and other1,959,078
 41% 1,917,280
 43%
Consumer loans51,161
 1% 56,172
 1%
Subtotal4,776,911
 100% 4,451,525
 100%
Unamortized net deferred loan costs (fees)(6,848)   1,941
  
Total loans$4,770,063
   $4,453,466
  


Included in the table above are PPP loans totaling $244.9 million that are in the line item "Commercial, financial and foreclosed real estate that were coveredagricultural." PPP loans are fully guaranteed by loss share agreements between the FDIC and First BankSBA. Included in unamortized net deferred loan fees are $8.8 million 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 will be recorded in the periods in which afforded First Bank significant loss protection - see Note 2 toprincipal amounts are forgiven in accordance with the financial statementsterms of the program.

Also included in the Company’s 2011 Annual Reporttable above are various non-PPP SBA loans, with additional information on Form 10-K for detailed information regarding FDIC-assisted purchase transactions. On September 22, 2016,these loans presented in the table below.

($ in thousands)June 30, 2020 December 31, 2019
Guaranteed portions of non-PPP SBA loans included in table above$31,630
 54,400
Unguaranteed portions of SBA Loans included in table above123,125
 110,782
Total non-PPP SBA loans included in the table above$154,755
 165,182
 

 

Sold portions of SBA with servicing retained - not included in tables above$347,376
 316,730

At June 30, 2020 and December 31, 2019, there was a remaining unaccreted discount on the retained portion of sold SBA loans amounting to $6.8 million and $7.1 million, respectively.
The Company terminated all of the loss share agreements with the FDIC, such that all future losses and recoveries on loans and foreclosed real estate associated with the failed bankshas several acquired through FDIC-assisted transactions will be borne solely by First Bank.

In the information presented below, the term “covered” is used to describe assets that were subject to FDIC loss share agreements, while the term “non-covered” refers to the Company’s legacy assets, which were not included in any type of loss share arrangement. As discussed previously, all loss share agreements were terminated during 2016 and thus the entire loan portfolio is now classifiedportfolios as non-covered. Certain prior period disclosures will continue to present the breakout of the loan portfolio between covered and non-covered.

 Page 19

Index

On March 3, 2017, the Company acquired Carolina Bank (see Note 4 for more information). As a result of thismerger and acquisition transactions. In these transactions, the Company recorded loans with aat their fair value of $497.5 million. Of those loans, $19.3 millionas required by applicable accounting guidance. Included in these loan portfolios were considered to be purchased credit impaired (“PCI”) loans, which are loans for which it is probable at acquisition date that all contractually required payments will not be collected. The remaining loans arewere considered to be purchased non-impaired loans and their related fair value discount or premium is being recognized as an adjustment to yield over the remaining life of each loan.

The following table relates

As of June 30, 2020 and December 31, 2019, there was a remaining accretable discount of $9.5 million and $11.1 million, respectively, related to Carolina Bank acquired PCI loans and summarizes the contractually required payments, which includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at the acquisition date.

($ in thousands)

 

 Carolina Bank Acquisition
on March 3, 2017		 
Contractually required payments $27,108 
Nonaccretable difference  (4,237)
Cash flows expected to be collected at acquisition  22,871 
Accretable yield  (3,617)
Fair value of PCI loans at acquisition date $19,254 

The following table relates to acquired Carolina Bank purchased non-impaired loans and providesloans. The discounts are amortized as yield adjustments over the contractually required payments, fair value, and estimate of contractual cash flows not expected to be collected at the acquisition date.

($ in thousands)

 

 Carolina Bank Acquisition
on March 3, 2017		 
Contractually required payments $569,980 
Fair value of acquired loans at acquisition date  478,515 
Contractual cash flows not expected to be collected  3,650 

 Page 20

Index

The following is a summaryrespective lives of the major categories of total loans, outstanding:

($ in thousands) September 30, 2017  December 31, 2016  September 30, 2016 
  Amount  Percentage  Amount  Percentage  Amount  Percentage 
All loans:                  
                   
Commercial, financial, and agricultural $376,940   11%  $261,813   9%  $248,877   9% 
Real estate – construction, land development & other land loans  450,746   13%   354,667   13%   327,863   12% 
Real estate – mortgage – residential (1-4 family) first mortgages  796,222   23%   750,679   28%   756,880   29% 
Real estate – mortgage – home equity loans / lines of credit  315,322   9%   239,105   9%   239,049   9% 
Real estate – mortgage – commercial and other  1,431,934   42%   1,049,460   39%   1,026,328   39% 
Installment loans to individuals  59,028   2%   55,037   2%   52,264   2% 
    Subtotal  3,430,192   100%   2,710,761   100%   2,651,261   100% 
Unamortized net deferred loan costs (fees)  (437)      (49)      198     
    Total loans $3,429,755      $2,710,712      $2,651,459     

so long as the loans perform.



Page 17
Index

The following table presents information regarding covered purchased non-impaired loans since January 1, 2016. The amounts include principal only and do not reflect accrued interest aschanges in the carrying value of the date of the acquisition or beyond. All balances of covered loans were transferred to non-covered as of the termination of the loss share agreements.

($ in thousands)

 

   
Carrying amount of nonimpaired covered loans at January 1, 2016 $101,252 
Principal repayments  (7,997)
Transfers to foreclosed real estate  (1,036)
Net loan recoveries  1,784 
Accretion of loan discount  1,908 
Transfer to non-covered loans due to expiration of loss-share agreement, April 1, 2016  (17,530)
Transfer to non-covered loans due to termination of loss-share agreements, September 22, 2016  (78,381)
Carrying amount of nonimpaired covered loans at September 30, 2016 $— 

PCI loans.

PCI loansFor the Six Months Ended June 30, 2020 For the Six Months Ended June 30, 2019
Balance at beginning of period$12,664
 17,393
Change due to payments received and accretion(2,939) (3,273)
Change due to loan charge-offs(10) (11)
Transfers to foreclosed real estate—
 —
Other27
 66
Balance at end of period$9,742
 14,175

The following table presents information regarding allchanges in the accretable yield for PCI loans since January 1, 2016.

($ in thousands)

 

Purchased Credit Impaired Loans

 Accretable
Yield		  Carrying
Amount		 
Balance at January 1, 2016 $—   1,970 
Change due to payments received  —   (1,386)
Change due to loan charge-off  —   (70)
Balance at December 31, 2016  —   514 
Additions due to acquisition of Carolina Bank  3,617   19,254 
Accretion  (1,326)  1,326 
Change due to payments received  —   (5,585)
Transfer to foreclosed real estate  —   (69)
Other  —   (406)
Balance at September 30, 2017 $2,291   15,034 

loans.

Accretable Yield for PCI loansFor the Six Months Ended June 30, 2020 For the Six Months Ended June 30, 2019
Balance at beginning of period$4,149
 4,750
Accretion(742) (811)
Reclassification from (to) nonaccretable difference366
 502
Other, net(510) (89)
Balance at end of period$3,263
 4,352

During the first ninesix months of 2017,2020, the Company received $848,000$414,000 in payments that exceeded the carrying amount of the related PCI loans, of which $775,000$341,000 was recognized as loan discount accretion income, and $73,000$59,000 was recorded as additional loan interest income.income, and $14,000 was recorded as a recovery. During the first ninesix months of 2016,2019, the Company received $1,108,000$290,000 in payments that exceeded the carrying amount of the related PCI loans, of which $780,000$263,000 was recognized as loan discount accretion income $295,000and $27,000 was recorded as additional loan interest income, and $33,000 was recorded as a recovery.

 Page 21

income.
Index

Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and still accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are summarized as follows:

 

ASSET QUALITY DATA($ in thousands)

 September 30,
2017		  December 31,
2016		  September 30,
2016		 
          
Nonperforming assets            
Nonaccrual loans $23,350   27,468   32,796 
Restructured loans - accruing  20,330   22,138   27,273 
Accruing loans > 90 days past due  —   —   — 
     Total nonperforming loans  43,680   49,606   60,069 
Foreclosed real estate  9,356   9,532   10,103 
Total nonperforming assets $53,036   59,138   70,172 
             
Purchased credit impaired loans not included above (1) $15,034   —   — 

follows.

($ in thousands)June 30,
2020
December 31,
2019
Nonperforming assets 

 
Nonaccrual loans$34,922

24,866
Restructured loans - accruing9,867

9,053
Accruing loans > 90 days past due—

—
Total nonperforming loans44,789

33,919
Foreclosed real estate2,987

3,873
Total nonperforming assets$47,776

37,792






Purchased credit impaired loans not included above (1)$9,742

12,664






(1) In the March 3, 2017 acquisition of Carolina Bank, Holdings, Inc.,and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3 million and $9.9 million, respectively, in purchased credit impairedPCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.4$0.8 million and $0.8 million in purchased credit impairedPCI loans at SeptemberJune 30, 20172020 and December 31, 2019, respectively, that arewere contractually past due 90 days or more.

At SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had $0.9$2.0 million and $1.7$0.6 million in residential mortgage loans in process of foreclosure, respectively.




Page 18
Index

The following is a summary of the Company’s nonaccrual loans by major categories.

($ in thousands) September 30,
2017		  December 31,
2016		 
Commercial, financial, and agricultural $996   1,842 
Real estate – construction, land development & other land loans  1,565   2,945 
Real estate – mortgage – residential (1-4 family) first mortgages  14,878   16,017 
Real estate – mortgage – home equity loans / lines of credit  2,250   2,355 
Real estate – mortgage – commercial and other  3,534   4,208 
Installment loans to individuals  127   101 
  Total $23,350   27,468 
         

 Page 22

($ in thousands)June 30,
2020		 December 31,
2019
Commercial, financial, and agricultural$8,239
 5,518
Real estate – construction, land development & other land loans1,038
 1,067
Real estate – mortgage – residential (1-4 family) first mortgages7,327
 7,552
Real estate – mortgage – home equity loans / lines of credit1,903
 1,797
Real estate – mortgage – commercial and other16,229
 8,820
Consumer loans186
 112
Total$34,922
 24,866

Index

The following table presents an analysis of the payment status of the Company’s loans as of SeptemberJune 30, 2017.

($ 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 $325   —   —   996   375,364   376,685 
Real estate – construction, land development & other land loans  432   —   —   1,565   447,873   449,870 
Real estate – mortgage – residential (1-4 family) first mortgages  4,911   472   —   14,878   772,651   792,912 
Real estate – mortgage – home equity loans / lines of credit  2,455   —   —   2,250   309,906   314,611 
Real estate – mortgage – commercial and other  1,094   469   —   3,534   1,417,012   1,422,109 
Installment loans to individuals  145   79   —   127   58,620   58,971 
Purchased credit impaired  611   —   449   —   13,974   15,034 
  Total $9,973   1,020   449   23,350   3,395,400   3,430,192 
Unamortized net deferred loan fees                      (437)
           Total loans                     $3,429,755 

2020. Due to the onset of the COVID-19 pandemic not occurring until late in the first quarter of 2020, as well as the Company's COVID-19 deferral program and the SBA's relief program, whereby the SBA is making six months of principal and interest payments on most SBA loans held in the Company's portfolio, the past due amounts below were not negatively impacted by the pandemic and were likely favorably impacted.

($ 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$1,133
 95
 —
 8,239
 713,401
 722,868
Real estate – construction, land development & other land loans133
 751
 —
 1,038
 643,790
 645,712
Real estate – mortgage – residential (1-4 family) first mortgages624
 1,279
 —
 7,327
 1,061,983
 1,071,213
Real estate – mortgage – home equity loans / lines of credit593
 203
 —
 1,903
 315,824
 318,523
Real estate – mortgage – commercial and other1,055
 278
 —
 16,229
 1,940,194
 1,957,756
Consumer loans136
 35
 —
 186
 50,740
 51,097
Purchased credit impaired11
 13
 800
 —
 8,918
 9,742
Total$3,685
 2,654
 800
 34,922
 4,734,850
 4,776,911
Unamortized net deferred loan costs (fees)          (6,848)
Total loans          $4,770,063


Page 19
Index

The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2016.

($ 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 $92   —   —   1,842   259,879   261,813 
Real estate – construction, land development & other land loans  473   168   —   2,945   351,081   354,667 
Real estate – mortgage – residential (1-4 family) first mortgages  4,487   443   —   16,017   729,732   750,679 
Real estate – mortgage – home equity loans / lines of credit  1,751   178   —   2,355   234,821   239,105 
Real estate – mortgage – commercial and other  1,482   449   —   4,208   1,042,807   1,048,946 
Installment loans to individuals  186   193   —��  101   54,557   55,037 
Purchased credit impaired  —   —   —   —   514   514 
  Total $8,471   1,431   —   27,468   2,673,391   2,710,761 
Unamortized net deferred loan fees                      (49)
           Total loans                     $2,710,712 

2019.

($ 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$752
 —
 —
 5,518
 497,788
 504,058
Real estate – construction, land development & other land loans37
 152
 —
 1,067
 529,444
 530,700
Real estate – mortgage – residential (1-4 family) first mortgages10,858
 5,056
 —
 7,552
 1,076,205
 1,099,671
Real estate – mortgage – home equity loans / lines of credit770
 300
 —
 1,797
 334,832
 337,699
Real estate – mortgage – commercial and other4,257
 —
 —
 8,820
 1,897,573
 1,910,650
Consumer loans344
 137
 —
 112
 55,490
 56,083
Purchased credit impaired218
 38
 762
 —
 11,646
 12,664
Total$17,236
 5,683
 762
 24,866
 4,402,978
 4,451,525
Unamortized net deferred loan costs          1,941
Total loans          $4,453,466



Page 23

20
Index
Index

The following table presents the activity in the allowance for loan losses for all loans for the three and ninesix months ended SeptemberJune 30, 2017.

 

($ 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		  Installment
Loans to
Individuals		  Unallo
-cated		  Total 
                
As of and for the three months ended September 30, 2017
Beginning balance $3,430   2,676   7,085   2,057   6,153   1,074   1,550   24,025 
Charge-offs  (131)  (43)  (499)  (213)  (159)  (162)  —   (1,207)
Recoveries  330   809   170   120   275   71   —   1,775 
Provisions  (314)  (973)  (281)  (49)  (271)  45   1,843   — 
Ending balance $3,315   2,469   6,475   1,915   5,998   1,028   3,393   24,593 
                                 
As of and for the nine months ended September 30, 2017
                                 
Beginning balance $3,829   2,691   7,704   2,420   5,098   1,145   894   23,781 
Charge-offs  (1,335)  (312)  (1,746)  (791)  (573)  (521)  —   (5,278)
Recoveries  848   2,280   806   250   973   210   —   5,367 
Provisions  (27)  (2,190)  (289)  36   500   194   2,499   723 
Ending balance $3,315   2,469   6,475   1,915   5,998   1,028   3,393   24,593 
                                 
Ending balances as of September 30, 2017:  Allowance for loan losses
Individually evaluated for impairment $144   23   929   —   487   —   —   1,583 
Collectively evaluated for impairment $3,171   2,446   5,546   1,915   5,511   1,028   3,393   23,010 
Purchased credit impaired $—   —   —   —   —   —   —   — 
                                 
Loans receivable as of September 30, 2017:
Ending balance – total $376,940   450,746   796,222   315,322   1,431,934   59,028   —   3,430,192 
Unamortized net deferred loan fees                              (437)
Total loans                             $3,429,755 
                                 
Ending balances as of September 30, 2017: Loans
Individually evaluated for impairment $490   3,072   14,987   52   9,443   —   —   28,044 
Collectively evaluated for impairment $376,195   446,798   777,925   314,559   1,412,666   58,971   —   3,387,114 
Purchased credit impaired $255   876   3,310   711   9,825   57   —   15,034 

2020.

($ 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 June 30, 2020
                
Beginning balance$4,204
 2,599
 4,373
 1,394
 10,913
 1,015
 —
 24,498
Charge-offs(1,471) (5) (279) (313) (282) (110) —
 (2,460)
Recoveries260
 353
 224
 83
 55
 31
 —
 1,006
Provisions2,996
 2,730
 4,021
 1,195
 8,069
 287
 —
 19,298
Ending balance$5,989
 5,677
 8,339
 2,359
 18,755
 1,223
 —
 42,342
                
As of and for the six months ended June 30, 2020
                
Beginning balance$4,553
 1,976
 3,832
 1,127
 8,938
 972
 —
 21,398
Charge-offs(3,931) (45) (474) (381) (545) (397) —
 (5,773)
Recoveries477
 643
 315
 166
 102
 126
 —
 1,829
Provisions4,890
 3,103
 4,666
 1,447
 10,260
 522
 —
 24,888
Ending balance$5,989
 5,677
 8,339
 2,359
 18,755
 1,223
 —
 42,342
                
Ending balance as of June 30, 2020: Allowance for loan losses
Individually evaluated for impairment$830
 67
 817
 —
 1,052
 —
 —
 2,766
Collectively evaluated for impairment$5,117
 5,610
 7,412
 2,359
 17,699
 1,215
 —
 39,412
Purchased credit impaired$42
 —
 110
 —
 4
 8
 —
 164
                
Loans receivable as of June 30, 2020
Ending balance – total$723,053
 648,590
 1,076,411
 318,618
 1,959,078
 51,161
 —
 4,776,911
Unamortized net deferred loan fees              (6,848)
Total loans              $4,770,063
                
Ending balances as of June 30, 2020: Loans
Individually evaluated for impairment$6,736
 965
 9,743
 325
 17,697
 —
 —
 35,466
Collectively evaluated for impairment$716,132
 644,747
 1,061,470
 318,198
 1,940,059
 51,097
 —
 4,731,703
Purchased credit impaired$185
 2,878
 5,198
 95
 1,322
 64
 —
 9,742


Page 24

21
Index
Index

The following table presents the activity in the allowance for loan losses for the year ended December 31, 2016. There were no covered loans at December 31, 2016 and all reserves associated with previously covered loans have been transferred to the non-covered allowance.

 

($ 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		  Installment
Loans to
Individuals		  Unallo
-cated		  Covered  Total 
                   
As of and for the year ended December 31, 2016
Beginning balance $4,742   3,754   7,832   2,893   5,816   1,051   696   1,799   28,583 
Charge-offs  (2,271)  (1,101)  (3,815)  (969)  (1,005)  (1,008)  (1)  (244)  (10,414)
Recoveries  805   1,422   1,060   250   836   354   —   1,958   6,685 
Transfer from covered status  56   65   839   293   127   —   1   (1,381)  — 
Removed due to branch loan sale  (263)  (39)  (347)  (110)  (228)  (63)  —   —   (1,050)
Provisions  760   (1,410)  2,135   63   (448)  811   198   (2,132)  (23)
Ending balance $3,829   2,691   7,704   2,420   5,098   1,145   894   —   23,781 
                                     
Ending balances as of December 31, 2016:  Allowance for loan losses
Individually evaluated for impairment $7   184   1,339   5   105   —   —   —   1,640 
Collectively evaluated for impairment $3,822   2,507   6,365   2,415   4,993   1,145   894   —   22,141 
Purchased credit impaired $—   —   —   —   —   —   —   —   — 
                                     
Loans receivable as of December 31, 2016:
Ending balance – total $261,813   354,667   750,679   239,105   1,049,460   55,037   —   —   2,710,761 
Unamortized net deferred loan fees                                  (49)
Total loans                                 $2,710,712 
                                     
Ending balances as of December 31, 2016: Loans
Individually evaluated for impairment $644   4,001   20,807   280   6,494   —   —   —   32,226 
Collectively evaluated for impairment $261,169   350,666   729,872   238,825   1,042,452   55,037   —   —   2,678,021 
Purchased credit impaired $—   —   —   —   514   —   —   —   514 

2019.

($ 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, 2019
                
Beginning balance$2,889
 2,243
 5,197
 1,665
 7,983
 952
 110
 21,039
Charge-offs(2,473) (553) (657) (307) (1,556) (757) —
 (6,303)
Recoveries980
 1,275
 705
 629
 575
 235
 —
 4,399
Provisions3,157
 (989) (1,413) (860) 1,936
 542
 (110) 2,263
Ending balance$4,553
 1,976
 3,832
 1,127
 8,938
 972
 —
 21,398
                
Ending balances as of December 31, 2019: Allowance for loan losses
Individually evaluated for impairment$1,791
 50
 750
 —
 983
 —
 —
 3,574
Collectively evaluated for impairment$2,720
 1,926
 2,976
 1,127
 7,931
 961
 —
 17,641
Purchased credit impaired$42
 —
 106
 —
 24
 11
 —
 183
                
Loans receivable as of December 31, 2019:
Ending balance – total$504,271
 530,866
 1,105,014
 337,922
 1,917,280
 56,172
 —
 4,451,525
Unamortized net deferred loan costs              1,941
Total loans              $4,453,466
                
Ending balances as of December 31, 2019: Loans
Individually evaluated for impairment$4,957
 796
 9,546
 333
 9,570
 —
 —
 25,202
Collectively evaluated for impairment$499,101
 529,904
 1,090,125
 337,366
 1,901,080
 56,083
 —
 4,413,659
Purchased credit impaired$213
 166
 5,343
 223
 6,630
 89
 —
 12,664


Page 25

22
Index
Index

The following table presents the activity in the allowance for loan losses for all loans for the three and ninesix months ended SeptemberJune 30, 2016. There were no covered loans at September 30, 2016 and all reserves associated with previously covered loans have been transferred to the non-covered allowance.

 

($ 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		  Installment
Loans to
Individuals		  Unallo
-cated		  Covered  Total 
                   
As of and for the three months ended September 30, 2016
Beginning balance $4,282   2,899   7,860   2,285   5,571   1,480   572   1,074   26,023 
Charge-offs  (495)  (161)  (692)  (196)  (288)  (223)  —   —   (2,055)
Recoveries  252   588   377   69   317   55   —   —   1,658 
Transfer from covered status  —   3   788   281   1   —   1   (1,074)  — 
Removed due to branch loan sale  (263)  (39)  (347)  (110)  (228)  (63)  (1)  —   (1,051)
Provisions  755   (612)  (492)  54   (165)  (38)  498   —   — 
Ending balance $4,531   2,678   7,494   2,383   5,208   1,211   1,070   —   24,575 
                                     
As of and for the nine months ended September 30, 2016
Beginning balance $4,742   3,754   7,832   2,893   5,816   1,051   696   1,799   28,583 
Charge-offs  (1,229)  (638)  (3,383)  (930)  (850)  (741)  —   (244)  (8,015)
Recoveries  554   799   672   188   602   308   —   1,958   5,081 
Transfer from covered status  56   65   839   293   127   —   1   (1,381)  — 
Removed due to branch loan sale  (263)  (39)  (347)  (110)  (228)  (63)  (1)  —   (1,051)
Provisions  671   (1,263)  1,881   49   (259)  656   374   (2,132)  (23)
Ending balance $4,531   2,678   7,494   2,383   5,208   1,211   1,070   —   24,575 
                                     
Ending balances as of September 30, 2016:  Allowance for loan losses
Individually evaluated for impairment $9   169   1,306   5   444   —   —   —   1,933 
Collectively evaluated for impairment $4,522   2,509   6,188   2,372��  4,764   1,211   1,070   —   22,636 
Loans acquired with deteriorated credit quality $—   —   —   6   —   —   —   —   6 
                                     
Loans receivable as of September 30, 2016:
Ending balance – total $248,877   327,863   756,880   239,049   1,026,328   52,264   —   —   2,651,261 
Unamortized net deferred loan costs                                  198 
Total loans                                 $2,651,459 
                                     
Ending balances as of September 30, 2016: Loans
Individually evaluated for impairment $1,732   4,181   21,611   310   11,291   1   —   —   39,126 
Collectively evaluated for impairment $247,145   323,682   735,062   238,733   1,014,506   52,263   —   —   2,611,391 
Loans acquired with deteriorated credit quality $—   —   207   6   531   —   —   —   744 

2019.

($ 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 June 30, 2019
                
Beginning balance$3,709
 2,284
 4,510
 1,374
 8,120
 1,006
 92
 21,095
Charge-offs(690) (29) (155) (66) (2) (155) —
 (1,097)
Recoveries191
 202
 222
 327
 103
 54
 —
 1,099
Provisions8
 (642) (454) (364) 631
 306
 207
 (308)
Ending balance$3,218

1,815

4,123

1,271

8,852

1,211

299

20,789
                
As of and for the six months ended June 30, 2019
                
Beginning balance$2,889
 2,243
 5,197
 1,665
 7,983
 952
 110
 21,039
Charge-offs(936) (293) (185) (146) (838) (436) —
 (2,834)
Recoveries605
 489
 382
 455
 374
 87
 —
 2,392
Provisions660
 (624) (1,271) (703) 1,333
 608
 189
 192
Ending balance$3,218
 1,815
 4,123
 1,271
 8,852
 1,211
 299
 20,789
                
Ending balance as of June 30, 2019: Allowance for loan losses
Individually evaluated for impairment$435
 44
 770
 —
 783
 —
 —
 2,032
Collectively evaluated for impairment$2,776
 1,771
 3,289
 1,271
 8,013
 1,195
 299
 18,614
Purchased credit impaired$7
 —
 64
 —
 56
 16
 —
 143
                
Loans receivable as of June 30, 2019
Ending balance – total$471,188
 456,781
 1,090,601
 349,355
 1,900,188
 69,600
 —
 4,337,713
Unamortized net deferred loan costs              1,784
Total loans              $4,339,497
                
Ending balances as of June 30, 2019: Loans
Individually evaluated for impairment$992
 1,020
 10,334
 21
 7,451
 —
 —
 19,818
Collectively evaluated for impairment$469,932
 455,589
 1,074,325
 349,124
 1,885,294
 69,456
 —
 4,303,720
Purchased credit impaired$264
 172
 5,942
 210
 7,443
 144
 —
 14,175




Page 26

23
Index
Index

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of SeptemberJune 30, 2017.

 

($ in thousands)

 Recorded
Investment		  Unpaid
Principal
Balance		  Related
Allowance		  Average
Recorded
Investment		 
Impaired loans with no related allowance recorded:                
                 
Commercial, financial, and agricultural $185   425   —   299 
Real estate – mortgage – construction, land development & other land loans  2,838   4,023   —   2,871 
Real estate – mortgage – residential (1-4 family) first mortgages  6,461   7,029   —   7,533 
Real estate – mortgage –home equity loans / lines of credit  52   79   —   70 
Real estate – mortgage –commercial and other  2,158   2,394   —   3,162 
Installment loans to individuals  —   —   —   1 
Total impaired loans with no allowance $11,694   13,950   —   13,936 
                 
                 
Impaired loans with an allowance recorded:                
                 
Commercial, financial, and agricultural $305   305   144   169 
Real estate – mortgage – construction, land development & other land loans  234   243   23   570 
Real estate – mortgage – residential (1-4 family) first mortgages  8,526   8,721   929   10,198 
Real estate – mortgage –home equity loans / lines of credit  —   —   —   83 
Real estate – mortgage –commercial and other  7,285   7,392   487   5,354 
Installment loans to individuals  —   —   —   — 
Total impaired loans with allowance $16,350   16,661   1,583   16,374 

2020.

($ in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
Impaired loans with no related allowance recorded:       
        
Commercial, financial, and agricultural$13
 17
 —
 16
Real estate – mortgage – construction, land development & other land loans331
 500
 —
 223
Real estate – mortgage – residential (1-4 family) first mortgages4,584
 4,874
 —
 4,595
Real estate – mortgage –home equity loans / lines of credit325
 357
 —
 329
Real estate – mortgage –commercial and other14,293
 16,311
 —
 7,469
Consumer loans—
 —
 —
 —
Total impaired loans with no allowance$19,546
 22,059
 —
 12,632
        
Impaired loans with an allowance recorded:       
        
Commercial, financial, and agricultural$6,723
 7,533
 830
 4,898
Real estate – mortgage – construction, land development & other land loans634
 643
 67
 616
Real estate – mortgage – residential (1-4 family) first mortgages5,159
 5,383
 817
 5,140
Real estate – mortgage –home equity loans / lines of credit—
 —
 —
 34
Real estate – mortgage –commercial and other3,404
 3,427
 1,052
 5,574
Consumer loans—
 —
 —
 —
Total impaired loans with allowance$15,920
 16,986
 2,766
 16,262
Interest income recorded on impaired loans recognized during the ninesix months ended SeptemberJune 30, 20172020 was insignificant.



Page 24
Index

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, 2016.

 

($ in thousands)

 Recorded
Investment		  Unpaid
Principal
Balance		  Related
Allowance		  Average
Recorded
Investment		 
Impaired loans with no related allowance recorded:         
             
Commercial, financial, and agricultural $593   706   —   816 
Real estate – mortgage – construction, land development & other land loans  3,221   4,558   —   3,641 
Real estate – mortgage – residential (1-4 family) first mortgages  10,035   12,220   —   11,008 
Real estate – mortgage –home equity loans / lines of credit  114   146   —   139 
Real estate – mortgage –commercial and other  4,598   5,112   —   8,165 
Installment loans to individuals  —   2   —   1 
Total impaired loans with no allowance $18,561   22,744   —   23,770 
                 
                 
Impaired loans with an allowance recorded:                
                 
Commercial, financial, and agricultural $51   51   7   202 
Real estate – mortgage – construction, land development & other land loans  780   798   184   844 
Real estate – mortgage – residential (1-4 family) first mortgages  10,772   11,007   1,339   13,314 
Real estate – mortgage –home equity loans / lines of credit  166   166   5   324 
Real estate – mortgage –commercial and other  1,896   1,929   105   4,912 
Installment loans to individuals  —   —   —   49 
Total impaired loans with allowance $13,665   13,951   1,640   19,645 

2019.

($ in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
Impaired loans with no related allowance recorded:       
        
Commercial, financial, and agricultural$16
 19
 —
 74
Real estate – mortgage – construction, land development & other land loans221
 263
 —
 366
Real estate – mortgage – residential (1-4 family) first mortgages4,300
 4,539
 —
 4,415
Real estate – mortgage –home equity loans / lines of credit333
 357
 —
 147
Real estate – mortgage –commercial and other2,643
 3,328
 —
 3,240
Consumer loans—
 —
 —
 —
Total impaired loans with no allowance$7,513
 8,506
 —
 8,242
        
Impaired loans with an allowance recorded:       
        
Commercial, financial, and agricultural$4,941
 4,995
 1,791
 1,681
Real estate – mortgage – construction, land development & other land loans575
 575
 50
 586
Real estate – mortgage – residential (1-4 family) first mortgages5,246
 5,469
 750
 6,206
Real estate – mortgage –home equity loans / lines of credit—
 —
 —
 55
Real estate – mortgage –commercial and other6,927
 7,914
 983
 5,136
Consumer loans—
 —
 —
 —
Total impaired loans with allowance$17,689
 18,953
 3,574
 13,664

Interest income recorded on impaired loans recognized during the year ended December 31, 20162019 was insignificant.

 Page 27

$1.3 million, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on accruing restructured loans.
Index

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.



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Index

The following describes the Company’s internal risk grades in ascending order of likelihood of loss:

 Risk GradeDescription
Pass: 
 1Loans with virtually no risk, including cash secured loans.
 2Loans 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.
 3Loans 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.
 4Loans 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.  
 5Loans 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: 
 6Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank.
Classified: 
 7An 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.
 8Loans 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.
 9Loans 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 28

Index

The following table presents the Company’s recorded investment in loans by credit quality indicators as of SeptemberJune 30, 2017.

($ in thousands)   
  Pass  Special
Mention Loans		  Classified
Accruing Loans		  Classified
Nonaccrual
Loans		  Total 
                
Commercial, financial, and agricultural $365,505   8,974   1,210   996   376,685 
Real estate – construction, land development & other land loans  435,960   6,009   6,336   1,565   449,870 
Real estate – mortgage – residential (1-4 family) first mortgages  729,341   15,298   33,395   14,878   792,912 
Real estate – mortgage – home equity loans / lines of credit  304,114   1,262   6,985   2,250   314,611 
Real estate – mortgage – commercial and other  1,384,255   23,736   10,584   3,534   1,422,109 
Installment loans to individuals  58,444   224   176   127   58,971 
Purchased credit impaired  6,748   5,002   3,284   —   15,034 
  Total $3,284,367   60,505   61,970   23,350   3,430,192 
Unamortized net deferred loan fees                  (437)
            Total loans                  3,429,755 

2020.

($ in thousands)Pass 
Special
Mention Loans
 
Classified
Accruing Loans
 
Classified
Nonaccrual
Loans
 Total
Commercial, financial, and agricultural$708,073
 5,910
 646
 8,239
 722,868
Real estate – construction, land development & other land loans638,421
 4,722
 1,531
 1,038
 645,712
Real estate – mortgage – residential (1-4 family) first mortgages1,042,495
 8,132
 13,259
 7,327
 1,071,213
Real estate – mortgage – home equity loans / lines of credit309,614
 1,183
 5,823
 1,903
 318,523
Real estate – mortgage – commercial and other1,915,982
 21,647
 3,898
 16,229
 1,957,756
Consumer loans50,504
 209
 198
 186
 51,097
Purchased credit impaired7,933
 86
 1,723
 —
 9,742
Total$4,673,022
 41,889
 27,078
 34,922
 4,776,911
Unamortized net deferred loan costs        (6,848)
Total loans        4,770,063


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Index

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2016.

($ in thousands)   
  Pass  Special
Mention Loans		  Classified
Accruing Loans		  Classified
Nonaccrual
Loans		  Total 
                
Commercial, financial, and agricultural $247,451   10,560   1,960   1,842   261,813 
Real estate – construction, land development & other land loans  335,068   8,762   7,892   2,945   354,667 
Real estate – mortgage – residential (1-4 family) first mortgages  678,878   16,998   38,786   16,017   750,679 
Real estate – mortgage – home equity loans / lines of credit  226,159   1,436   9,155   2,355   239,105 
Real estate – mortgage – commercial and other  1,005,687   26,032   13,019   4,208   1,048,946 
Installment loans to individuals  54,421   256   259   101   55,037 
Purchased credit impaired  —   514   —   —   514 
  Total $2,547,664   64,558   71,071   27,468   2,710,761 
Unamortized net deferred loan fees                  (49)
            Total loans                  2,710,712 

2019.

($ in thousands)Pass 
Special
Mention Loans
 
Classified
Accruing Loans
 
Classified
Nonaccrual
Loans
 Total
Commercial, financial, and agricultural$486,081
 7,998
 4,461
 5,518
 504,058
Real estate – construction, land development & other land loans522,767
 4,075
 2,791
 1,067
 530,700
Real estate – mortgage – residential (1-4 family) first mortgages1,063,735
 13,187
 15,197
 7,552
 1,099,671
Real estate – mortgage – home equity loans / lines of credit328,903
 1,258
 5,741
 1,797
 337,699
Real estate – mortgage – commercial and other1,873,594
 20,800
 7,436
 8,820
 1,910,650
Consumer loans55,203
 413
 355
 112
 56,083
Purchased credit impaired8,098
 2,590
 1,976
 —
 12,664
Total$4,338,381
 50,321
 37,957
 24,866
 4,451,525
Unamortized net deferred loan costs        1,941
Total loans        4,453,466

Troubled Debt Restructurings

The restructuring of a loan is considered a “troubled debt restructuring” 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, restructuring amortization schedulesextension of terms and other actions intended to minimize potential losses.

As previously noted, under the CARES Act and banking regulator guidance, which the Company has applied, modifications deemed to be COVID-19-related are not considered a troubled debt restructuring if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. Under these terms, as of June 30, 2020, the Company had processed payment deferrals for 1,483 loans with an aggregate loan balance of $774 million. These deferrals were generally no more than 90 days in duration and are not included in the troubled debt restructurings disclosed in this report. As the initial 90 day deferrals expire, the Company is approving second deferral requests based on the circumstances of each borrower. Thus a portion of the deferrals at June 30, 2020 represent grants of second deferrals for those borrowers whose initial deferrals were on or prior to April 1, 2020. The Company continues to accrue interest on these loans during the deferral period.

The vast majority of the Company’s troubled debt restructurings modified during the periods ended June 30, 2020 and June 30, 2019 related to interest rate reductions combined with restructured amortization schedules.extension of terms. The Company does not generally grant principal forgiveness.

All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are nonaccrual are reported within the nonaccrual loan totals presented previously.



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27
Index
Index

The following table presents information related to loans modified in a troubled debt restructuring during the three months ended SeptemberJune 30, 20172020 and 2016.

($ in thousands) For three months ended
September 30, 2017		  For the three months ended
September 30, 2016		 
  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  —  $—  $—   1  $1,071  $1,071 
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  —   —   —   —   —   — 
Installment loans to individuals  —   —   —   —   —   — 
                         
TDRs – Nonaccrual                        
Commercial, financial, and agricultural  —   —   —   —   —   — 
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  —   —   —   —   —   — 
Installment loans to individuals  —   —   —   —   —   — 
Total TDRs arising during period  —  $—  $—   1  $1,071  $1,071 
                         
Total covered TDRs arising during period included above  —  $—  $—   —  $—  $— 

2019.

($ in thousands)For the three months ended
June 30, 2020		 For the three months ended
June 30, 2019
 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—
 $—
 $—
 1
 $143
 $143
Real estate – construction, land development & other land loans1
 67
 67
 —
 —
 —
Real estate – mortgage – residential (1-4 family) first mortgages2
 75
 78
 1
 136
 136
Real estate – mortgage – home equity loans / lines of credit—
 —
 —
 —
 —
 —
Real estate – mortgage – commercial and other—
 —
 —
 1
 965
 965
Consumer loans—
 —
 —
 —
 —
 —
TDRs – Nonaccrual        

  
Commercial, financial, and agricultural—
 —
 —
 —
 —
 —
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 period3
 $142
 $145
 3
 $1,244
 $1,244





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28
Index
Index

The following table presents information related to loans modified in a troubled debt restructuring during the ninesix months ended SeptemberJune 30, 20172020 and 2016.

($ in thousands) For nine months ended
September 30, 2017		  For the nine months ended
September 30, 2016		 
  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  —  $—  $—   1  $1,071  $1,071 
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  5   3,550   3,525   —   —   — 
Installment loans to individuals  —   —   —   —   —   — 
                         
TDRs – Nonaccrual                        
Commercial, financial, and agricultural  —   —   —   —   —   — 
Real estate – construction, land development & other land loans  1   32   32   —   —   — 
Real estate – mortgage – residential (1-4 family) first mortgages  1   215   215   —   —   — 
Real estate – mortgage – home equity loans / lines of credit  —   —   —   —   —   — 
Real estate – mortgage – commercial and other  —   —   —   —   —   — 
Installment loans to individuals  —   —   —   —   —   — 
Total TDRs arising during period  7  $3,797  $3,772   1  $1,071  $1,071 
                         
Total covered TDRs arising during period included above  —  $—  $—   —  $—  $— 

2019.

($ in thousands)For the six months ended
June 30, 2020		 For the six months ended
June 30, 2019
 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 agricultural2
 $143
 $143
 1
 $143
 $143
Real estate – construction, land development & other land loans1
 67
 67
 —
 —
 —
Real estate – mortgage – residential (1-4 family) first mortgages2
 75
 78
 3
 390
 394
Real estate – mortgage – home equity loans / lines of credit—
 —
 —
 —
 —
 —
Real estate – mortgage – commercial and other—
 —
 —
 1
 965
 965
Consumer loans—
 —
 —
 —
 —
 —
TDRs – Nonaccrual           
Commercial, financial, and agricultural—
 —
 —
 —
 —
 —
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 period5
 $285
 $288
 5
 $1,498
 $1,502

Accruing restructured loans that were modified in the previous 12twelve months and that defaulted during the three months ended SeptemberJune 30, 20172020 and 20162019 are presented in the table below. 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.

($ in thousands)

For the three months ended

September 30, 2017

For the three months ended

September 30, 2016

Number of
Contracts

Recorded
Investment

Number of
Contracts


Recorded Investment

Accruing TDRs that subsequently defaulted
Real estate – mortgage – residential (1-4 family) first mortgages—$——$—
Total accruing TDRs that subsequently defaulted—$——$—
Total covered accruing TDRs that subsequently defaulted included above—$——$—

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Index
($ in thousands)For the Three Months Ended June 30, 2020 For the Three Months Ended June 30, 2019
 Number of
Contracts		 Recorded
Investment		 Number of
Contracts		 Recorded
Investment
Accruing TDRs that subsequently defaulted       
Real estate – mortgage – residential (1-4 family first mortgages)—
 $—
 1
 $93
Real estate – mortgage – commercial and other1
 274
 —
 —
Total accruing TDRs that subsequently defaulted1
 $274
 1
 $93



Accruing restructured loans that were modified in the previous 12twelve months and that defaulted during the ninesix months ended SeptemberJune 30, 20172020 and 20162019 are presented in the table below.

($ in thousands) For the nine months ended
September 30, 2017		  For the nine months ended
September 30, 2016		 
  Number of
Contracts		  Recorded
Investment		  Number of
Contracts		  Recorded
Investment		 
             
Accruing TDRs that subsequently defaulted                
Commercial, financial, and agricultural  —  $—   1  $44 
Real estate – mortgage – residential (1-4 family) first mortgages  2   880   —   — 
Real estate – mortgage – commercial and other  —   —   1   21 
Total accruing TDRs that subsequently defaulted  2  $880   2  $65 
Total covered accruing TDRs that subsequently defaulted included above  —  $—   1  $44 

Note 9 – Deferred Loan (Fees) Costs

The amount of loans shown on the Consolidated Balance Sheets includes net deferred loan (fees) costs of approximately ($437,000), ($49,000), and $198,000 at September 30, 2017, December 31, 2016, and September 30, 2016, respectively.

Note 10 – FDIC Indemnification Asset

The Company terminated all loss share agreements with the FDIC effective September 22, 2016. As a result, the remaining balance in the FDIC Indemnification Asset, which represented the estimated amount to be received from the FDIC under the loss share agreements, was written off as indemnification asset expense as of the termination date.

The following presents a rollforward of the FDIC indemnification asset from January 1, 2016 through the date of termination.

($ in thousands)   
Balance at January 1, 2016 $8,439 
Decrease related to favorable changes in loss estimates  (2,246)
Increase related to reimbursable expenses  205 
Cash paid (received)  1,554 
Related to accretion of loan discount  (2,005)
Other  (236)
Write off of asset balance upon termination of FDIC loss share agreements effective September 22, 2016  (5,711)
Balance at September 30, 2016 $— 


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Index

($ in thousands)For the Six Months Ended June 30, 2020 For the Six Months Ended June 30, 2019
 Number of
Contracts		 Recorded
Investment		 Number of
Contracts		 Recorded
Investment
Accruing TDRs that subsequently defaulted       
Real estate – mortgage – residential (1-4 family first mortgages)—
 $—
 1
 $93
Real estate – mortgage – commercial and other1
 274
 —
 —
Total accruing TDRs that subsequently defaulted1
 $274
 1
 $93


Note 118 – Goodwill and Other Intangible Assets

The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of SeptemberJune 30, 2017,2020 and December 31, 2016, and September 30, 20162019, and the carrying amount of unamortized intangible assets as of those same dates.

  September 30, 2017  December 31, 2016  September 30, 2016 
($ in thousands) Gross Carrying
Amount		  Accumulated
Amortization		  Gross Carrying
Amount		  Accumulated
Amortization		  Gross Carrying
Amount		  Accumulated
Amortization		 
Amortizable intangible assets:                        
   Customer lists $6,013   953   2,369   746   2,369   668 
   Core deposit premiums  18,520   10,084   9,730   8,143   9,730   7,902 
   Other  1,303   471   1,032   224   1,032   166 
        Total $25,836   11,508   13,131   9,113   13,131   8,736 
                         
SBA servicing asset $1,306       415       208     
                         
Unamortizable intangible assets:                        
   Goodwill $144,667       75,042       75,392     

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Index
  June 30, 2020 December 31, 2019
($ in thousands) 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Amortizable intangible assets:        
Customer lists $6,013
 2,445
 6,013
 2,185
Core deposit intangibles 28,440
 22,337
 28,440
 20,610
SBA servicing asset 8,480
 3,809
 7,776
 2,393
Other 1,303
 1,173
 1,303
 1,127
Total $44,236
 29,764
 43,532
 26,315
         
Unamortizable intangible assets:        
Goodwill $234,368
   234,368
  

Activity related to transactions during the periods presented includes the following (See Note 4 to the Consolidated Financial Statements

SBA servicing assets are recorded for more information on each of these transactions):

(1)In connection with the January 1, 2016 acquisition of Bankingport, Inc., the Company recorded $1,693,000 in goodwill, $591,000 in a customer list intangible, and $92,000 in other amortizable intangible assets.
(2)In connection with the May 5, 2016 acquisition of SBA Complete, Inc., the Company recorded $4,333,000 in goodwill, $1,100,000 in a customer list intangible, and $940,000 in other amortizable intangible assets.
(3)In connection with the branch exchange transaction with First Community Bank on July 15, 2016, the Company recorded a net increase of $1,961,000 in goodwill and $1,170,000 in core deposit premiums.
(4)In connection with the Carolina Bank acquisition on March 3, 2017, the Company recorded a net increase of $65,516,000 in goodwill and $8,790,000 in core deposit premiums.
(5)In connection with the September 1, 2017 acquisition of Bear Insurance Service, the Company recorded $5,330,000 in goodwill, $3,644,000 in a customer list intangible, and $271,000 in other amortizable intangible assets.

In addition to the above acquisition related activity,SBA loans, or portions thereof, that the Company recorded $415,000 in net servicing assets associated with the guaranteed portion of SBA loans originated andhas sold during the third and fourth quarters of 2016. During the first nine months of 2017, the Company recorded an additional $1,003,000 in servicing assets, as well as $112,000 in amortization expense.but continue to service for a fee. Servicing assets are initially recorded at fair value and amortized over the expected lives of the related loans.

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 noted in the table above, the Company has a SBA servicing asset at June 30, 2020 with a remaining book value of $4,671,000. The Company recorded $704,000 and $1,484,000 in servicing assets associated with the guaranteed portion of SBA loans sold during the first six months of 2020 and 2019, respectively. During the first six months of 2020 and 2019, the Company recorded $1,416,000 and $621,000, respectively, in related amortization expense. Included in the amortization expense for the first six months of 2020 is a first quarter of 2020 impairment charge of approximately $500,000 due to a decrease in the fair value of the asset resulting from deteriorations in market conditions at the end of the first quarter of 2020.

Amortization expense of all other intangible assets totaled $902,000$978,000 and $387,000$1,242,000 for the three months ended SeptemberJune 30, 20172020 and 2016, respectively,2019, respectively. Amortization expense of all other intangible assets totaled $2,033,000 and $2,509,000 and $834,000$2,574,000 for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

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 step-one goodwill impairment quantitative analysis. The results of the March 31, 2020 analysis determined that none of the Company's goodwill was impaired as of March 31, 2020. As a result of the continued economic turmoil and market volatility during the period ended June 30, 2020, the Company qualitatively reviewed the factors and assumptions used in the March 31, 2020 analysis, including financial projections, discount rates, and market premiums, in light of the triggering event existing as of June 30, 2020 and based on that analysis, the Company concluded there was no impairment of its goodwill at June 30, 2020. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.



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The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets, excluding SBA servicing assets, forassets. These amounts will be recorded as "Intangibles amortization expense" within the last quarter of calendar year 2017 and for eachnoninterest expense section of the four calendar years ending December 31, 2021 and the estimated amount amortizable thereafter.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.

($ in thousands)

 

 Estimated Amortization
Expense		 
October 1 to December 31, 2017 $902 
2018  3,262 
2019  2,654 
2020  2,090 
2021  1,628 
Thereafter  3,792 
         Total $14,328 
     

income within the line item "Other service charges, commissions and fees" of the Consolidated Statements of Income.

 Page 33

($ in thousands) 
Estimated Amortization
Expense
July 1 to December 31, 2020 $1,808
2021 2,927
2022 2,022
2023 1,041
2024 404
Thereafter 1,599
Total $9,801

Index

Note 129 – Pension Plans

The Company has historically sponsored two2 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 incomecost totaling $202,000$215,000 and $163,000$244,000 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, which primarily related to investment income fromand $431,000 and $488,000 for the Pension Plan’s assets.six months ended June 30, 2020 and 2019, respectively. The following table contains the components of the pension income.

  For the Three Months Ended September 30, 
  2017  2016  2017  2016  2017 Total  2016 Total 
($ in thousands) Pension Plan  Pension Plan  SERP  SERP  Both Plans  Both Plans 
Service cost $—   —   29   27   29   27 
Interest cost  361   375   57   60   418   435 
Expected return on plan assets  (702)  (675)  —   —   (702)  (675)
Amortization of transition obligation  —   —   —   —   —   — 
Amortization of net (gain)/loss  61   59   (8)  (9)  53   50 
Amortization of prior service cost  —   —   —   —   —   — 
   Net periodic pension (income)/cost $(280)  (241)  78   78   (202)  (163)

cost.

 For the Three Months Ended June 30,
($ in thousands)2020
Pension Plan
2019
Pension Plan
2020
SERP
2019
SERP
2020 Total
Both Plans		 2019 Total
Both Plans
Service cost$—

—

—

—

—

—
Interest cost305

372

55

41

360

413
Expected return on plan assets(325)
(397)
—

—

(325)
(397)
Amortization of net (gain)/loss221

223

(41)
5

180

228
Net periodic pension cost$201

198

14

46

215

244
 Six Months Ended June 30, 2020
($ in thousands)2020 Pension Plan 2019 Pension Plan 2020 SERP 2019 SERP 2020 Total Both Plans 2019 Total Both Plans
Service cost$—
 —
 —
 —
 —
 —
Interest cost613
 744
 110
 82
 723
 826
Expected return on plan assets(650) (794) —
 —
 (650) (794)
Amortization of net (gain)/loss440
 446
 (82) 10
 358
 456
Net periodic pension cost$403
 396
 28
 92
 431
 488

The Company recordedservice cost component of net periodic pension income totaling $605,000cost is included in salaries and $488,000 for the nine months ended September 30, 2017benefits expense and 2016, respectively, which primarily related to investment income from the Pension Plan’s assets. The following table contains theall other components of thenet periodic pension income.

  For the Nine Months Ended September 30, 
  2017  2016  2017  2016  2017 Total  2016 Total 
($ in thousands) Pension Plan  Pension Plan  SERP  SERP  Both Plans  Both Plans 
Service cost – benefits earned during the period $—   —   88   80   88   80 
Interest cost  1,086   1,127   170   178   1,256   1,305 
Expected return on plan assets  (2,107)  (2,025)  —   —   (2,107)  (2,025)
Amortization of transition obligation  —   —   —   —   —   — 
Amortization of net (gain)/loss  183   179   (25)  (27)  158   152 
Amortization of prior service cost  —   —   —   —   —   — 
   Net periodic pension (income)/cost $(838)  (719)  233   231   (605)  (488)

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 contributions are investedCompany did 0t contribute to provide for benefits under the Pension Plan. The CompanyPlan in the first six months of 2020 and does not0t expect to contribute to the Pension Plan in 2017.

the remainder of 2020.



Page 31
Index

The Company’s funding policy with respect to the SERP is to fund the related benefits from the operating cash flow of the Company.

 Page 34

Index

Note 1310 – Accumulated Other Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period for non-owner transactions and is divided into net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of accumulated other comprehensive income (loss) for the Company are as follows:

($ in thousands)

 

 September 30,
2017		  December 31,
2016		  September 30,
2016		 
Unrealized gain (loss) on securities available for sale $438   (3,085)  1,964 
     Deferred tax asset (liability)  (162)  1,138   (767)
Net unrealized gain (loss) on securities available for sale  276   (1,947)  1,197 
             
Additional pension asset (liability)  (4,854)  (5,012)  (4,505)
     Deferred tax asset (liability)  1,796   1,852   1,757 
Net additional pension asset (liability)  (3,058)  (3,160)  (2,748)
             
Total accumulated other comprehensive income (loss) $(2,782)  (5,107)  (1,551)

($ in thousands)June 30, 2020 December 31, 2019
Unrealized gain (loss) on securities available for sale$25,256
 9,743
Deferred tax asset (liability)(5,804) (2,239)
Net unrealized gain (loss) on securities available for sale19,452
 7,504
    
Postretirement plans asset (liability)(2,734) (3,092)
Deferred tax asset (liability)628
 711
Net postretirement plans asset (liability)(2,106) (2,381)
    
Total accumulated other comprehensive income (loss)$17,346
 5,123

The following table discloses the changes in accumulated other comprehensive income (loss) for the ninesix months ended SeptemberJune 30, 20172020 (all amounts are net of tax).

($ in thousands)

 

 Unrealized Gain
(Loss) on
Securities
Available for Sale		  Additional
Pension Asset
(Liability)		  Total 
Beginning balance at January 1, 2017 $(1,947)  (3,160)  (5,107)
     Other comprehensive income (loss) before reclassifications  2,075   —   2,075 
     Amounts reclassified from accumulated other comprehensive income  148   102   250 
Net current-period other comprehensive income (loss)  2,223   102   2,325 
             
Ending balance at September 30, 2017 $276   (3,058)  (2,782)

($ 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 reclassifications18,128
 —
 18,128
Amounts reclassified from accumulated other comprehensive income(6,180) 275
 (5,905)
Net current-period other comprehensive income (loss)11,948
 275
 12,223
      
Ending balance at June 30, 2020$19,452
 (2,106) 17,346
The following table discloses the changes in accumulated other comprehensive income (loss) for the ninesix months ended SeptemberJune 30, 20162019 (all amounts are net of tax).

($ in thousands)

 

 Unrealized Gain
(Loss) on
Securities
Available for Sale		  Additional
Pension Asset
(Liability)		  Total 
Beginning balance at January 1, 2016 $(709)  (2,841)  (3,550)
     Other comprehensive income before reclassifications  1,908   —   1,908 
     Amounts reclassified from accumulated other comprehensive income  (2)  93   91 
Net current-period other comprehensive income  1,906   93   1,999 
             
Ending balance at September 30, 2016 $1,197   (2,748)  (1,551)

($ in thousands)
Unrealized Gain
(Loss) on
Securities
Available for Sale
 
Postretirement Plans Asset
(Liability)
 Total
Beginning balance at January 1, 2019$(9,494) (2,467) (11,961)
Other comprehensive income (loss) before reclassifications13,510
 —
 13,510
Amounts reclassified from accumulated other comprehensive income—
 339
 339
Net current-period other comprehensive income (loss)13,510
 339
 13,849
      
Ending balance at June 30, 2019$4,016
 (2,128) 1,888


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.


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Note 1411 – Fair Value

Relevant accounting guidance establishes

Fair value is the exchange price that would be received for an asset or paid to transfer a fair value hierarchy which requiresliability (exit price) in the principal and most advantageous market for the asset or liability in an entity to maximizeorderly transaction between market participants on the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describesmeasurement date. There are three levels of inputs that may be used to measure fair value:

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;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.

 Page 35

Index

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at SeptemberJune 30, 2017.

($ in thousands)      
Description of Financial Instruments Fair Value at
September
30, 2017		  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 $8,992   —   8,992   — 
        Mortgage-backed securities  155,535   —   155,535   — 
        Corporate bonds  34,397   —   34,397   — 
          Total available for sale securities $198,924   —   198,924   — 
                 
Nonrecurring                
     Impaired loans $14,932   —   —   14,932 
     Foreclosed real estate  9,356   —   —   9,356 

2020.

($ in thousands)
Description of Financial Instruments Fair Value at
June 30, 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 $45,394
 —
 45,394
 —
Mortgage-backed securities 694,299
 —
 694,299
 —
Corporate bonds 45,139
 —
 45,139
 —
Total available for sale securities $784,832
 —
 784,832
 —
         
Presold mortgages in process of settlement $31,015
 31,015
 —
 —
         
Nonrecurring        
Impaired loans $16,783
 —
 —
 16,783
Foreclosed real estate 1,151
 —
 —
 1,151


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Index

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2016.

($ in thousands)      
Description of Financial Instruments Fair Value at
December 31,
2016		  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 $17,490   —   17,490   — 
Mortgage-backed securities  148,065   —   148,065   — 
Corporate bonds  33,600   —   33,600   — 
Equity securities  174   —   174   — 
Total available for sale securities $199,329   —   199,329   — 
                 
Nonrecurring                
     Impaired loans $12,284   —   —   12,284 
     Foreclosed real estate  9,532   —   —   9,532 

2019.

($ in thousands)    
Description of Financial Instruments Fair Value at
December 31, 2019		 
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 $20,009
 —
 20,009
 —
Mortgage-backed securities 767,285
 —
 767,285
 —
Corporate bonds 34,651
 —
 34,651
 —
Total available for sale securities $821,945
 —
 821,945
 —
         
Presold mortgages in process of settlement $19,712
 19,712
 —
 —
         
Nonrecurring        
Impaired loans $16,215
 —
 —
 16,215
  Foreclosed real estate 1,830
 —
 —
 1,830

The following is a description of the valuation methodologies used for instruments measured at fair value.

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, collateralized mortgagecommercial 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. Further, the Company validates the fair values for a sample of securities in the portfolio by comparing the fair values provided by the bond accounting provider to prices from other independent sources for the same or similar securities. The Company analyzes unusual or significant variances and conducts additional research with the portfolio manager, if necessary, and takes appropriate action based on its findings.

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Index

Impaired loans — Fair values for impaired loans in the above table 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 loan losses on the Consolidated Statements of Income.



Page 34
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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 SeptemberJune 30, 2017,2020, the significant unobservable inputs used in the fair value measurements were as follows:

($ in thousands)     
Description Fair Value at
September
30, 2017		  Valuation
Technique		 Significant Unobservable
Inputs		 General Range
of Significant
Unobservable
Input Values
Impaired loans $14,932  Appraised value; PV of expected cash flows Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0-10%
Foreclosed real estate  9,356  Appraised value; List or contract price Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell 0-10%
           

($ in thousands)      
Description Fair Value at
June 30, 2020		 
Valuation
Technique
 
Significant Unobservable
Inputs
 Range (Weighted Average)
Impaired loans - valued at collateral value $11,150
 Appraised value Discounts applied for estimated costs to sell 10%
Impaired loans - valued at PV of expected cash flows 5,633
 PV of expected cash flows Discount rates used in the calculation of PV of expected cash flows 4-11% (6.26%)
Foreclosed real estate 1,151
 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, 2016,2019, the significant unobservable inputs used in the fair value measurements were as follows:

($ in thousands)     
Description Fair Value at
December 31,
2016		  Valuation
Technique		 Significant Unobservable
Inputs		 General Range
of Significant
Unobservable
Input Values
Impaired loans $12,284  Appraised value; PV of expected cash flows Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0-10%
Foreclosed real estate  9,532  Appraised value; List or contract price Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell 0-10%
           

Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities measured on a recurring basis during the three or nine months ended September 30, 2017 or 2016.

($ in thousands)      
Description Fair Value at
December 31, 2019		 
Valuation
Technique
 
Significant Unobservable
Inputs
 Range (Weighted Average)
Impaired loans - valued at collateral value $10,718
 Appraised value Discounts applied for estimated costs to sell 10%
Impaired loans - valued at PV of expected cash flows 5,497
 PV of expected cash flows Discount rates used in the calculation of PV of expected cash flows 4-11% (6.50%)
Foreclosed real estate 1,830
 Appraised value Discounts for estimated costs to sell 10%
         




Page 37

35
Index
Index

For the nine months ended September 30, 2017 and 2016, the increase in the fair value of securities available for sale was $3,523,000 and $3,128,000, respectively, which is included in other comprehensive income (net of tax expense of $1,300,000 and $1,222,000, respectively). Fair value measurement methods at September 30, 2017 and 2016 are consistent with those used in prior reporting periods.

The carrying amounts and estimated fair values of financial instruments not carried at Septemberfair value at June 30, 20172020 and December 31, 20162019 are as follows:

    September 30, 2017  December 31, 2016 

 

($ 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 $82,758   82,758   71,645   71,645 
Due from banks, interest-bearing Level 1  326,089   326,089   234,348   234,348 
Securities available for sale Level 2  198,924   198,924   199,329   199,329 
Securities held to maturity Level 2  123,156   124,878   129,713   130,195 
Presold mortgages in process of settlement Level 1  17,426   17,426   2,116   2,116 
Total loans, net of allowance Level 3  3,405,162   3,396,635   2,686,931   2,650,820 
Accrued interest receivable Level 1  11,445   11,445   9,286   9,286 
Bank-owned life insurance Level 1  88,081   88,081   74,138   74,138 
                   
Deposits Level 2  3,651,241   3,647,532   2,947,353   2,944,968 
Borrowings Level 2  397,525   388,477   271,394   263,255 
Accrued interest payable Level 2  1,143   1,143   539   539 

Fair value methods and assumptions are set forth below for the Company’s financial instruments.

Cash and Amounts Due from Banks, Presold Mortgages in Process of Settlement, Accrued Interest Receivable, and Accrued Interest Payable-The carrying amounts approximate their fair value because of the short maturity of these financial instruments.

Available for Sale and Held to Maturity Securities-Fair values are provided by a third-party and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or matrix pricing.

Loans-For nonimpaired loans, fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial and agricultural, real estate construction, real estate mortgages and installment loans to individuals. Each loan category is further segmented into fixed and variable interest rate terms. The fair value for each category is determined by discounting scheduled future cash flows using current interest rates offered on loans with similar risk characteristics. Fair values for impaired loans are primarily based on estimated proceeds expected upon liquidation of the collateral or the present value of expected cash flows.

Bank-Owned Life Insurance – The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the issuer.

Deposits-The fair value of deposits with no stated maturity, such as noninterest-bearing checking accounts, savings accounts, interest-bearing checking accounts, and money market accounts, is equal to the amount payable on demand as of the valuation date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered in the marketplace for deposits of similar remaining maturities.

Borrowings-The fair value of borrowings is based on the discounted value of the contractual cash flows. The discount rate is estimated using the rates currently offered by the Company’s lenders for debt of similar maturities.

   June 30, 2020 December 31, 2019
($ in thousands)
Level in Fair
Value
Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Cash and due from banks, noninterest-bearingLevel 1 $94,684
 94,684
 64,519
 64,519
Due from banks, interest-bearingLevel 1 584,830
 584,830
 166,783
 166,783
Securities held to maturityLevel 2 94,924
 96,318
 67,932
 68,333
SBA loans held for saleLevel 2 3,382
 3,734
 —
 —
Total loans, net of allowanceLevel 3 4,727,721
 4,720,772
 4,432,068
 4,407,610
Accrued interest receivableLevel 1 19,943
 19,943
 16,648
 16,648
Bank-owned life insuranceLevel 1 105,712
 105,712
 104,441
 104,441
SBA Servicing AssetLevel 3 4,671
 4,973
 5,383
 5,649
          
DepositsLevel 2 5,831,138
 5,833,990
 4,931,355
 4,930,751
BorrowingsLevel 2 112,199
 103,001
 300,671
 295,399
Accrued interest payableLevel 2 1,525
 1,525
 2,154
 2,154

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 1512 – Series C Preferred Stock

On December 21, 2012, the Company issued 2,656,294 shares of its common stock and 728,706 sharesRevenue from Contracts with Customers


All of the Company’s Series C Preferred Stock to certain accredited investors, eachrevenues 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 and six months ended June 30, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.
 For the Three Months Ended For the SIx Months Ended
$ in thousandsJune 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Noninterest Income       
In-scope of ASC 606:       
Service charges on deposit accounts:$2,289
 3,210
 5,626
 6,155
Other service charges, commissions, and fees:       
Interchange income3,086
 3,492
 5,972
 6,301
Other service charges and fees1,538
 1,558
 2,721
 3,255
Commissions from sales of insurance and financial products:       
Insurance income1,363
 1,304
 2,561
 2,672
Wealth management income727
 900
 1,597
 1,561
SBA consulting fees3,739
 921
 4,766
 2,184
Noninterest income (in-scope of ASC 606)12,742
 11,385
 23,243
 22,128
Noninterest income (out-of-scope of ASC 606)13,451
 4,249
 16,655
 7,584
Total noninterest income$26,193
 15,634
 39,898
 29,712

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 pricepoint 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 $10.00 per share, pursuantthe 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 expenses were presented on a private placement transaction. Net proceedsgross basis prior to the adoption of ASC 606 and are presented on a net basis in 2019 and 2020. Other service charges include revenue from thisprocessing 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 commoninsurance and preferred stock were $33.8 millionfinancial products: The Company earns commissions from the sale of insurance policies and were usedwealth 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 strengthen the Company’s balance sheet in anticipation of a planned disposition of certain classified loans and write-down of foreclosed real estate.

On December 22, 2016, the Company, and the holderCompany recognizes the revenue. Performance-based commissions from insurance companies are recognized at a point in time as policies are sold.



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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 Series C Preferred Stock entered into an agreementfinancial product. Shortly after the policy is issued, the carrier remits the commission payment to effectively convert the preferred stock into common stock.Company, and the Company recognizes the revenue. The Company exchanged 728,706 sharesalso 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 preferred stockSBA 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 the three months ended June 30, 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 for approximately one-half of the fees received, which amounted to $1.6 million at June 30, 2020. 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 13 – Leases
The Company enters into leases in the normal course of business. As of June 30, 2020, the Company leased 8 branch offices for which the land and buildings are leased and 9 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 January 2021 through May 2076, some of which include options for multiple five- and ten-year extensions. The weighted average remaining life of the lease term for these leases was 20.4 years as of June 30, 2020. 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 same numberlease 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 3.27% as of June 30, 2020.
Total operating lease expense was $1.4 million and $1.2 million for the six months ended June 30, 2020 and 2019, respectively. The right-of-use assets and lease liabilities were $18.8 million and $19.1 million as of June 30, 2020, respectively.
Future undiscounted lease payments for operating leases with initial terms of one year or more as of June 30, 2020 are as follows.


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($ in thousands) 
July 1 to December 31, 2020$1,224
20212,257
20221,898
20231,776
20241,574
Thereafter19,564
Total undiscounted lease payments28,293
Less effect of discounting(9,184)
Present value of estimated lease payments (lease liability)$19,109




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Note 14 - Shareholders' Equity

Stock Repurchases

During the first six months months of 2020, the Company repurchased approximately 680,695 shares of the Company’sCompany's common stock. Asstock at an average stock price of $32.96 per share, which totaled $22 million, under a result$40 million repurchase authorization publicly announced in November 2019. The Company has $17.6 million remaining of the exchange, the Company has no shares of preferred stock currently outstanding.

$40 million repurchase authorization.

Note 15 - Borrowings
The Series C Preferred Stock qualified as Tier 1 capital and was Convertible Perpetual Preferred Stock, with dividend rights equal tofollowing tables present information regarding the Company’s Common Stock. The Series C Preferred Stock was non-voting, exceptoutstanding borrowings at June 30, 2020 and December 31, 2019 - dollars are in limited circumstances.

The Series C Preferred Stock paid a dividend per share equal to that of the Company’s common stock. During the three and nine months ended September 30, 2016, the Company accrued approximately $58,000 and $175,000, respectively, in preferred dividend payments for the Series C Preferred Stock.

Note 16 – Subsequent Event

On October 1, 2017, the Company completed its acquisition of ASB Bancorp, Inc. (“ASB Bancorp”), the parent company of Asheville Savings Bank, SSB, headquartered in Asheville, North Carolina, pursuant to an Agreement and Plan of Merger and Reorganization dated May 1, 2017. Asheville Savings Bank, SSB, operated 13 banking locations in the Asheville, Marion and Brevard markets. The acquisition complements the Company’s existing three branches in the Asheville market.

The total merger consideration consisted of $17.9 million in cash and 4.9 million shares of the Company’s common stock. As of the acquisition date, ASB Bancorp had assets of $793 million, gross loans of $617 million and deposits of $679 million. As of the filing of this report, the Company has not completed the fair value measurements of the assets, liabilities, and identifiable intangible assets of ASB Bancorp.

thousands:

Description Due date Call Feature June 30, 2020 Interest Rate
FHLB Term Note 8/6/2020 None $50,000
 0.20% fixed
FHLB Principal Reducing Credit 7/24/2023 None 146
 1.00% fixed
FHLB Principal Reducing Credit 12/22/2023 None 1,010
 1.25% fixed
FHLB Principal Reducing Credit 1/15/2026 None 6,000
 1.98% fixed
FHLB Principal Reducing Credit 6/26/2028 None 240
 0.25% fixed
FHLB Principal Reducing Credit 7/17/2028 None 52
 0.00% fixed
FHLB Principal Reducing Credit 8/18/2028 None 178
 1.00% fixed
FHLB Principal Reducing Credit 8/22/2028 None 178
 1.00% fixed
FHLB Principal Reducing Credit 12/20/2028 None 361
 0.50% fixed
Trust Preferred Securities 1/23/2034 Quarterly by Company
beginning 1/23/2009		 20,620
 3.46% at 6/30/2020
adjustable rate
3 month LIBOR + 2.70%
Trust Preferred Securities 6/15/2036 Quarterly by Company
beginning 6/15/2011		 25,774
 1.70% at 6/30/2020
adjustable rate
3 month LIBOR + 1.39%
Trust Preferred Securities 1/7/2035 Quarterly by Company
beginning 1/7/2010		 10,310
 3.22% at 6/30/2020
adjustable rate
3 month LIBOR + 2.00%
Total borrowings/ weighted average rate as of June 30, 2020 $114,869
 1.54%
Unamortized discount on acquired borrowings   (2,670)  
Total borrowings     $112,199
  




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40
Index

Description Due date Call Feature December 31, 2019 Interest Rate
FHLB Term Note 1/30/2020 None $100,000
 1.70% fixed
FHLB Term Note 1/31/2020 None 68,000
 1.70% fixed
FHLB Term Note 1/31/2020 None 30,000
 1.70% fixed
FHLB Term Note 5/29/2020 None 40,000
 1.62% fixed
FHLB Principal Reducing Credit 7/24/2023 None 168
 1.00% fixed
FHLB Principal Reducing Credit 12/22/2023 None 1,029
 1.25% fixed
FHLB Principal Reducing Credit 1/15/2026 None 6,500
 1.98% fixed
FHLB Principal Reducing Credit 6/26/2028 None 245
 0.25% fixed
FHLB Principal Reducing Credit 7/17/2028 None 55
 0.00% fixed
FHLB Principal Reducing Credit 8/18/2028 None 181
 1.00% fixed
FHLB Principal Reducing Credit 8/22/2028 None 181
 1.00% fixed
FHLB Principal Reducing Credit 12/20/2028 None 367
 0.50% fixed
Trust Preferred Securities 1/23/2034 Quarterly by Company
beginning 1/23/2009		 20,620
 4.64% at 12/31/2019
adjustable rate
3 month LIBOR + 2.70%
Trust Preferred Securities 6/15/2036 Quarterly by Company
beginning 6/15/2011		 25,774
 3.28% at 12/31/2019
adjustable rate
3 month LIBOR + 1.39%
Trust Preferred Securities 1/7/2035 Quarterly by Company
beginning 1/7/2010		 10,310
 3.99% at 12/31/2019
adjustable rate
3 month LIBOR + 2.00%
Total borrowings / weighted average rate as of December 31, 2019 $303,430
 2.12%
Unamortized discount on acquired borrowings   (2,759)  
Total borrowings     $300,671
  




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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 loan losses, intangible assets, and the fair value and discount accretion of acquired loans are three 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 Loan Losses

Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio.

As previously noted, and as permitted by the CARES Act, we elected to defer the implementation of CECL until the earlier of the cessation of the national emergency or December 31, 2020 because of the challenges associated with developing a reliable forecast of losses that may result from the unprecedented COVID-19 pandemic. Accordingly, the Company's provision for loan losses for the first six months of 2020 is based on the limited information available and the conditions that existed at June 30, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses and the remaining discussion below is based on that methodology. Upon the adoption of CECL, the Company expects its allowance for credit losses related to all financial assets will increase to approximately $40-$44 million as of January 1, 2020 compared to its allowance for loan losses at December 31, 2019 of approximately $21 million. As previously discussed, this initial impact will be reflected as a cumulative-effect adjustment to retained earnings.
Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on individually evaluated “impaired loans.” A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the original loan agreement. A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, troubled debt restructured status, purchased credit impaired status, and type of collateral) and the loan is determined to be impaired. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.

The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans (“general reserve loans”). General reserve loans are segregated into pools by loan type and risk grade and estimated loss percentages are assigned to each loan pool based on historical losses.  The historical loss percentages are then adjusted for any environmental factors used to reflect changes in the collectability of the portfolio not captured by historical data.

data such. In 2020, we have included environmental factors related to the COVID-19 pandemic. See additional discussion the "Summary of Loan Loss Experience."

The reserves estimated for individually evaluated impaired loans are then added to the reserve estimated for general reserve loans. This becomes our “allocated allowance.” The allocated allowance is compared to the actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded allowance to absorb losses inherent in the portfolio is recorded as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded. Any remaining difference between the allocated allowance and the actual allowance for loan losses recorded on our books is our “unallocated allowance.”

Purchased loans are recorded at fair value at the acquisition date. Therefore, amounts deemed uncollectible at the acquisition date represent a discount to the loan value and become a part of the fair value calculation and are excluded from the allowance for loan losses.calculation. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase


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in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan and this accretion is referred to as “loan discount accretion.”

Within the purchased loan portfolio, loans are deemed purchased credit impaired at acquisition if the bank believes it will not be able to collect all contractual cash flows. Performing loans with an unamortized discount or premium that are not deemed purchased credit impaired are considered to be purchased performing loans. Purchased credit impaired loans are individually evaluated as impaired loans, as described above, while purchased performing loans are evaluated as general reserve loans. For purchased performing loan pools, any computed allowance that is in excess of remaining net discounts is a component of the allocated allowance.
Although we use the best information available to make evaluations, future material adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on the examiners’ judgment about information available to them at the time of their examinations.

For further discussion, see “Nonperforming Assets” and “Summary of“Allowance for Loan Loss Experience”Losses and Provision for Loan Losses” below.

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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 SBA 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.

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, on at least an annual basis, with the annual evaluation occurring on October 31 of each year, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill. We have three reporting units – 1) First Bank with $222.7 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 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.



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In our 20162019 goodwill impairment evaluation, we concluded that the goodwill for each of our reporting units was not impaired. Additionally, 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 step-one goodwill impairment quantitative analysis. The results of the March 31, 2020 analysis determined that none of the Company's goodwill was not impaired.

impaired as of March 31, 2020. As a result of the continued economic turmoil and market volatility during the period ended June 30, 2020, the Company qualitatively reviewed the factors and assumptions used in the March 31, 2020 analysis, including financial projections, discount rates, and market premiums, in light of the triggering event existing as of June 30, 2020 and based on that analysis, the Company concluded there was no impairment of its goodwill at June 30, 2020. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

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.

Fair Value and Discount Accretion of Acquired Loans

We consider the determination of the initial fair value of acquired loans and the subsequent discount accretion of the purchased loans to involve a high degree of judgment and complexity.

We determine fair value accounting estimates of newly assumed assets and liabilities in accordance with relevant accounting guidance. However, the amount that we realize on these assets could differ materially from the carrying value reflected in our financial statements, based upon the timing of collections on the acquired loans in future periods. Because of inherent credit losses and interest rate marks associated with acquired loans, the amount that we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. For non-impaired purchased loans, we accrete the discount over the lives of the loans in a manner consistent with the guidance for accounting for loan origination fees and costs.

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For purchased credit-impaired (“PCI”) loans, the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans using the effective yield method, provided that the timing and the amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.

Subsequent to an acquisition, estimates of cash flows expected to be collected are updated periodically based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If there is a decrease in cash flows expected to be collected, the provision for loan losses is charged, resulting in an increase to the allowance for loan losses. If the Company has a probable increase in cash flows expected to be collected, we will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the loan. The impact of changes in variable interest rates is recognized prospectively as adjustments to interest income.

Current Accounting Matters

See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted.

RESULTS OF OPERATIONS

Overview

adopted and accounting standards that are pending adoption.


Recent Developments: COVID-19

In March 2020, the outbreak of the coronavirus (COVID-19) was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has caused economic and social disruption resulting in unprecedented uncertainty, volatility and disruption in financial markets, and has placed significant health, economic and other major pressures throughout the communities we serve, the United States and globally. While some industries have


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been impacted more severely than others, almost all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, material decreases in oil and gas prices and in business valuations, changes in consumer behavior related to pandemic fears, and aggressive measures by the federal government.

On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various programs and measures that the U.S. Department of the Treasury, the Small Business Administration, the Federal Reserve Board, and other federal banking agencies may or are required to implement. Further, in response to the COVID-19 outbreak, the Federal Reserve Board has implemented or announced a number of facilities to provide emergency liquidity to various segments of the U.S. economy and financial market.

Under the CARES Act, financial institutions are permitted to delay the implementation of ASU 2016-13, Financial Instruments - Credit Losses (CECL) until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company has elected such provision and will defer the adoption of CECL until such time that has occurred with an effective retrospective implementation date of January 1, 2020. Refer to Note 2, Accounting Policies, to the Company's consolidated financial statements included elsewhere in this report. Additionally, in a related action to the CARES Act, the joint federal bank regulatory agencies issued an interim final rule effective March 31, 2020, that allows banking organizations that implement CECL this year to elect to mitigate the effects of the CECL accounting standard on their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. Upon such point of adoption of CECL during 2020, the Company will likely elect to defer the regulatory capital effects of CECL in accordance with the interim final rule.

The CARES Act also includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Under these terms, as of June 30, 2020, the Company had processed payment deferrals for 1,483 loans with an aggregate loan balance of $774 million. These deferrals were generally no more than 90 days in duration. As the initial 90 day deferrals expire, the Company is approving second deferral requests based on the circumstances of each borrower. Thus a portion of the deferrals at June 30, 2020 represent grants of second deferrals for those borrowers whose initial deferrals were on or prior to April 1, 2020.

In response to the pandemic, the Company has implemented a number of procedures to support the safety and well-being of its employees, customers and shareholders. In addition, the Company has taken deliberate actions to ensure the continued health and strength of its balance sheet in order to serve its clients and communities.

Employees, Customers and Communities

The Company is supporting the health and safety of its employees and customers, and complying with government directives, through responsible operations administered under its Board approved business continuity plan and protocols:
Extra precautions are being taken to safeguard health and safety in branch facilities.
The Company is a lender for the SBA's PPP program, a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic


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and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. As of June 30, 2020, the Company holds 2,810 PPP loans totaling approximately $244.9 million under the allocation approved by Congress.
As previously discussed, the Company has implemented a short-term deferral modification program that complies with federal banking regulator's interagency guidance and is working with borrowers effected by COVID-19 on a case by case basis. Under these terms, as of June 30, 2020, the Company had processed payment deferrals for 1,483 loans with an aggregate loan balance of $774 million. As the initial 90 day deferrals expire, the Company is approving second deferral requests based on the circumstances of each borrower. Thus a portion of the deferrals at June 30, 2020 represent grants of second deferrals for those borrowers whose initial deferrals were on or prior to April 1, 2020.

Capital, Liquidity & Credit

Capital remains strong, with ratios of the Company, and its subsidiary bank, well above the standards to be considered well-capitalized under regulatory requirements.

Liquidity has increased since the onset of the pandemic, with the Company experiencing increases in deposits and in its cash levels. Management considers the Company's current liquidity position to be adequate to meet short-term and long-term liquidity needs.

Asset quality remains solid, with nonperforming assets to total assets amounting to 0.69% at June 30, 2020 compared to 0.62% at December 31, 2019.

In determining the appropriate level of allowance for loan losses at June 30, 2020, we reviewed industry types and deferral percentages within our loan portfolio in light of the pandemic. Based on that analysis, we assigned loan loss reserves for certain of those loan types that were consistent with probable loss rates incurred in a stressed economic scenario. The Company also recorded supplemental qualitative reserves for all other loans in deferral status. As a result the analysis, approximately $16.7 million of COVID-19 related qualitative reserves are included in the Company's June 30, 2020 allowance for loan loss amount of $42.3 million at June 30, 2020.
FINANCIAL OVERVIEW

Net income availableamounted to common shareholders was $13.1$16.4 million, or $0.53$0.56 per diluted common share, for the three months ended SeptemberJune 30, 2017, an increase of 130% in earnings per share from the $4.62020 compared to $23.9 million, or $0.23$0.80 per diluted common share, recorded in the thirdsecond quarter of 2016.2019. For the ninesix months ended SeptemberJune 30, 2017, we recorded2020, net income availableamounted to common shareholders of $31.8$34.5 million, or $1.33$1.18 per diluted common share an increase of 43.0% in earnings per share from the $19.0compared to $46.1 million, or $0.93$1.55 per diluted common share, for the ninesix months ended SeptemberJune 30, 2016.

2019.


The third quarter of 2016 results included two non-recurring items that impacted diluteddecrease in earnings per share negatively by a net of approximately $0.17 per diluted common share: 1) the termination of our loss share agreements with the FDIC, which resultedfor both periods in 2020 was primarily due to increases in the Company recordingprovisions for loan losses recorded, which were largely related to estimated losses arising from the economic impact of COVID-19, see additional indemnification asset expense of $5.7 million during the three months ended September 30, 2016, and 2) the exchange of branches with First Community Bank that resulted in a gain of $1.4 million.

Comparisons for the financial periods presented are significantly impacted by our March 3, 2017 acquisition of Carolina Bank, which operated eight branches and three mortgage loan offices, primarily in the Triad region of North Carolina (consists of Greensboro, Winston-Salem, and High Point and the surrounding areas). See Note 4 to the consolidated financial statements for more information on this transaction

As discussed at Note 16 to the consolidated financial statements, on October 1, 2017, the Company acquired ASB Bancorp, Inc., the parent company of Asheville Savings Bank, SSB, headquartered in Asheville, North Carolina (“Asheville Savings Bank”), which operated through 13 branches in the Asheville area. As of the acquisition date, Asheville Savings Bank reported total assets of approximately $793 million, including $617 million in loans and $679 million in deposits. Because this transaction closed in the fourth quarter, the financial position and earnings for Asheville Savings Bank are not included in the Company’s results for the third quarter.

discussion below.


Net Interest Income and Net Interest Margin


Net interest income for the thirdsecond quarter of 20172020 was $41.6$52.6 million, a 37.2% increase3.3% decrease from the $30.4$54.4 million recorded in the thirdsecond quarter of 2016.2019. Net interest income for the first ninesix months of 2017 amounted to $115.92020 was $107.4 million, a 25.8% increase0.4% decrease from the $92.1$107.8 million recorded in the comparable period of 2016.2019. The increasedecreases in net interest income waswere primarily due to higher amounts of loans outstanding as a result of internal growth, as well as the acquisition of Carolina Bank.

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Also contributing to the increase inlower net interest income was a higher net interest margin for the period. margins.


Our net interest margin (tax-equivalent(a non-GAAP measure calculated by dividing tax-equivalent net interest income divided by average earning assets) increased for the fourth consecutive quarter and amounted to 4.16% for the thirdsecond quarter of 2017 compared to 3.93% for2020 was 3.49%, which was 57 basis points lower than the third4.06% realized in the second quarter of 2016.2019. For the nine month periodsix months ended SeptemberJune 30, 2017,2020, our net interest margin was 4.11%3.71% compared to 4.07%4.06% for the same period in 2016. Asset yields have increased primarily as a result of three Federal Reserve interest rate increases during the past year. Funding costs have also increased, but to a lesser degree.

2019. The net interestlower margins for both periods were also impacted by higher amounts of loan discount accretion associated with acquired loan portfolios. The Company recorded loan discount accretion amounting to $1.7 million in the third quarter of 2017, compared to $0.8 million in the third quarter of 2016. For the first nine months of 2017 and 2016, loan discount accretion amounted to $5.1 million and $3.6 million, respectively. The increase in loan discount accretion is primarily due to the loan discounts recorded inimpact of the acquisition of Carolina Bank.

interest rate cuts initiated by the Federal Reserve Bank since August 2019.


Provision for Loan Losses and Asset Quality

We recorded no provision


As permitted by the CARES Act enacted in March 2020, we elected to defer the implementation of the Current Expected Credit Loss (CECL) methodology. Accordingly, our allowance for loan losses at each period end is based


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on our estimate of probable losses that have been incurred at the end of each reporting period, including losses arising from the impact of COVID-19, in accordance with the third quarters of 2017 or 2016. For the nine months ended September 30, 2017, wepre-CECL methodology for determining loan losses.

We recorded totala provision for loan losses of $0.7$19.3 million in the second quarter of 2020 compared to a total negative provision for loan losses (reduction of $23,000the allowance for loan losses) of $0.3 million in the same periodsecond quarter of 2016. We2019. For the six months ended June 30, 2020 and 2019, we recorded provisions for loan losses of $24.9 million and $0.2 million, respectively. The increases in 2020 are primarily related to estimated probable losses arising from the economic impact of COVID-19. Since the onset of the pandemic in March 2020, we have experienced low levelsworked with many of our borrowers, including the option of loan payment deferrals, with total loans on deferral status amounting to $774 million at June 30, 2020, or 16% of the loan portfolio.

Total net charge-offs for the second quarter of 2020 amounted to $1.5 million, or 0.12% of average loans on an annualized basis, compared to no net charge-offs in the second quarter of 2019. For the six months ended June 30, 2020 and asset quality indicators have steadily improved.

2019, total net charge-offs were $3.9 million and $0.4 million, respectively, which on an annualized basis amounted to 0.17% and 0.02%, respectively.


Noninterest Income


Total noninterest income was $12.4$26.2 million and $5.2$15.6 million for the three months ended SeptemberJune 30, 20172020 and September 30, 2016,2019, respectively. For the ninesix months ended SeptemberJune 30, 2017,2020 and 2019, total noninterest income was $39.9 million and $29.7 million, respectively. The increases in noninterest income in 2020 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 an $8.0 million gain realized from securities sales in the second quarter of 2020.

Noninterest Expenses

Noninterest expenses amounted to $34.0$38.9 million in the second quarter of 2020 compared to $16.1$40.1 million forrecorded in the same period of 2016.

Core noninterest income for the thirdsecond quarter of 2017 was $12.82019, a decrease of 3.0%. For the six months ended June 30, 2020, noninterest expenses amounted to $79.0 million, an increase of 31.2%0.2% from the $9.8 million reported for the third quarter of 2016. For the first nine months of 2017, core noninterest income amounted to $34.2 million, a 35.4% increase from the $25.3$78.9 million recorded in the comparable period of 2016. Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions,2019. Noninterest expenses in the second quarter of 2020 trended lower due primarily to the generally lower economic activity resulting from the pandemic.


Income Taxes

Our effective tax rate was 20.7% and fees, iii) fees from presold mortgage loans, iv) commissions from sales of insurance and financial products, v) SBA consulting fees, vi) SBA loan sale gains, and vii) bank-owned life insurance income.

The primary reason20.5% for the three and six months ended June 30, 2020, respectively, compared to 21.2% and 21.0% for the three and six months ended June 30, 2019, respectively.


Balance Sheet and Capital

Total assets at June 30, 2020 amounted to $6.9 billion, a 12.1% increase from December 31, 2019.

Loan growth for the six months ended June 30, 2020 amounted to $316.6 million, including the origination of $244.9 million in core noninterest incomePPP loans. Loan growth for the first six months of 2020, excluding PPP loans, was $71.7 million, or 3.2% annualized. Deposit growth for the first six months of 2020 amounted to $899.8 million and was primarily concentrated in 2017 wastransaction based accounts. In addition to deposits arising from PPP loans, this high deposit growth is believed to be due to a combination of stimulus funds and changes in customer behaviors during the acquisition of Carolina Bank,pandemic, as well as income derivedour ongoing deposit growth initiatives.

With the excess liquidity resulting from the Company’s SBA consulting fees and SBA loan sale gains, which began in the second and third quarters of 2016.

Noninterest Expenses

Noninterest expenses amounted to $34.4 million in the third quarter of 2017 compared to $27.7 million recorded in the third quarter of 2016. Noninterest expenses for the nine months ended September 30, 2017 amounted to $101.5 million compared to $78.6 million in 2016. The majority of the increase in noninterest expenses in 2017 relates to the Company’s acquisition of Carolina Bank.

Balance Sheet and Capital

Total assets at September 30, 2017 amounted to $4.6 billion, a 29.8% increase from a year earlier. Total loans at September 30, 2017 amounted to $3.4 billion, a 29.4% increase from a year earlier, and total deposits amounted to $3.7 billion at September 30, 2017, a 25.4% increase from a year earlier.

In addition to the growth realized from the acquisition of Carolina Bank in March 2017, we have experienced strong organic loan andhigh deposit growth during 2017. For the first nine monthswe experienced, we reduced our outstanding borrowings from $300.7 million at December 31, 2019 to $112.2 million at June 30, 2020, a decline of 2017, organic loan growth (i.e. excluding loan balances assumed from Carolina Bank) amounted to $221.5 million, or 10.9% annualized. For the first nine months of 2017, organic deposit growth amounted to $118.5 million, or 5.4% annualized. The strong growth was a result of ongoing internal initiatives to drive loan and deposit growth, including our recent expansion into higher growth markets, including Charlotte, Raleigh, and the Triad.

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We remain well-capitalized by all regulatory standards, with an estimateda Total Risk-Based Capital Ratio at SeptemberJune 30, 20172020 of 12.44%15.13%, a declinean increase from 13.49%the 14.89% reported at September 30, 2016, but significantly in excess of the 10.00% minimum to be considered well-capitalized. Our tangible common equity to tangible assets ratio was 7.95% at September 30, 2017, a decrease of eight basis points from a year earlier. The decreases in the capital ratios are primarily due to the acquisition of Carolina Bank.

Note Regarding December 31, 2019.

Components of Earnings

For the periods in 2016 presented, our results of operations were significantly affected by the accounting for two FDIC-assisted failed bank acquisitions. In the discussion above and in the accompanying tables, the term “covered” is used to describe assets that were included in FDIC loss share agreements, while the term “non-covered” refers to our legacy assets, which are not included in any type of loss share arrangement. As previously discussed, all loss share agreements were terminated in the third quarter of 2016 and thus the entire loan portfolio is now classified as non-covered. Certain prior period disclosures will continue to present the breakout of the loan portfolio between covered and non-covered. See the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional discussion regarding the accounting and presentation related to the Company’s two FDIC-assisted failed bank acquisitions.

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. Net interest income for the three month period ended September 30, 2017 amounted to $41.6 million, an increase of $11.3 million, or 37.2%, from the $30.4 million recorded in the third quarter of 2016. Net interest income on a tax-equivalent basis for the three month period ended September 30, 2017 amounted to $42.3 million, an increase of $11.5 million, or 37.1%, from the $30.9 million recorded in the third quarter of 2016. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows


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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.

  Three Months Ended September 30, 
($ in thousands) 2017  2016 
Net interest income, as reported $41,639   30,354 
Tax-equivalent adjustment  702   534 
Net interest income, tax-equivalent $42,341   30,888 

Net interest income for the ninethree month period ended SeptemberJune 30, 20172020 amounted to $115.9$52.6 million, an increasea decrease of $23.8$1.7 million, or 25.7%3.3%, from the $92.1$54.4 million recorded in the first nine monthssecond quarter of 2016.2019. Net interest income on a tax-equivalent basis for the ninethree month period ended SeptemberJune 30, 20172020 amounted to $117.8$53.0 million, an increasea decrease of $24.2$1.9 million, or 25.9%3.4%, from the $93.6$54.8 million recorded in the comparablesecond quarter of 2019.
Net interest income for the six month period ended June 30, 2020 amounted to $107.4 million, a decrease of 2016.

  Nine Months Ended September 30, 
($ in thousands) 2017  2016 
Net interest income, as reported $115,851   92,087 
Tax-equivalent adjustment  1,979   1,510 
Net interest income, tax-equivalent $117,830   93,597 

$0.4 million, or 0.4%, from the $107.8 million recorded in the first six months of 2019. Net interest income on a tax-equivalent basis for the six month period ended June 30, 2020 amounted to $108.0 million, a decrease of $0.6 million, or 0.5%, from the $108.6 million recorded in the first six months of 2019.

($ in thousands)Three Months Ended June 30,
 2020 2019
Net interest income, as reported$52,624
 54,409
Tax-equivalent adjustment330
 423
Net interest income, tax-equivalent$52,954
 54,832
    
 Six Months Ended June 30,
 2020 2019
Net interest income, as reported$107,383
 107,770
Tax-equivalent adjustment664
 847
Net interest income, tax-equivalent$108,047
 108,617
There are two primary factors that cause changes in the amount of net interest income we record:record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

For the three and ninesix months ended SeptemberJune 30, 2017,2020, the higherlower net interest income compared to the same periodperiods of 20162019 was primarily due primarily to growth in loans outstanding.

lower net interest margins.




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The following table presents an analysis of net interest income analysis onincome.
 For the Three Months Ended June 30,
 2020 2019
($ in thousands)
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
 
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
Assets 
  
  
  
  
  
Loans (1)$4,738,702
 4.41% $51,964
 $4,329,866
 5.16% $55,652
Taxable securities770,441
 2.49% 4,771
 715,848
 2.80% 4,993
Non-taxable securities17,795
 2.64% 117
 34,604
 3.14% 271
Short-term investments, primarily interest-bearing cash575,074
 0.55% 788
 336,966
 2.51% 2,106
Total interest-earning assets6,102,012
 3.80% 57,640
 5,417,284
 4.67% 63,022
            
Cash and due from banks88,727
     53,853
    
Premises and equipment114,911
     136,813
    
Other assets422,112
     386,645
    
Total assets$6,727,762
     $5,994,595
    
            
Liabilities           
Interest bearing checking$972,580
 0.11% $267
 $892,615
 0.14% $301
Money market deposits1,294,462
 0.29% 920
 1,099,531
 0.63% 1,725
Savings deposits454,791
 0.13% 147
 414,095
 0.30% 309
Time deposits >$100,000632,319
 1.48% 2,324
 723,218
 1.95% 3,522
Other time deposits242,754
 0.69% 416
 262,537
 0.71% 467
Total interest-bearing deposits3,596,906
 0.46% 4,074
 3,391,996
 0.75% 6,324
Borrowings288,997
 1.31% 942
 324,096
 2.83% 2,289
Total interest-bearing liabilities3,885,903
 0.52% 5,016
 3,716,092
 0.93% 8,613
            
Noninterest bearing checking1,905,449
     1,418,033
    
Other liabilities64,915
     58,339
    
Shareholders’ equity871,495
     802,131
    
Total liabilities and
shareholders’ equity
$6,727,762
     $5,994,595
    
            
Net yield on interest-earning assets and net interest income  3.47% $52,624
   4.03% $54,409
Net yield on interest-earning assets and net interest income – tax-equivalent (2)  3.49% $52,954
   4.06% $54,832
            
Interest rate spread  3.28%     3.74%  
            
Average prime rate  3.25%     5.50%  
(1)   Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)   Includes tax-equivalent adjustments of $330,000 and $423,000 in 2020 and 2019, 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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 For the Six Months Ended June 30,
 2020 2019
($ in thousands)Average
Volume		 Average
Rate		 Interest
Earned
or Paid		 Average
Volume		 Average
Rate		 Interest
Earned
or Paid
Assets           
Loans (1)$4,625,798
 4.66% $164,754
 $4,305,069
 5.13% $109,612
Taxable securities802,485
 2.57% 14,859
 685,589
 2.86% 9,730
Non-taxable securities19,756
 2.86% 820
 38,452
 3.19% 608
Short-term investments, primarily interest-bearing cash400,935
 0.95% 6,705
 365,915
 2.65% 4,807
Total interest-earning assets5,848,974
 4.11% $187,138
 5,395,025
 4.66% 124,757
            
Cash and due from banks75,984
     54,876
    
Premises and equipment114,624
     136,918
    
Other assets416,009
     383,003
    
Total assets$6,455,591
     $5,969,822
    
            
Liabilities           
Interest bearing checking$935,792
 0.14% $966
 $900,327
 0.14% $628
Money market deposits1,248,796
 0.42% 5,036
 1,078,231
 0.58% 3,120
Savings deposits440,508
 0.19% 903
 420,469
 0.29% 596
Time deposits >$100,000638,216
 1.65% 10,221
 717,879
 1.88% 6,700
Other time deposits246,807
 0.74% 1,372
 262,854
 0.66% 857
Total interest-bearing deposits3,510,119
 0.56% 18,498
 3,379,760
 0.71% 11,901
Borrowings302,566
 1.62% 7,092
 365,143
 2.81% 5,086
Total interest-bearing liabilities3,812,685
 0.65% 25,590
 3,744,903
 0.91% 16,987
            
Noninterest bearing checking1,716,212
     1,377,370
    
Other liabilities61,570
     58,954
    
Shareholders’ equity865,124
     788,595
    
Total liabilities and
shareholders’ equity
$6,455,591
     $5,969,822
    
            
Net yield on interest-earning assets and net interest income  3.69% $161,548
   4.03% $107,770
Net yield on interest-earning assets and net interest income – tax-equivalent (2)  3.71% $162,808
   4.06% $108,617
            
Interest rate spread  3.46%     3.75%  
            
Average prime rate  3.84%     5.50%  
(1)   Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)   Includes tax-equivalent basis.

  For the Three Months Ended September 30, 
  2017  2016 
($ in thousands) Average
Volume		  Average
Rate		  Interest
Earned
or Paid		  Average
Volume		  Average
Rate		  Interest
Earned
or Paid		 
Assets                  
Loans (1) $3,404,862   4.84%  $41,549  $2,635,707   4.52%  $29,919 
Taxable securities  275,544   2.89%   2,004   296,873   2.26%   1,688 
Non-taxable securities (2)  54,606   8.00%   1,101   49,371   7.81%   969 
Short-term investments  305,245   1.38%   1,059   145,268   0.58%   213 
Total interest-earning assets  4,040,257   4.49%   45,713   3,127,219   4.17%   32,789 
                         
Cash and due from banks  80,191           60,951         
Premises and equipment  96,596           77,117         
Other assets  297,365           178,450         
   Total assets $4,514,409          $3,443,737         
                         
Liabilities                        
Interest bearing checking $688,739   0.06%  $105  $584,232   0.06%  $92 
Money market deposits  794,788   0.19%   372   642,201   0.18%   283 
Savings deposits  402,330   0.21%   208   205,044   0.05%   26 
Time deposits >$100,000  494,680   0.84%   1,053   400,043   0.65%   657 
Other time deposits  246,475   0.28%   172   259,215   0.30%   196 
     Total interest-bearing deposits  2,627,012   0.29%   1,910   2,090,735   0.24%   1,254 
Borrowings  331,122   1.75%   1,462   228,273   1.13%   647 
Total interest-bearing liabilities  2,958,134   0.45%   3,372   2,319,008   0.33%   1,901 
                         
Noninterest bearing checking  1,005,307           732,520         
Other liabilities  30,536           26,456         
Shareholders’ equity  520,432           365,753         
Total liabilities and
shareholders’ equity		 $4,514,409          $3,443,737         
                         
Net yield on interest-earning
assets and net interest income		      4.16%  $42,341       3.93%  $30,888 
Interest rate spread      4.04%           3.84%     
                         
Average prime rate      4.25%           3.50%     
(1)Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)Includes tax-equivalent adjustments of $702,000 and $534,000 in 2017 and 2016, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount has been computed assuming a 37%adjustments of $664,000 and $847,000 in 2020 and 2019, 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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  For the Nine Months Ended September 30, 
  2017  2016 
($ in thousands) Average
Volume		  Average
Rate		  Interest
Earned
or Paid		  Average
Volume		  Average
Rate		  Interest
Earned
or Paid		 
Assets                  
Loans (1) $3,211,844   4.78%  $114,908  $2,576,605   4.68%  $90,301 
Taxable securities  284,588   2.74%   5,830   304,669   2.40%   5,472 
Non-taxable securities (2)  56,092   7.74%   3,249   50,221   7.51%   2,822 
Short-term investments, principally federal funds  283,601   1.08%   2,299   142,156   0.58%   612 
Total interest-earning assets  3,836,125   4.40%   126,286   3,073,651   4.31%   99,207 
                         
Cash and due from banks  74,135           57,943         
Premises and equipment  92,042           76,339         
Other assets  267,231           175,302         
   Total assets $4,269,533          $3,383,235         
                         
Liabilities                        
Interest bearing checking $676,939   0.06%  $320  $585,052   0.06%  $284 
Money market deposits  771,826   0.18%   1,067   652,017   0.17%   846 
Savings deposits  362,164   0.19%   505   197,204   0.05%   74 
Time deposits >$100,000  473,200   0.75%   2,641   394,403   0.65%   1,931 
Other time deposits  248,985   0.27%   511   277,123   0.35%   725 
     Total interest-bearing deposits  2,533,114   0.27%   5,044   2,105,799   0.24%   3,860 
Borrowings  294,650   1.55%   3,411   200,427   1.17%   1,750 
Total interest-bearing liabilities  2,827,764   0.40%   8,455   2,306,226   0.32%   5,610 
                         
Noninterest bearing checking  932,233           695,718         
Other liabilities  31,782           23,350         
Shareholders’ equity  477,754           357,941         
Total liabilities and
shareholders’ equity		 $4,269,533          $3,383,235         
                         
Net yield on interest-earning
assets and net interest income		      4.11%  $117,831       4.07%  $93,597 
Interest rate spread      4.00%           3.99%     
                         
Average prime rate      4.03%           3.50%     
(1)Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)Includes tax-equivalent adjustments of $1,979,000 and 1,510,000 in 2017 and 2016, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount was computed assuming a 37% tax rate and is reduced by the related nondeductible portion of interest expense.

Average loans outstanding for the thirdsecond quarter of 20172020 were $3.405$4.739 billion, which was $769$409 million, or 29.2%9.4%, higher than the average loans outstanding for the thirdsecond quarter of 20162019 ($2.6364.330 billion). Average loans for the ninesix months ended SeptemberJune 30, 20172020 were $3.212$4.626 billion, which was 24.7%$321 million, or 7.5%, higher than the average loans outstanding for the nine months ended September 30, 2016comparable period of 2019 ($2.5774.305 billion). The higher amount of average loans outstanding in 20172020 was due to a combination of acquired growth and organic growth. The acquisition of Carolina Bank on March 3, 2017 added $497 million in loans as of the acquisition date. Also, due to our loan growth initiatives, including our continued focus and expansion into higher growth markets, our hiring of experienced bankers and improved loan demandour emphasis on SBA lending. Also significantly impacting our growth in our market areas, we have grownloans in 2020 was the origination of $245 million in PPP loans during the second quarter of 2020. Excluding PPP loan balances, organically by $281 million overaverage loans outstanding were approximately 5.3% higher for the past year.

The mixboth the three and six months ended June 30, 2020 compared to the prior respective periods.



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In late 2018 and early 2019, in order to reduce exposure to the possibility of lower interest rates, we invested a portion of our loan portfolio remained substantiallyinterest-bearing cash balances into fixed rate investment securities. As a result, as shown in the tables above, our average balance of taxable securities grew by $117 million, or 17.1% when comparing the first six months of 2020 to the first six months of 2019.

Average short-term investments, primarily interest-bearing cash, for the second quarter of 2020 amounted to $575 million, which was $238 million, or 70.5%, higher than for the second quarter of 2019 ($337 million). Average short-term investments, primarily interest-bearing cash, outstanding increased $35 million, or 9.6%, when comparing the first six months of 2020 to the same at September 30, 2017 comparedperiod of 2019. Interest-bearing cash balances increased significantly in 2020 due to December 31, 2016, with approximately 87% of our loans being real estate loans, 11% being commercial, financial, and agricultural loans, andhigh deposit growth experienced, as discussed in the remaining 2% being consumer installment loans. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

following paragraph.

Average total deposits outstanding for the thirdsecond quarter of 20172020 were $3.632$5.502 billion, which was $809$692 million, or 28.7%14.4%, higher than the average deposits outstanding for the thirdsecond quarter of 20162019 ($2.8234.810 billion). Average total deposits outstanding for the ninefirst six months ended September 30, 2017of 2020 were $3.465 billion, which was 23.7%$469 million, or 9.9%, higher than the average deposits outstanding forcomparable period of 2019. The majority of the nine months ended September 30, 2016 ($2.802 billion). As discussed previously, we acquired Carolina Bank during the first quarter of 2017, which had $585 milliongrowth has occurred in deposits on the acquisition date. Including the acquisition, averageour transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased. 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 $2.130 billion for the nine months ended Septemberour deposit account growth initiatives.
We utilized funds provided by our high deposit growth to pay down a substantial portion of our borrowings in 2020. Total borrowings at June 30, 20162020 amounted to $2.743 billion for the nine months ended September 30, 2017, representing growth$112 million, a decline of $613$188 million, or 28.8%.62.7% from December 31, 2019, while average borrowings decreased $34 million, or 10.5%, when comparing the second quarter of 2020 to the second quarter of 2019. Average time deposits also increased forborrowings decreased $63 million, or 17.1%, when comparing the first ninesix months of 2017 in comparison2020 to the first ninesix months of 2016, from $672 million to $722 million, an increase of $50 million, or 7.5%.

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2019.
Index

Average borrowings increased for the nine months ended September 30, 2017 to $294.7 million from the $200.4 million for the same period of 2016. Carolina Bank had approximately $19 million in borrowings on the date of acquisition. Our cost of funds, which includes noninterest bearing checking accounts at a zero percent cost, was 0.30% in the first nine months of 2017 compared to 0.25% in the first nine months of 2016, with the increase being due to the increased costs associated with our higher levels of borrowings.

See additional information regarding changes in our loans and deposits in the section below entitled “Financial Condition.”


Our net interest margin (tax-equivalent(a non-GAAP measure calculated by dividing tax-equivalent net interest income divided by average earning assets) for the thirdsecond quarter of 20172020 was 4.16% compared to 3.93% for3.49%, which was 57 basis points lower than the third4.06% realized in the second quarter of 2016.2019. For the nine month periodsix months ended SeptemberJune 30, 2017,2020, our net interest margin was 4.11%3.71% compared to 4.07%4.06% for the same period in 2016.2019. The increases in 2017lower margins were primarily due to both increasedthe impact of lower interest rates.
As derived from the table above, in comparing 2020 to 2019, interest-earning asset yields and higher amountsdecreased 87 basis points in the second quarter of discount accretion. Asset2020 compared to the second quarter of 2019, while interest-bearing liability costs decreased by only 41 basis points over that same period. In comparing the year-to-date periods, interest-earning asset yields have increased primarily as a result of threedecreased 55 basis points, while interest-bearing liability costs decreased by only 26 basis points. Since August 2019, the Federal Reserve Board has decreased interest rates by 225 basis points, which resulted in significant declines in our asset yields. Most significantly, approximately one-third of our loan portfolio is comprised of adjustable rate loans, most of which repriced down following the interest rate increases duringcuts. We have been able to reduce our deposit costs, but not to the past year. Funding costs have also increased, but to a lesser degree.

same level as the reduction experienced in our asset yields. Our net interest margin benefitswas also negatively impacted by high levels of overnight funds that resulted from the strong deposit growth during the second quarter of 2020.


Our PPP loans did not significantly impact our net accretioninterest margins during 2020. During the 2020 periods, we amortized as interest income $1.3 million of purchase accounting premiums/discounts associatedthe origination fees, which when added to the interest earned from the stated note rate of 1%, resulted in a 3.97% yield on those loans for the second quarter of 2020. We have $8.8 million in remaining deferred PPP fees that will be recognized over the lives of the loans, with acquired loans and deposits. accelerated amortization expected to result from the loan forgiveness process.

We recorded loan discount accretion amountingof $1.4 million in the second quarter of 2020, compared to $1.7 million in the thirdsecond quarter of 2017, compared to $0.8 million in the third quarter of 2016. For the first nine months of 2017 and 2016,2019. The lower loan discount accretion amountedin 2020 was attributable to $5.1lower loan payoffs. For the six months ended June 30, 2020 and 2019, we recorded loan discount accretion of $3.2 million and $3.6$3.1 million, respectively. The increase inhigher loan discount accretion is primarilywas attributable to higher accretion on SBA loans due to the loan discounts recordedgrowth in the acquisition of Carolina Bank. Unaccreted loan discount has increased from $13.2 million at September 30, 2016 to $16.9 million at September 30, 2017 primarily as a result of the Carolina Bank acquisition.

that portfolio.

See additional information regarding net interest income in the section entitled “Interest Rate Risk.”




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Index

We recorded no provision for loan losses in the third quarters of 2017 or 2016. For the nine months ended September 30, 2017, we recorded totala provision for loan losses of $0.7$19.3 million in the second quarter of 2020 compared to a total negative provision for loan losses (reduction of $23,000the allowance for loan losses) of $0.3 million in the same periodsecond quarter of 2016.

Our provision2019. For the six months ended June 30, 2020 and 2019, we recorded provisions for loan loss levelslosses of $24.9 million and $0.2 million, respectively. The increases in 2020 are primarily related to estimated probable losses arising from the economic impact of COVID-19. Since the onset of the pandemic in March 2020, we have been impacted by continued improvement in asset quality. Nonperforming assets amountedworked with many of our borrowers, including the option of loan payment deferrals, with total loans on deferral status amounting to $53.0$774 million at SeptemberJune 30, 2017, a decrease2020, or 16% of 24.4% from the $70.2 million one year earlier. Our nonperforming assets to total assets ratio was 1.16% at September 30, 2017 compared to 1.98% at September 30, 2016. Also, our provisionloan portfolio. See the section entitled "Allowance for loan loss levels were impacted by lower net loan charge-offs in 2017. We experienced net loan recoveries of $0.1 millionLoan Losses and Provision for the first nine months of 2017, compared to net loan charge-offs of $2.9 millionLoan Losses" below for the first nine months of 2016. The ratio of annualized net charge-offs to average loans for the nine months ended September 30, 2017 was 0.00%, compared to 0.15% for the same period of 2016.

additional information.


Total noninterest income was $12.4$26.2 million and $5.2$15.6 million for the three months ended SeptemberJune 30, 20172020 and September 30, 2016,2019, respectively. For the ninesix months ended SeptemberJune 30, 2017,2020 and 2019, total noninterest income amounted to $34.0was $39.9 million compared to $16.1and $29.7 million, for the same period of 2016.

As shown in the table below, core noninterest income for the third quarter of 2017 was $12.8 million, an increase of 31.2% from the $9.8 million reported for the third quarter of 2016. For the first nine months of 2017, core noninterest income amounted to $34.2 million, a 35.4% increase from the $25.3 million recorded in the comparable period of 2016. Core noninterest income includes i) servicerespectively.


Service charges on deposit accounts ii) other service charges, commissions, and fees, iii) fees from presold mortgage loans, iv) commissions from sales of insurance and financial products, v) SBA consulting fees, vi) SBA loan sale gains, and vii) bank-owned life insurance income.

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Index

The following table presents our core noninterest incomeamounted to $2.3 million for the three and nine month periods ending September 30, 2017 and 2016, respectively.

  For the Three Months Ended  For the Nine Months Ended 
$ in thousands September 30,
2017		  September 30,
2016		  September 30,
2017		  September 30,
2016		 
             
Service charges on deposit accounts $2,945   2,710   8,525   7,960 
Other service charges, commissions, and fees  3,468   2,996   10,195   8,869 
Fees from presold mortgage loans  1,842   710   4,121   1,491 
Commissions from sales of insurance and financial products  1,426   969   3,304   2,844 
SBA consulting fees  864   1,178   3,174   1,898 
SBA loan sale gains  1,692   694   3,241   694 
Bank-owned life insurance income  579   514   1,667   1,526 
     Core noninterest income $12,816   9,771   34,227   25,282 
                 

As shown in the table above, service charges on deposit accounts increased from $2.7second quarter of 2020 compared to $3.2 million in the thirdsecond quarter of 2016 to $2.9 million in the third quarter of 2017.2019. For the ninefirst six months ended September 30, 2017,of 2020 and 2019, service charges on deposit accounts amounted to $8.5$5.6 million which is a $0.5and $6.2 million, increase from the $8.0 million recorded in the comparable period of 2016.respectively. The increases for both periodsdecreases are primarily due to fewer instances of overdraft fees that we believe is likely associated with the service charges from accounts assumed in the Carolina Bank acquisition.

generally higher levels of deposits maintained by our customers during 2020.


Other service charges, commissions, and fees increased from $3.0amounted to $4.6 million in the thirdsecond quarter of 20162020 compared to $3.5$5.1 million, a decline of 8.4%. For the first six months of 2020, this line item amounted to $8.7 million compared to $9.6 million for the same period of 2019, a decline of 9.0%. Both periods in 2020 were impacted by lower interchange income due to reduced credit card and debit card usage that we believe is attributable to the pandemic. The first quarter of 2020 was also negatively impacted by a $0.5 million impairment of our SBA servicing asset due to the lower fair value of that asset resulting from market conditions at March 31, 2020.

Fees from presold mortgages amounted to $3.0 million for the second quarter of 2020 compared to $0.9 million in the thirdsecond quarter of 2017. For the nine months ended September 30, 2017, this revenue amounted to $10.2 million, which was a $1.3 million increase from the $8.9 million recorded in the comparable period of 2016. The increase in this line item was due to a combination of the Carolina Bank acquisition, as well as growth in interchange fees from debit and credit cards. We earn a small fee each time a customer uses a debit or credit card to make a purchase. Due to the growth in checking accounts and increased customer usage of debit cards, we have experienced increases in this line item. Interchange income from credit cards has also increased due to growth in the number and usage of credit cards, which we believe is a result of increased promotion of this product.

Fees from presold mortgage loans increased to $1.8 million for the third quarter of 2017 from $0.7 million in the third quarter of 2016.2019. For the first ninesix months of 2017,2020 and 2019, fees from presold mortgage loans increasedmortgages amounted to $4.1$4.9 million from the $1.5and $1.4 million, recorded in the comparable period of 2016.respectively. The increases werein 2020 are primarily due to the acquisition of Carolina Bank in March 2017, which had a significanthigher mortgage loan operation.

origination volume arising from historically low mortgage loan interest rates.

Commissions from sales of insurance and financial products amounted to approximately $1.4 million and $1.0 million for the third quarters of 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, commissions from sales of insurance and financial products amounted to $3.3 million and $2.8 million, respectively. The increase was primarily due to the acquisition of an insurance agency during the third quarter of 2017 – see additional discussion at Note 4 to the Consolidated Financial Statements.

One of the primary reasons for the increases in core noninterest income for the three and nine months ended September 30, 2017 was the addition of SBA consulting fees and SBA loan sale gains beginning in 2016. On May 5, 2016, we completed the acquisition of a firm that specializes in consulting with financial institutions across the country related to SBA loan origination and servicing. We recorded $0.9 million and $3.2 million in SBA consulting fees related to this business during the three and nine months ended September 30, 2017, respectively, in comparison to $1.2 million and $1.9 million for the three and nine months ended September 30, 2016, respectively. In the third quarter of 2016, we launched a national SBA lending division offering SBA loans to small business owners throughout the United States. The SBA division earned $1.7 million and $3.2 million from gains on the sales of the guaranteed portions of these loans during the three and nine months ended September 30, 2017, respectively, in comparison to $0.7 million for both the three and nine months ended September 30, 2016.

Bank-owned life insurance income was relatively unchangeddid not vary significantly for the periods presented, amounting to $0.6approximately $2.1 million and $2.2 million for the second quarters of 2020 and 2019, respectively, and $4.2 million for both the six months ended June 30, 2020 and 2019.


For the second quarters of 2020 and 2019, SBA consulting fees amounted to $3.7 million and $0.9 million, respectively. For the first six months of 2020 and 2019, SBA consulting fees amounted to $4.8 million and $2.2 million, respectively. The increases in 2020 are due to fees earned in the thirdsecond quarter by the Company's SBA subsidiary, SBA Complete, related to assisting its third-party client banks with the PPP, which amounted to approximately $3.0 million. Included in the $3.0 million of 2017 compared toPPP fees are $0.5 million in servicing fees related to those loans. Based on June 30, 2020 balances, PPP servicing fees are estimated at $230,000 per month, which will be reduced upon the thirdpayback and/or forgiveness of the PPP loans. In addition to the PPP fees recorded in the second quarter of 2016, and $1.72020, SBA Complete deferred $1.6 million of revenue that will be recorded as income upon the forgiveness portion of the PPP loans.

SBA loan sale gains amounted to $1.5 million for the first nine months of 2017 and 2016, respectively.

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Index

Within the noncore components of noninterest income, the largest variance for the periods presented related to indemnification asset expense. As discussed previously, in the third quarter of 2016, we terminated our FDIC loss share agreements, and thus there was no indemnification asset income or expense in 2017. In 2016, we recorded indemnification asset expense of $5.7$2.0 million and $10.3$2.6 million for the three and ninesix months ended SeptemberJune 30, 2016,2020, respectively, compared to $3.1 million and $5.1 million for the three and six months ended June 30, 2019, respectively.

Origination of SBA loans have generally declined due to the economic impact of COVID-19.


During the ninesecond quarter of 2020, we sold approximately $220 million in mortgage-backed and commercial mortgage-backed securities at a gain of $8.0 million. The securities sold were believed to be favorably impacted by historically low interest rates and Federal Reserve stimulus measures. No securities gains were recorded in the first half of 2019.

Noninterest expenses amounted to $38.9 million in the second quarter of 2020 compared to $40.1 million recorded in the second quarter of 2019, a decrease of 3.0%. For the six months ended SeptemberJune 30, 2017, we2020, noninterest expenses amounted to $79.0 million, an increase of 0.2% from the $78.9 million recorded $0.2 million in losses from sales of securities. For the comparable period of 2016, we recorded an insignificant amount of gain.

Other gains and losses for the 2017 periods presented represent the net effects of miscellaneous gains and losses that are non-routine in nature. In the third quarter of 2016, the Company recorded a net gain of $1.4 million as a result of a branch exchange transaction.

2019. Noninterest expenses amountedin 2020 were impacted by generally lower economic activity resulting from the pandemic.




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Personnel expense increased 1.3% to $34.4$24.5 million in the thirdsecond quarter of 2017 compared to $27.7 million recorded in the third quarter of 2016. Noninterest expenses for the nine months ended September 30, 2017 amounted to $101.5 million compared to $78.6 million in 2016. The majority of the increase in noninterest expenses in 2017 relates to our acquisition of Carolina Bank.

Salaries expense increased to $16.62020 from $24.2 million in the thirdsecond quarter of 2017 from2019. For the $13.4six months ended June 30, 2020 and 2019, personnel expense amounted to $49.1 million recordedand $47.7 million, an increase of 2.9%. The increase in 2020 was primarily due to an increase in commissions earned by the thirdCompany's mortgage loan originators that is associated with the high volume of originations in 2020. In the second quarter of 2016. Salaries2020, the Company deferred approximately $500,000 in personnel costs associated with PPP loan originations (FAS 91).

The combined amount of occupancy and equipment expense did not vary significantly among the periods presented, amounting to $3.7 million and $3.9 million for three month periods ending June 30, 2020 and 2019, respectively, and $7.8 million and $8.0 million for the first nine months of 2017 amounted to $46.8 million compared to $37.5 million in 2016. The primary reason for the increase in salariessix month periods ending June 30, 2020 and 2019, respectively.

Intangibles amortization expense in 2017 was the addition of personnel assumed in the Carolina Bank acquisition. Also impacting salaries expense is the 2016 acquisition and continued growth of the Company’s SBA consulting firm which was acquired in May 2016 and the SBA national lending division, which began operations in the third quarter of 2016.

Employee benefits expense was $3.4decreased from $1.2 million in the thirdsecond quarter of 2017 compared2019 to $1.0 million in the second quarter of 2020, and decreased from $2.6 million in the third quarter of 2016. For the first ninesix months of 2017, employee benefits expense amounted2019 to $10.7 million compared to $7.9 million in 2016. This increase in 2017 was primarily due to the acquisition and growth initiatives discussed above.

Occupancy and equipment expense increased in 2017 primarily due to the acquisitions discussed above. For the three months ended September 30, 2017, occupancy and equipment expense totaled $3.5 million compared to $2.9 million in the third quarter of 2016. For the nine months ended September 30, 2017, occupancy and equipment expense totaled $10.3 million compared to $8.5$2.0 million in the first ninesix months of 2016.

Merger and acquisition expenses amounted to $1.3 million and $0.6 million for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, merger and acquisition expenses amounted to $4.8 million and $1.3 million, respectively. Merger and acquisition expenses represent transaction related costs associated2020. The declines were primarily with the acquisitions of Carolina Bank and Asheville Savings Bank.

Intangibles amortization expense increased from $0.4 million in the third quarter of 2016 to $0.9 million in the third quarter of 2017 and from $0.8 million in the first nine months of 2016 to $2.5 million in the first nine months of 2017, primarily as a result of the amortization of intangible assets associated with acquisitions that were recorded in connection with our acquisitions.

typically have amortization schedules that decline over time.


Foreclosed property losses decreased among the 2020 periods presented due primarily to lower levels of foreclosed properties that the Bank holds.
Other operating expenses amounted to $8.7 million and $7.8$9.7 million for the third quarterssecond quarter of 2017 and 2016, respectively, and $26.42020 compared to $10.3 million in the first nine monthssecond quarter of 2017 compared to $22.7 million2019, a decrease of 5.9%. The decrease was primarily a result of a general decline in the first nine months of 2016. The increases were primarilyvarious activity-based expenses due to the Company’s growth, including the acquisitions of the SBA consulting firm and Carolina Bank.

pandemic. For the third quarter of 2017,six months ended June 30, 2020 and 2019, other operating expenses did not vary significantly, amounting to $19.8 million and $19.7 million, respectively.

For the three months ended June 30, 2020 and 2019, the provision for income taxes was $6.5$4.3 million, an effective tax rate of 33.3%20.7%, compared to $3.1and $6.4 million, for the same period of 2016, which is an effective tax rate of 40.0%.21.2%, respectively. For the first ninesix months of 2017,ended June 30, 2020 and 2019, the provision for income taxes was $15.8$8.9 million, an effective tax rate of 33.3%20.5%, compared to $10.4and $12.3 million, for the same period of 2016, which was an effective tax rate of 35.2%. Tax matters associated with the branch exchange with First Community Bank21.0%, respectively.
The consolidated statements of comprehensive income reflect other comprehensive loss of $3.9 million during the thirdsecond quarter of 2016 contributed2020 compared to other comprehensive income of $9.2 million during the increase in effective tax rate forsecond quarter of 2019. For the periods in 2016.

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The Consolidated Statementsfirst six months of Comprehensive Income2020 and 2019, the consolidated statements of comprehensive income reflect other comprehensive income of $0.2 million during each of the third quarters of 2017 and 2016. During the nine months ended September 30, 2017 and 2016, we recorded other comprehensive income of $2.3$12.2 million and $2.0$13.8 million, respectively. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains (losses) of our available for sale securities.securities resulting from declines in interest rates. The other comprehensive loss in the second quarter of 2020 was due to the realization of $8.0 million ($6.2 million, net of taxes) in gains from sales of approximately $220 million of available for sale securities, which offset $2.8 million ($2.1 million, net of taxes) of unrealized holding gains. 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. 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 SeptemberJune 30, 20172020 amounted to $4.59$6.9 billion, a 29.8%12.1% increase from a year earlier.December 31, 2019. Total loans at SeptemberJune 30, 20172020 amounted to $3.43$4.8 billion, a 29.4%7.1% increase from a year earlier,December 31, 2019, and total deposits amounted to $3.65$5.8 billion, a 25.4%an 18.2% increase from a year earlier.

December 31, 2019.

The following table presents information regarding the nature of changes in our levels of loans and deposits for the twelve months ended September 30, 2017 and for the first ninesix months of 2017.

October 1, 2016 to
September 30, 2017		 Balance at
beginning
of period		  Internal
Growth,
net		  Growth
from
Acquisitions
(1)		  Balance at
end of
period		  Total
percentage
growth		  Internal
percentage
growth		 
          
          
Loans outstanding $2,651,459   280,774   497,522   3,429,755   29.4%   10.6% 
                         
Deposits – Noninterest bearing checking  749,256   120,782   146,909   1,016,947   35.7%   16.1% 
Deposits – Interest bearing checking  593,065   28,277   61,771   683,113   15.2%   4.8% 
Deposits – Money market  658,166   35,562   100,191   793,919   20.6%   5.4% 
Deposits – Savings  207,494   521   188,177   396,192   90.9%   0.3% 
Deposits – Brokered  147,406   56,732   11,477   215,615   46.3%   38.5% 
Deposits – Internet time  —   (3,253)  11,248   7,995   —   — 
Deposits – Time>$100,000  306,041   (46,818)  36,783   296,006   -3.3%   -15.3% 
Deposits – Time<$100,000  249,412   (36,783)  28,825   241,454   -3.2%   -14.7% 
     Total deposits $2,910,840   155,020   585,381   3,651,241   25.4%   5.3% 
                         

January 1, 2017 to
September 30, 2017		                  
Loans outstanding $2,710,712   221,521   497,522   3,429,755   26.5%   8.2% 
                         
Deposits – Noninterest bearing checking  756,003   114,035   146,909   1,016,947   34.5%   15.1% 
Deposits – Interest bearing checking  635,431   (14,089)  61,771   683,113   7.5%   -2.2% 
Deposits – Money market  683,680   10,048   100,191   793,919   16.1%   1.5% 
Deposits – Savings  209,074   (1,059)  188,177   396,192   89.5%   -0.5% 
Deposits – Brokered  136,466   67,672   11,477   215,615   58.0%   49.6% 
Deposits – Internet time  —   (3,253)  11,248   7,995   —   — 
Deposits – Time>$100,000  287,939   (28,716)  36,783   296,006   2.8%   -10.0% 
Deposits – Time<$100,000  238,760   (26,131)  28,825   241,454   1.1%   -10.9% 
     Total deposits $2,947,353   118,507   585,381   3,651,241   23.9%   4.0% 

(1)Includes the acquisition of Carolina Bank on March 3, 2017, which had $497.5 million in loans and $585.4 million in deposits.

2020.



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$ in thousands        
January 1, 2020 to
June 30, 2020
 
Balance at
beginning
of period
 
Internal
Growth,
net
 
Balance at
end of
period
 
Total
percentage
growth
Total loans $4,453,466
 316,597
 4,770,063
 7.1 %
         
Deposits – Noninterest bearing checking 1,515,977
 525,801
 2,041,778
 34.7 %
Deposits – Interest bearing checking 912,784
 199,841
 1,112,625
 21.9 %
Deposits – Money market 1,173,107
 179,946
 1,353,053
 15.3 %
Deposits – Savings 424,415
 50,040
 474,455
 11.8 %
Deposits – Brokered 86,141
 (22,072) 64,069
 (25.6)%
Deposits – Internet time 698
 —
 698
 — %
Deposits – Time>$100,000 563,108
 (17,738) 545,370
 (3.2)%
Deposits – Time<$100,000 255,125
 (16,035) 239,090
 (6.3)%
Total deposits $4,931,355
 899,783
 5,831,138
 18.2 %
As derived from the table above, for the twelvefirst six months preceding September 30, 2017, our total loans increased $778 million, or 29.4%. The loan growth from acquisitions is due to our acquisition of Carolina Bank in March 2017, which had $497.5 million in loans on the date of acquisition. Carolina Bank operated through eight branches predominately in the Triad region on North Carolina, and we expect these branches to enhance our recent expansion into this high-growth market. Internal2020, loan growth was $280.8$316.6 million, or 10.6%,7.1%. Loan growth for the twelve months ended September 30, 2017 andperiod was $221.5 million, or 8.2% (10.9% annualized), for the first nine months of 2017. Internal loan growth has been primarily driven by the origination of $244.9 million in PPP loans. Loan growth for the period, excluding PPP loans, was $71.7 million, or 3.2% annualized. Loan growth was organic and driven by our recentcontinued expansion into high-growth markets, and theour hiring of experienced bankers in these areas. Weand our emphasis on SBA lending. Exclusive of PPP balances, we expect continued growth in our loan portfolio for the remainder of 2017.

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2020, however likely at lower levels than we would normally expect as a result of the impact of the pandemic.
Index

The mix of our loan portfolio remains substantially the same at SeptemberJune 30, 20172020 compared to December 31, 2016.2019, with PPP loans increasing the percentage of commercial and industrial loans at June 30, 2020 - see note 4 to the consolidated financial statements for additional information. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

Note 7 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

For both the nine and twelvesix month periodsperiod ended SeptemberJune 30, 2017,2020, we experienced netstrong internal growth in total deposits. For these periods, increases in transactionour core deposit account balancesaccounts (checking, money market and savings) offset declines. In addition to deposits arising from PPP loans, this high deposit growth is believed to be due to a combination of stimulus funds and changes in time deposits. Duecustomer 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 low interest rate environment, somepast year. Our liquid assets (cash and securities) as a percentage of our customers are shifting their funds from time deposits into transaction accounts, which do not pay a materially lower interest rate, while being more liquid. We also experienced growth from acquisitions due to the Carolina Bank acquisition. We acquired $585.4 million in deposits from the Carolina Bank acquisition, and of that, $497.0 million were in the transaction deposit categories.

While retail deposits (non-brokered) have experienced growth over recent periods, the loan growth we have experienced has exceeded the retail deposit growth. This is largely associated with our recent growth and expansion into the larger markets of North Carolina – Charlotte, Raleigh, and the Triad. When initially entering markets such as these, our experience has been that we are able to capture loan market share faster than deposit market share. This imbalance has resulted in higher use of brokeredtotal deposits and borrowings to fund the loan growth. Total brokered deposits amounted to $215.6 million at September 30, 2017, which is a 46% increase from the $147.4 million outstanding a year earlier. Borrowings have increased from $236.4 million21.4% at December 31, 2019 to $397.5 million over that same period.

26.2% at June 30, 2020. 

Nonperforming Assets

Nonperforming assets include nonaccrual loans, troubled debt restructurings,restructured loans, 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
September 30,
2017		  As of/for the
quarter ended
December 31,
2016		  As of/for the
quarter ended
September 30,
2016		 
          
Nonperforming assets            
   Nonaccrual loans $23,350   27,468   32,796 
   Restructured loans – accruing  20,330   22,138   27,273 
   Accruing loans >90 days past due  —   —   — 
      Total nonperforming loans  43,680   49,606   60,069 
   Foreclosed real estate  9,356   9,532   10,103 
          Total nonperforming assets $53,036   59,138   70,172 
             
Purchased credit impaired loans not included above (1) $15,034   —   — 
             
Asset Quality Ratios – All Assets            
Net charge-offs to average loans - annualized  -0.07%   0.12%   0.06% 
Nonperforming loans to total loans  1.27%   1.83%   2.27% 
Nonperforming assets to total assets  1.16%   1.64%   1.98% 
Allowance for loan losses to total loans  0.72%   0.88%   0.93% 
Allowance for loan losses to nonperforming loans  56.30%   47.94%   40.91% 



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ASSET QUALITY DATA ($ in thousands)
 As of/for the quarter ended June 30, 2020 As of/for the quarter ended December 31, 2019
Nonperforming assets    
Nonaccrual loans $34,922
 24,866
Restructured loans – accruing 9,867
 9,053
Accruing loans >90 days past due —
 —
Total nonperforming loans 44,789
 33,919
Foreclosed real estate 2,987
 3,873
Total nonperforming assets $47,776
 37,792
     
Purchased credit impaired loans not included above (1) $9,742
 12,664
     
Asset Quality Ratios – All Assets    
Net charge-offs to average loans - annualized 0.12% 0.09%
Nonperforming loans to total loans 0.94% 0.76%
Nonperforming assets to total assets 0.69% 0.62%
Allowance for loan losses to total loans 0.89% 0.48%
Allowance for loan losses to nonperforming loans 94.54% 63.09%
(1)In the March 3, 2017 acquisition of Carolina Bank Holdings, Inc.,and the CompanyOctober 1, 2017 acquisition of Asheville Savings Bank, we acquired $19.3 million and $9.9 million, respectively, in purchased credit impairedPCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from the nonperforming loan amounts.amounts, including $0.8 million and $0.8 million in PCI loans at June 30, 2020 and December 31, 2019, respectively, that were contractually past due 90 days or more.

Nonperforming assets have increased since December 31, 2019, which was primarily driven by four loans in the $2-$4 million range being placed on nonaccrual status in the second quarter of 2020 that were not directly related to the impact of the pandemic. Due to the onset of the COVID-19 pandemic not occurring until late in the first quarter of 2020 and the Company's COVID-19 deferral relief program, the nonperforming assets at June 30, 2020 do not reflect the likely impact from COVID-19. While there are still many uncertainties associated with the pandemic and the stimulus measures taken by the United States government to address it, higher unemployment levels and business closures would generally be expected to result in higher levels of nonperforming assets in the future.
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.

Consistent with the weak economy experienced in much of our market associated with the onset of the recession in 2008, we experienced higher levels of loan losses, delinquencies and nonperforming assets compared to our historical averages. As the economic conditions have improved in our market area over the past several years, we have experienced steady declines in our levels of nonperforming assets.

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As noted in the table above, at SeptemberAt June 30, 2017,2020, total nonaccrual loans amounted to $23.4$34.9 million, compared to $27.5$24.9 million at December 31, 2016 and $32.82019. As noted above, the increase was primarily driven by four loans. One of those four loans, with a balance of approximately $4 million, at September 30, 2016. “Restructuredhas a 75% SBA guarantee.

Restructured loans – accruing”, or troubled debt restructurings (“TDRs”),(TDRs) are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At SeptemberJune 30, 2017,2020, total accruing TDRs amounted to $20.3$9.9 million, compared to $22.1$9.1 million at December 31, 2016 and $27.32019. As previously discussed, COVID-19 related deferrals, which amounted to $774 million at SeptemberJune 30, 2016.

2020 are excluded from TDR consideration at June 30, 2020.

Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $9.4$3.0 million at SeptemberJune 30, 2017, $9.52020 and $3.9 million at December 31, 2016, and $10.1 million at September 30, 2016.2019. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and the improvement in ourfavorable overall asset quality. In the first quarter of 2017, we acquired Carolina Bank and assumed $3.1 million of foreclosed real estate in this transaction.



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The following is the composition, by loan type, of all of our nonaccrual loans at each period end, as classified for regulatory purposes:

($ in thousands) At September 30,
2017		  At December 31,
2016		  At September 30,
2016		 
Commercial, financial, and agricultural $996   1,842   2,253 
Real estate – construction, land development, and other land loans  1,565   2,945   3,858 
Real estate – mortgage – residential (1-4 family) first mortgages  14,878   16,017   17,989 
Real estate – mortgage – home equity loans/lines of credit  2,250   2,355   2,441 
Real estate – mortgage – commercial and other  3,534   4,208   6,151 
Installment loans to individuals  127   101   104 
   Total nonaccrual loans $23,350   27,468   32,796 
             

The table above indicated decreases in most categories of nonaccrual loans. The decreases reflect stabilization in most of our market areas and our increased focus on the resolution of our nonperforming assets.

end.

($ in thousands)At June 30, 2020 At December 31, 2019 
Commercial, financial, and agricultural$8,239
 5,518
 
Real estate – construction, land development, and other land loans1,038
 1,067
 
Real estate – mortgage – residential (1-4 family) first mortgages7,327
 7,552
 
Real estate – mortgage – home equity loans/lines of credit1,903
 1,797
 
Real estate – mortgage – commercial and other16,229
 8,820
 
Consumer loans186
 112
 
Total nonaccrual loans$34,922
 24,866
 

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 September 30, 2017  At December 31, 2016  At September 30, 2016 
Vacant land $3,617   3,221   3,324 
1-4 family residential properties  3,257   4,345   4,538 
Commercial real estate  2,482   1,966   2,241 
   Total foreclosed real estate $9,356   9,532   10,103 

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($ in thousands)At June 30, 2020 At December 31, 2019 
Vacant land and farmland$1,536
 1,752
 
1-4 family residential properties565
 974
 
Commercial real estate886
 1,147
 
Total foreclosed real estate$2,987
 3,873
 

The following table presents geographicalgeographic information regarding our nonperforming assets at SeptemberJune 30, 2017.

  As of September 30, 2017 
($ in thousands) Total
Nonperforming
Loans		  Total Loans  Nonperforming
Loans to Total
Loans		  Total
Foreclosed
Real Estate		 
             
Region (1)                
Eastern Region (NC) $10,505   819,000   1.3%  $1,024 
Triangle Region (NC)  11,489   873,000   1.3%   1,650 
Triad Region (NC)  8,954   906,000   1.0%   2,289 
Charlotte Region (NC)  1,276   273,000   0.5%   334 
Southern Piedmont Region (NC)  6,882   286,000   2.4%   773 
Western Region (NC)  125   91,000   0.1%   912 
South Carolina Region  2,413   153,000   1.6%   528 
Virginia Region (2)  1,969   9,000   21.9%   1,846 
Other  67   20,000   0.3%   — 
      Total $43,680   3,430,000   1.3%  $9,356 
                 

2020.
 As of June 30, 2020
($ in thousands)
Total
Nonperforming
Loans
 Total Loans 
Nonperforming
Loans to Total
Loans
 
Total
Foreclosed
Real Estate
Region (1) 
  
    
Eastern Region (NC)$5,516
 1,013,830
 0.54% $517
Triangle Region (NC)6,637
 990,905
 0.67% 782
Triad Region (NC)9,520
 868,933
 1.10% 111
Charlotte Region (NC)1,854
 366,518
 0.51% —
Southern Piedmont Region (NC)3,282
 269,430
 1.22% 200
Western Region (NC)3,345
 641,741
 0.52% 410
South Carolina Region1,318
 190,150
 0.69% 424
Former Virginia Region82
 527
 15.56% 273
Other13,235
 428,029
 3.09% 270
Total$44,789
 4,770,063
 0.94% $2,987
(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 - Anson, 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

(2)As part of the terms of a July 2016 branch transaction with First Community Bank in which we divested all of our Virginia branches, loans classified as substandard or below were not exchanged between the banks.

Summary

Other includes loans originated on a national basis through the Company’s SBA Lending Division and through the Company's Credit Card Division
Allowance for Loan Losses and Provision for Loan Losses
As previously noted, and as permitted by the CARES Act, we elected to defer the implementation of Loan Loss Experience

CECL until the earlier of the cessation of the national emergency or December 31, 2020 because of the challenges associated with



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developing a reliable forecast of losses that may result from the unprecedented COVID-19 pandemic. Accordingly, the Company's provision for loan losses for the first six months of 2020 is based on the information available and the conditions that existed at June 30, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses. See further discussion below.
The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses” for the period in which the charge is taken). Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. The recoveriesRecoveries realized during the period are credited to this allowance.

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.

The weak economic environmentfactors that beganinfluence management’s judgment in 2008 resulted in elevated levels of classified and nonperforming assets, which generally leddetermining the amount charged to higher provisions foroperating expense include recent loan losses compared to historical averages. Over the past several years, we have seen ongoing signs of a recovering economy in most of our market areas. Although we continue to have an elevated level of past due and adversely classified assets compared to historic averages, we believe the severityloss experience, composition of the loss rateloan portfolio, evaluation of probable inherent in ourlosses and current inventory of classified loans is less than in the recession years.

We recorded no provision for loan losses in the third quarters of 2017 or 2016. For the nine months ended September 30, 2017, we recorded total provision for loan losses of $0.7 million compared to a total negative provision for loan losses of $23,000 in the same period of 2016. The negative provision in 2016 was primarily due to significant recoveries on covered loans.

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Index

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) Nine Months
Ended
September 30,		  Twelve Months
Ended
December 31,		  Nine Months
Ended
September 30,		 
  2017  2016  2016 
Loans outstanding at end of period $3,429,755   2,710,712   2,651,459 
Average amount of loans outstanding $3,211,844   2,603,327   2,576,605 
             
Allowance for loan losses, at beginning of year $23,781   28,583   28,583 
Provision (reversal) for loan losses  723   (23)  (23)
   24,504   28,560   28,560 
Loans charged off:            
Commercial, financial, and agricultural  (1,335)  (2,033)  (1,273)
Real estate – construction, land development & other land loans  (312)  (1,101)  (638)
Real estate – mortgage – residential (1-4 family) first mortgages  (1,746)  (3,894)  (3,461)
Real estate – mortgage – home equity loans / lines of credit  (791)  (1,010)  (970)
Real estate – mortgage – commercial and other  (573)  (1,088)  (933)
Installment loans to individuals  (521)  (1,288)  (741)
       Total charge-offs  (5,278)  (10,414)  (8,016)
Recoveries of loans previously charged-off:            
Commercial, financial, and agricultural  848   817   614 
Real estate – construction, land development & other land loans  2,280   2,690   2,066 
Real estate – mortgage – residential (1-4 family) first mortgages  806   1,207   820 
Real estate – mortgage – home equity loans / lines of credit  250   279   217 
Real estate – mortgage – commercial and other  973   1,286   1,052 
Installment loans to individuals  210   406   312 
       Total recoveries  5,367   6,685   5,081 
            Net (charge-offs)/recoveries  89   (3,729)  (2,935)
Allowance removed related to sold loans  —   (1,050)  (1,050)
Allowance for loan losses, at end of period $24,593   23,781   24,575 
             
Ratios:            
   Net charge-offs as a percent of average loans (annualized)  0.00%   0.14%   0.15% 
   Allowance for loan losses as a percent of loans at end of  period  0.72%   0.88%   0.93% 
             

The




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($ in thousands)
Six Months
Ended
June 30, 2020
 
Twelve Months
Ended December 31,
2019
 
Six Months
Ended
June 30, 2019
Loans outstanding at end of period$4,770,063
 4,453,466
 4,339,467
Average amount of loans outstanding$4,625,798
 4,346,331
 4,305,069
      
Allowance for loan losses, at beginning of year$21,398
 21,039
 21,039
Provision for loan losses24,888
 2,263
 192
 46,286
 23,302
 21,231
      
Loans charged off:     
Commercial, financial, and agricultural(3,931) (2,473) (936)
Real estate – construction, land development & other land loans(45) (553) (293)
Real estate – mortgage – residential (1-4 family) first mortgages(474) (657) (185)
Real estate – mortgage – home equity loans / lines of credit(381) (307) (146)
Real estate – mortgage – commercial and other(545) (1,556) (838)
Consumer loans(397) (757) (436)
Total charge-offs(5,773) (6,303) (2,834)
Recoveries of loans previously charged-off:     
Commercial, financial, and agricultural477
 980
 605
Real estate – construction, land development & other land loans643
 1,275
 489
Real estate – mortgage – residential (1-4 family) first mortgages315
 705
 382
Real estate – mortgage – home equity loans / lines of credit166
 629
 455
Real estate – mortgage – commercial and other102
 575
 374
Consumer loans126
 235
 87
Total recoveries1,829
 4,399
 2,392
Net (charge-offs) recoveries(3,944) (1,904) (442)
Allowance for loan losses, at end of period$42,342
 21,398
 20,789
      
Ratios:     
Net charge-offs (recoveries) as a percent of average loans (annualized)0.17% 0.09% 0.02%
Allowance for loan losses as a percent of loans at end of period0.89% 0.48% 0.48%

We recorded a provision for loan losses of $19.3 million in the second quarter of 2020 compared to a negative provision for loan losses (reduction of the allowance for loan losses) of $0.3 million in the second quarter of 2019. For the six months ended June 30, 2020 and 2019, we recorded provisions for loan losses of $24.9 million and $0.2 million, respectively. The increases in 2020 are primarily related to estimated probable losses arising from the economic impact of COVID-19, as discussed below.

In March 2020, the COVID-19 pandemic began to impact our nation. The subsequent closures of many businesses and job losses are leading to widespread negative economic impacts. The U.S. Government has taken steps to lessen the negative impacts. In determining the appropriate level of allowance for loan losses at June 30, 2020, we reviewed industry types and deferral percentages within our loan portfolio in light of the pandemic. Based on that analysis, we record is driven by anassigned loan loss reserves for certain of those loan types that were consistent with probable loss rates incurred in a stressed economic scenario. The Company also recorded supplemental qualitative reserves for all other loans in deferral status. As a result the analysis, approximately $16.7 million of COVID-19 related qualitative reserves are included in the Company's June 30, 2020 allowance for loan loss mathematical model. The primary factors impacting this model are loan growth, net charge-off history, and asset quality trends. In 2017, the impactamount of strong organic loan growth, which would normally result in higher provisions for loan losses, was substantially offset by net loan recoveries in 2017 and improving asset quality trends.

The allowance for loan losses amounted to $24.6$42.3 million at SeptemberJune 30, 2017, compared to $23.82020.


As of June 30, 2020, we have granted approximately $774 million at December 31, 2016 and $24.6 million at September 30, 2016. in loan deferrals under the CARES act provisions, as detailed below.


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COVID-19 Loan Deferral Information at June 30, 2020   
 Deferrals Total LoansPercentage Deferred
Construction Loans$38,658
648,590
6%
Farmland and Agriculture1,432
36,361
3.9%
Home equity loans2,511
318,618
0.8%
Residential first lien loans85,536
1,072,945
8%
Multifamily loans31,220
182,255
17.1%
Owner-Occupied Commercial Real Estate186,098
742,204
25.1%
Non-Owner-Occupied Commercial Real Estate369,112
999,679
36.9%
Commercial & Industrial Loans57,735
552,881
10.4%
Loans to Municipalities—
147,187
—%
Consumer Loans1,241
51,161
2.4%
Other Loans678
18,182
3.7%
 $774,221
4,770,063
16.2%
The ratio of our allowance to total loans has declined from 0.93%was 0.89% and 0.48% at SeptemberJune 30, 2016 to 0.72% at September 30, 2017 as2020 and December 31, 2019, respectively. The increase in this ratio was a result of the factors discussed above that impacted our relatively low levelsincreased level of provision for loan losses as well as applicablein 2020.
Our ratio of allowance to total loans is significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank in 2017, which had over $1 billion in total loans. Applicable accounting guidance that doesdid not allow us to record an allowance for loan losses upon the acquisition of loans. Thus, no allowance for loan losses was recorded for the approximately $497 million in loans acquired in the Carolina Bank acquisition – instead the acquired loans were recorded at their discounted fair value, which included the consideration of any expected losses. No allowance for loan losses is recorded for the acquired loans unless the expected credit losses exceed the remaining unamortized discounts – based on an individual basis for purchased credit impaired loans and on a pooled basis for performing acquired loans. See Critical Accounting Policies above for further discussion. Unaccreted discount on acquired loans, which is available to absorb loan losses on a loan-by-loan basis,those acquired loans, amounted to $16.9$10.6 million and $12.7 million and $13.2 million at SeptemberJune 30, 2017,2020 and December 31, 2016, and September 30, 2016,2019, respectively. The ratios of allowance for loan losses plus unaccreted discount were 1.21%, 1.34%, and 1.43% at September 30, 2017, December 31, 2016, and September 30, 2016, respectively.

We believe our reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve 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 Loan Losses” above.

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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.

Based on the results of our loan analysis and grading program and our evaluation of the allowance for loan losses at SeptemberJune 30, 2017,2020, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2016.

2019.

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.



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In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $813 million$1.095 billion line of credit with the Federal Home Loan BankFHLB (of which $344$58 million wasand $247 million were outstanding at SeptemberJune 30, 20172020 and $225 million was outstanding at December 31, 2016)2019, respectively), 2) a $35 million federal funds line with a correspondent bank (of which none was outstanding at SeptemberJune 30, 20172020 or December 31, 2016)2019), and 3) an approximately $113$121 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at SeptemberJune 30, 20172020 or December 31, 2016)2019). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was reduced by $190 million at Septemberboth June 30, 20172020 and $193 million at December 31, 2016,2019, as a result of our pledging letters of credit for public deposits at each of those dates. Unused and available lines of credit amounted to $427 million$1.0 billion at SeptemberJune 30, 20172020 compared to $425$775 million at December 31, 2016.

2019.

Our overall liquidity has decreased slightlyincreased since September 30, 2016 but remains sufficient.December 31, 2019 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 decreasedincreased from 19.6%21.4% at SeptemberDecember 31, 2019 to 26.2% at June 30, 2016 to 18.1% at September 30, 2017.

2020.

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, 2016,2019, detail of which is presented in Table 18 on page 9066 of our 20162019 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. See Part II – Item 1 for additional information regarding legal proceedings.

Off-Balance Sheet Arrangements and Derivative Financial Instruments

Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities.

Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through SeptemberJune 30, 2017,2020, and have no current plans to do so.

Capital Resources

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The Company is regulated by the Board of Governors of the Federal Reserve Board (“Federal Reserve”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.

We must comply


In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), was enacted and which amended certain aspects of the regulatory framework for small depository institutions with assets less than $10 billion and for large banks with assets of more than $50 billion. The Economic Growth Act, among other matters, provided for an alternative capital rule for financial institutions and their holding companies with total consolidated assets of less than $10 billion. The Economic Growth Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10%, which was proposed to be 9% by the federal regulators. The Community Bank Leverage Ratio provides for a simpler calculation of a bank’s capital ratio than the Basel III provisions that have been in place. Any qualifyingdepository institution or its holding company that elects to adopt the Community Bank Leverage Ratio and exceeds the ratio set by the banking regulators is considered to have met generally applicable leverage and risk-based regulatory capital requirements established byand any qualifying depository institution that exceeds the Federal Reserve. Failurenew ratio will be considered to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulatorsbe “well capitalized” under the prompt corrective action rules. March 31, 2020 was the earliest date that if undertaken,the Company could have a direct material effect on our financial statements. elected to


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adopt the Community Bank Leverage Ratio. However, the Company did not opt-in to that alternative framework and instead continues to use the Basel III standards.
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 Federal ReserveFRB 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 will increaseincreased each year until fully implemented at 2.5% inon 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 Federal ReserveFRB has not advised us of any requirement specifically applicable to us.

At SeptemberJune 30, 2017,2020, 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.

  September 30,
2017		  December 31,
2016		  September 30,
2016		 
          
Risk-based capital ratios:            
Common equity Tier 1 to Tier 1 risk weighted assets  10.30%   10.92%   10.67% 
Minimum required Common equity Tier 1 capital  4.50%   4.50%   4.50% 
             
Tier I capital to Tier 1 risk weighted assets  11.74%   12.49%   12.57% 
Minimum required Tier 1 capital  6.00%   6.00%   6.00% 
             
Total risk-based capital to Tier II risk weighted assets  12.44%   13.36%   13.49% 
Minimum required total risk-based capital  8.00%   8.00%   8.00% 
             
Leverage capital ratios:            
Tier 1 capital to quarterly average total assets  9.72%   10.17%   10.22% 
Minimum required Tier 1 leverage capital  4.00%   4.00%   4.00% 

 June 30, 2020 
December 31,
2019
 
Risk-based capital ratios: 
  
 
Common equity Tier 1 to Tier 1 risk weighted assets13.10% 13.28% 
Minimum required Common equity Tier 1 capital7.00% 7.00% 
     
Tier I capital to Tier 1 risk weighted assets14.21% 14.41% 
Minimum required Tier 1 capital8.50% 8.50% 
     
Total risk-based capital to Tier II risk weighted assets15.13% 14.89% 
Minimum required total risk-based capital10.50% 10.50% 
     
Leverage capital ratios: 
  
 
Tier 1 capital to quarterly average total assets10.29% 11.19% 
Minimum required Tier 1 leverage capital4.00% 4.00% 
First Bank is also subject to capital requirements similar to those discussed above. First Bank’s capital ratiosthat do not vary materially from the Company’s capital ratios presented above. At SeptemberJune 30, 2017,2020, First Bank significantly exceeded the minimum ratios established by the regulatory authorities.

Our capital ratios are generally lower at September 30, 2017 compared to prior periods The 90 basis point reduction in our leverage ratio reflected in the table below was due to the acquisition of Carolina Banksignificant balance sheet growth experienced in March 2017 (see Note 4 to the Consolidated Financial Statements for more information on this transaction).

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2020, resulting primarily from a strong increase in deposits.

In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible assets (“TCE Ratio”). Our TCE ratio was 7.95% at September 30, 2017 compared to 8.16% at December 31, 2016 and 8.03% at September 30, 2016.

BUSINESS DEVELOPMENT AND OTHER SHAREHOLDER MATTERS

The following is a list of business development and other miscellaneous matters affecting the Company and First Bank.

·On August 4, 2017, the Company converted the data processing systems of Carolina Bank to First Bank, and the former Carolina Bank branches now fully operate under the name “First Bank.” As part of this conversion, the Company consolidated four branches into two branches in Winston-Salem and consolidated two branches into one branch in Asheboro.

·On September 1, 2017, the Company completed the acquisition of Bear Insurance Service, with four locations in Stanly, Cabarrus, and Montgomery counties. This acquisition provided the Company the opportunity to enhance its insurance product offerings, as well as complementing its insurance agency operations in these markets and the surrounding areas. In 2016, Bear Insurance Service recorded approximately $4 million in annual insurance commissions.

·On September 15, 2017, the Company announced a quarterly cash dividend of $0.08 cents per share payable on October 25, 2017 to shareholders of record on September 30, 2017. This is the same dividend rate as the Company declared in the third quarter of 2016.

·On October 1, 2017, the Company acquired ASB Bancorp, Inc., the parent company of Asheville Savings Bank, headquartered in Asheville, North Carolina, which operated through 13 branches in the Asheville area. As of the acquisition date, Asheville Savings Bank had total assets of $798 million, including $617 million in loans and $679 million in deposits. In connection with the acquisition, the Company paid a total of $17.9 million in cash and issued 4.9 million shares of First Bancorp common stock to the shareholders of ASB Bancorp, Inc. The conversion of Asheville Savings Bank’s computer systems to First Bank’s systems is scheduled to occur in March 2018. Until that time, the acquired branches will continue to operate under the name “Asheville Savings Bank.”

Bank, our bank subsidiary.

On July 1, 2020, the Company reported that Forbes had recognized First Bank as one of America's best banks in its 2020 Best-in-State Banks list for the second year in a row. This year, First Bank was ranked the number one bank in North Carolina, based on an independent survey of more than 25,000 U.S. consumers regarding their overall satisfaction in five service areas.


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On June 12, 2020, the Company announced a quarterly cash dividend of $0.18 per share payable on July 24, 2020 to shareholders of record on June 30, 2020. This dividend rate represents a 50% increase over the dividend rate declared in the second quarter of 2019.
SHARE REPURCHASES

We did not repurchase any

For the three months ended June 30, 2020, we repurchased 104,289 shares of our common stock duringat an average price of $23.32 per share, which totaled $2.4 million. For the first ninesix months ended June 30, 2020, we repurchased 680,695 shares of 2017.our common stock at an average price of $32.96 per share, which totaled $22.4 million. At SeptemberJune 30, 2017,2020, we had approximately 214,000 shares available for repurchase under existing authority from our Board of Directors.Directors to repurchase up to an additional $17.6 million in shares of the Company’s common stock. We may repurchase these 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 relativelyfairly consistent yield on average earning assets (net(and net interest margin). Over the past five calendar years, our net interest margin has ranged from a low of 4.03%4.00% (realized in 2016)2019) to a high of 4.92%4.13% (realized in 2013)2015). UntilAs discussed below, we experienced a significant decline in our net interest margin in the endsecond quarter of 2015, the prime rate of interest had remained at 3.25% since 2008. In response to Federal Reserve actions, the prime rate increased to 3.50% in December 2015 and has since risen to 4.25% as of September 30, 2017.2020. The historical consistency of ourthe net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At SeptemberJune 30, 2017,2020, approximately 77%72% of our interest-earning assets were 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.

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Index

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 September, at June 30, 2017,2020, we had $1.0$1.6 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 SeptemberJune 30, 20172020 are deposits totaling $1.87$2.9 billion comprised of checking, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced with, or in the same proportion, as general market indicators.

Overall, we believe that in the near term (twelve months), net interest income will not likely experience significant downward pressure from rising interest rates. Similarly, we would not expect a significant increase in near term net interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. In the short-term (less than sixtwelve 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.rates, which is what we experienced following the March 2020 interest rate cuts. However, in the twelve-month and


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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. As a result of the prolonged negative/fragile economic environment,Due to actions taken by the Federal Reserve took stepsrelated to suppress long-termshort-term interest rates in an effort to boostand the housing market, increase employment, and stimulateimpact of the global economy which resultedon longer-term interest rates, we are currently in a very low and flat interest rate curve.curve environment. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the Company,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 and loan yields narrows, which pressures our net interest margin.

While there have been periods in the last few years that the yield curve has steepened somewhat,slightly, it currently remains relativelyvery flat. This flat yield curve and the intense competition for high-quality loans in our market areas have limited our ability to charge higherresulted in lower interest rates on loans,loans.


In an effort to address concerns about the national and thus we continue to experience challenges in increasing our loan yields and net interest margin.

As noted earlier,global economy the Federal Reserve made no changescut 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 short term interest rates it sets directly from 2008 until December 2015,COVID-19 pandemic. Our interest-bearing cash balances and during that time we were able to reprice manymost of our maturing time deposits atvariable rate loans, which comprise approximately one-third of our loan portfolio, generally reset to lower rates soon after interest rates.rate cuts. We werereduced our offering rates on most deposit products since March 2020 and our borrowing costs have also ablebeen lowered by lower rates and repaying a significant portion of our outstanding borrowings. Overall however, the interest rate cuts negatively impacted our earnings, with loan yields declining from 4.93% in the first quarter of 2020 to generally decrease4.41% in the ratessecond quarter of 2020, a decline of 52 basis points, while the cost of interest-bearing liability only declined by 26 basis points, from 0.78% in the first quarter of 2020 to 0.52% in the second quarter of 2020. The larger decline in loan yields, as well as the high level of cash balances we paidheld during the quarter arising from the strong deposit growth, resulted in a decline in our net interest margin for the second quarter of 2020 to 3.49% compared to 3.94% in the first quarter of 2020. While the effects of the March 2020 interest rate cuts fully impacted our second quarter net interest margin, we expect continued pressure on other categoriesour net interest margin (excluding the impact of depositsPPP - see below) as a result of declining short-termpricing pressures on maturing loans and investments. However we expect any downward pressure on the net interest ratesmargin will be less than that experienced in the marketplacesecond quarter of 2020.


In April and an increaseearly May 2020, we approved approximately $245 million in liquidity that lessened our need to offer premium interest rates. However, as our average funding rate approached zero several years ago, meaningful further declines were not possible. Thus far, the fourPPP loans. These loans all have an interest rate increases initiated byof 1.00%. In addition to the Federal Reserveinterest 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 approximately $10.6 million in these fees related to these loans, which were netted against the cost to originate each loan of approximately $0.5 million and are initially being amortized over the past 18 months havetwo year maturities of the loans using the effective interest method of recognition. Early repayments, including the loan forgiveness provisions contained in the PPP, will result in accelerated amortization. In the second quarter of 2020, we amortized $1.3 million of the PPP loan fees. Remaining deferred fees at June 30, 2020 amounted to $8.8 million. Because of the uncertainties associated with the timing of PPP repayments, the anticipated impact of these loans has not resulted in significant competitive pressure to increase deposit rates, but we expectbeen incorporated into the competitive pressures to increase.

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discussion above.
Index

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 which amounted to $5.1$1.4 million and $3.6$1.7 million for the ninethree months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $3.1 million and $3.2 million for the six months ended June 30, 2020 and 2019, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that wereare initially recorded and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and susceptible to volatility. The remaining loan discount on acquired loans amounted to $16.9$10.6 million at SeptemberJune 30, 2017.

Based on our most recent interest rate modeling, which assumes one interest rate increase for the remainder of 2017 (federal funds rate = 1.50%, prime = 4.50%), we project that our net interest margin will likely remain fairly stable over the next twelve months. We expect the yields we earn on excess cash and investment security yields2020 compared to increase as a result of the recent and expected rate increases, while we expect loan yields to be stable, and deposit rates to gradually rise.

$12.7 million at December 31, 2019.



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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 Securities and Exchange Commission (“SEC”)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

From time to time,

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 a party to routineinvolved in any pending legal proceedings within its normal course of business. Managementthat management believes that such routine legal proceedings taken together are immaterialmaterial to the Company’sCompany or its consolidated financial condition or results of operations. Any non-routine legal proceedings are described in Item 3 ofposition.  If an exposure were to be identified, it is the Company’s Annual Report on Form 10-K forpolicy to establish and accrue appropriate reserves during the year ended December 31, 2016.

In our Quarterly Report on Form 10-Q for theaccounting period ended June 30, 2017, we reported thatin which a purported shareholder of ASB Bancorp, Inc. filed a lawsuit in the United States District Court, Western District of North Carolina, naming the Company, ASB Bancorp, and members of ASB Bancorp’s board of directors as defendants. The lawsuit alleged inadequate disclosures in ASB Bancorp’s proxy statement/prospectus, violations of the Securities Exchange Act of 1934 and other state law claims. The lawsuit sought, among other remedies, to enjoin the merger or, in the event the merger was completed, rescission of the merger or rescissory damages; to direct defendants to account for unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees. This lawsuit was dismissed prior to the October 1, 2017 completion of the Company’s acquisition of ASB Bancorp, Inc. andloss is not expecteddeemed to be refiled.

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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, 2016,2019, 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, 2019, except as described below.


Changes in business and economic conditions, in particular those of North Carolina and South Carolina, are expected to lead to lower revenue, lower asset quality, and lower earnings.

Our business and earnings are closely tied to the economies of North Carolina and South Carolina. These local economies rely significantly on tourism, real estate, construction, government, and other service-based industries. Less tourism, real or threatened acts of war or terrorism, increases in energy costs, natural disasters and adverse weather, public health issues including the spread of the COVID-19 virus, and Federal, State of North Carolina, State of South Carolina, and local government budget issues may impact consumer and corporate spending.

Recent deterioration of economic conditions, locally, nationally, or globally could adversely affect the quality of our assets, credit losses, and the demand for our products and services, which could lead to lower revenues and lower earnings. Housing prices and unemployment rates are some of the metrics that we continually monitor. We also monitor the value of collateral, such as real estate, that secures the loans we have made. The borrowing power of our customers could also be negatively impacted by a decline in the value of collateral.

The COVID-19 pandemic has impacted the local economies in the communities we serve and our business, and the extent and severity of the impact on our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted.



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The COVID-19 pandemic has negatively impacted the local, national, and global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. The duration of the COVID-19 pandemic and its effects cannot be determined with certainty, but the effects could be present for an extended period of time.

The majority of state and local jurisdictions have imposed, and others in the future may impose, variations of “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. In late March and early April 2020, the Governors of North Carolina and South Carolina, respectively, signed stay-at-home orders with only certain exceptions for essential activities and prohibited gatherings of more than 10 people. Theses orders have had a negative impact on our local and national economies and are expected to continue to negatively impact these economies and our financial results. On May 1, 2020, the Governor of South Carolina ended the state's stay-at-home order effective May 4, 2020, but provided restrictions on the operating activities of certain businesses. In light of the spread of COVID-19 in May and June, the Governor of South Carolina increased various restrictions again on July 11, 2020. The State of North Carolina’s stay-at-home order was set to expire on April 30, 2020. The Governor of North Carolina extended the stay-at-home order through May 8, 2020. On May 22, 2020, the Governor of North Carolina executed the "safer-at-home" order, which increased the number of reasons people are allowed to leave and allows most retail businesses that can comply with specific requirements to open at 50 percent capacity. North Carolina is still under the "safer-at-home" order until at least August 7, 2020.

The COVID-19 pandemic and the institution of social distancing and sheltering-in-place requirements resulted in temporary closures of many businesses. As a result, the demand for our products and services may be significantly impacted. Furthermore, the COVID-19 pandemic has influenced and may continue to influence the recognition of credit losses in our loan portfolios and our allowance for credit losses, particularly as some businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Our operations may also be disrupted if significant portions of our workforce are unable to work effectively, including due to illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic.

In response to the COVID-19 pandemic, we have suspended residential property foreclosure sales and are offering fee waivers, payment deferrals or forbearances, and other expanded assistance for mortgages and home equity loans and lines, commercial, small business and personal lending customers. The extent to which the COVID-19 pandemic impacts 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.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities
PeriodTotal Number of
Shares
Purchased (2)		Average Price
Paid per Share		Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)		Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
July 1, 2017 to July 31, 2017———214,241
August 1, 2017 to August 31, 2017———214,241
September 1, 2017 to September 30, 2017———214,241
Total———214,241

Issuer Purchases of Equity Securities
Period 
Total Number of
Shares
Purchased (2)
 
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)
April 1, 2020 to April 30, 2020 —
 $—
 —
 $20,000,000
May 1, 2020 to May 31, 2020 —
 —
 —
 $20,000,000
June 1, 2020 to June 30, 2020 104,289
 23.32
 104,289
 $17,567,520
Total 104,289
 23.32
 104,289
 $17,567,520
Footnotes to the Above Table

(1)All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. On JulyAs of June 30, 2004,2020, the Company announced that its Board of Directors had approved the remaining authorization to repurchase of 375,000 sharesup to $17.6 million of the Company’s common stock.Company's stock, which was authorized and announced on November 19, 2019. The repurchase authorization does not havehas an expiration date. There are no plans or programs the Company has determined to terminate prior to expiration, or under which we do not intend to make further purchases.date of December 31, 2020.



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(2)The table above does not include shares that were used by option holders to satisfy the exercise price of the options issued by the Company to its employees and directors pursuant to the Company’s stock option plans. There were no such exercisestransactions during the three months ended SeptemberJune 30, 2017.2020.

During the three months ended September 30, 2017, the Company issued 13,374 shares of unregistered common stock in completing the acquisition of Bear Insurance Service — see Note 4 to the consolidated financial statements for additional information. The Company relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions not involving any public offering due to the small number of shareholders of Bear Insurance Service, their level of financial sophistication and the absence of any general solicitation. There were no other unregistered sales of the Company’s securities during the three months ended September 30, 2017.




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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
Purchase and Assumption Agreement dated as of March 3, 2016 between First Bank (as Seller) and First Community Bank (as Purchaser) was filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March 7, 2016, and is incorporated herein by reference.

2.b
Purchase and Assumption Agreement dated as of March 3, 2016 between First Community Bank (as Seller) and First Bank (as Purchaser) was filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on March 7, 2016, and is incorporated herein by reference.

2.c
Merger Agreement between First Bancorp and Carolina Bank Holdings, Inc. dated June 21, 2016 was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 22, 2016, and is incorporated herein by reference.

2.d
Merger Agreement between First Bancorp and ASB Bancorp, Inc. dated May 1, 2017 was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 1, 2017, and is incorporated herein by reference.

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Index

3.a
Articles of Incorporation of the Company and amendments thereto were filed asExhibits 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 asExhibits 3.1and3.2tothe 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 asExhibit 3.1.b to the Company’s Registration Statement on Form S-3D filed on June 29, 2010(Commission (Commission File No. 333-167856), and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed asExhibit 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 asExhibit 3.1 to the Company’sCompany��s Current Report on Form 8-K filed on December 26, 2012, and are incorporated herein by reference.reference.

3.b
Second Amended and Restated Bylaws of the Company were filed as Exhibit 4.13.1 to the Company's Current Report on Form 8-K filed on MarchFebruary 9, 2017,2018, and are incorporated herein by reference.

4.a
Form of Common Stock Certificate was filed as Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference.

31.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101
The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2020, 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, Executive Vice President/Secretary, 300 SW Broad Street, Southern Pines, North Carolina, 28387



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67

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
  
August 10, 2020BY:/s/  Richard H. Moore
Richard H. Moore
Chief Executive Officer
(Principal Executive Officer),
and Director
  
  
August 10, 2020November 9, 2017BY:/s/ Richard H. Moore
Richard H. Moore
Chief Executive Officer
(Principal Executive Officer),
and Director
November 9, 2017BY:/s/  Eric P. Credle
 
Eric P. Credle
Executive Vice President
and Chief Financial Officer



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