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

2023

Commission File Number 0-15572

FIRST BANCORP

(Exact Name of Registrant as Specified in its Charter)

North Carolina56-1421916
North Carolina56-1421916
(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 Carolina28387
(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, 20172023 was 29,643,990.

41,083,178.


INDEX

FIRST BANCORP AND SUBSIDIARIES

Page
Page
Consolidated Balance Sheets - SeptemberJune 30 2017, 2023 and September 30, 2016  (With Comparative Amounts at December 31, 2016)2022
4
Consolidated Statements of Income - For the PeriodsThree and Six Months Ended SeptemberJune 30 2017, 2023 and 20162022
5
Consolidated Statements of Comprehensive Income - For the PeriodsThree and Six Months Ended SeptemberJune 30 2017, 2023 and 20162022
6
Consolidated Statements of Shareholders’ Equity - For the PeriodsThree and Six Months Ended SeptemberJune 30 2017, 2023 and 20162022
7
Consolidated Statements of Cash Flows - For the PeriodsSix Months Ended SeptemberJune 30 2017, 2023 and 20162022
8
9
Notes to Consolidated Financial Statements
9
11
40
43
57
60
59
62
59
63
59
63
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds60
60
64
62
65


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, geopolitical influences and general economic conditions. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 20162022 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,
2023 (unaudited)		December 31,
2022
ASSETS  
Cash and due from banks, noninterest-bearing$101,215 101,133 
Due from banks, interest-bearing259,460 169,185 
Total cash and cash equivalents360,675 270,318 
Securities available for sale2,219,786 2,314,493 
Securities held to maturity (fair values of $441,881 and $432,528)537,821 541,700 
Presold mortgages in process of settlement at fair value4,953 1,282 
Loans7,897,629 6,665,145 
Allowance for credit losses on loans(109,230)(90,967)
Net loans7,788,399 6,574,178 
Premises and equipment152,443 134,187 
Operating right-of-use lease assets18,375 18,733 
Accrued interest receivable33,446 29,710 
Goodwill478,750 364,263 
Other intangible assets37,097 12,675 
Bank-owned life insurance181,659 164,592 
Other assets219,594 198,918 
Total assets$12,032,998 10,625,049 
LIABILITIES
Deposits:      Noninterest-bearing deposits$3,639,930 3,566,003 
Interest-bearing deposits6,528,639 5,661,526 
Total deposits10,168,569 9,227,529 
Borrowings481,658 287,507 
Accrued interest payable4,845 2,738 
Operating lease liabilities19,109 19,391 
Other liabilities61,175 56,288 
Total liabilities10,735,356 9,593,453 
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Preferred stock, no par value per share.  Authorized: 5,000,000 shares
Issued & outstanding:  none as of June 30, 2023 and December 31, 2022— — 
Common stock, no par value per share.  Authorized: 60,000,000 shares
Issued & outstanding:  41,082,678 shares and 35,704,154 shares as of June 30, 2023 and December 31, 2022, respectively960,851 725,153 
Retained earnings674,933 648,418 
Stock in rabbi trust assumed in acquisition(1,365)(1,585)
Rabbi trust obligation1,365 1,585 
Accumulated other comprehensive loss(338,142)(341,975)
Total shareholders’ equity1,297,642 1,031,596 
Total liabilities and shareholders’ equity$12,032,998 10,625,049 
See accompanying notes to unaudited consolidated financial statements.

Page 4
Index
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended June 30,Six Months Ended June 30,
($ in thousands, except share data - unaudited)2023202220232022
INTEREST INCOME
Interest and fees on loans$102,963 65,077 202,343 129,279 
Interest on investment securities:
Taxable interest income13,063 13,385 26,479 26,595 
Tax-exempt interest income1,120 1,104 2,250 2,152 
Other, principally overnight investments4,015 881 7,263 1,530 
Total interest income121,161 80,447 238,335 159,556 
INTEREST EXPENSE
Interest on deposits27,328 1,585 46,246 3,356 
Interest on borrowings6,848 592 12,618 1,052 
Total interest expense34,176 2,177 58,864 4,408 
Net interest income86,985 78,270 179,471 155,148 
Provision for credit losses3,700 — 15,151 3,500 
Reversal of provision for unfunded commitments(1,339)— (288)(1,500)
Total provision for credit losses2,361 — 14,863 2,000 
Net interest income after provision for credit losses84,624 78,270 164,608 153,148 
NONINTEREST INCOME
Service charges on deposit accounts4,114 3,700 8,008 7,241 
Other service charges and fees5,650 7,882 11,570 14,887 
Fees from presold mortgage loans557 454 963 1,575 
Commissions from sales of financial products1,413 1,151 2,719 2,096 
SBA consulting fees409 704 930 1,484 
SBA loan sale gains696 841 951 4,102 
Bank-owned life insurance income1,066 942 2,112 1,918 
Other gains, net330 1,590 518 3,212 
Total noninterest income14,235 17,264 27,771 36,515 
NONINTEREST EXPENSE
Salaries expense28,676 23,799 57,997 47,253 
Employee benefits expense6,165 6,310 12,558 11,888 
Total personnel expense34,841 30,109 70,555 59,141 
Occupancy expense3,547 3,122 7,235 6,506 
Equipment related expenses1,425 1,514 2,804 2,818 
Merger and acquisition expenses1,334 737 13,516 4,221 
Intangibles amortization expense2,049 953 4,194 1,970 
Other operating expenses18,397 12,963 37,464 26,207 
Total noninterest expenses61,593 49,398 135,768 100,863 
Income before income taxes37,266 46,136 56,611 88,800 
Income tax expense7,863 9,551 12,047 18,246 
Net income$29,403 36,585 44,564 70,554 
Earnings per common share:
Basic$0.72 1.03 1.09 1.98 
Diluted0.71 1.03 1.08 1.98 
Dividends declared per common share$0.22 0.22 0.44 0.44 
Weighted average common shares outstanding:
Basic40,721,840 35,474,664 40,665,172 35,476,902 
Diluted41,129,100 35,642,471 41,123,869 35,641,728 
See accompanying notes to unaudited consolidated financial statements.

Page 5
Index
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended
June 30,		Six Months Ended June 30,
($ in thousands - unaudited)2023202220232022
Net income$29,403 36,585 44,564 70,554 
Other comprehensive income (loss):
Unrealized (losses) gains on securities available for sale:
Unrealized (losses) gains arising during the period(31,415)(109,623)3,918 (291,418)
Tax benefit (expense)7,273 25,192 (152)66,968 
Postretirement Plans:
Amortization of unrecognized net actuarial loss44 44 88 88 
Tax benefit(10)(10)(21)(20)
Other comprehensive (loss) income(24,108)(84,397)3,833 (224,382)
Comprehensive income (loss)$5,295 (47,812)48,397 (153,828)
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 StockRetained
Earnings		Stock in
Rabbi
Trust
Assumed
in
Acquisition		Rabbi
Trust
Obligation		Accumulated
Other
Comprehensive
Loss		Total
Shareholders’
Equity
SharesAmount
Three Months Ended June 30, 2022
Balances, April 1, 202235,640 $723,441 559,004 (1,814)1,814 (164,955)1,117,490 
Net income36,585 36,585 
Cash dividends declared ($0.22 per common share)(7,850)(7,850)
Change in Rabbi Trust Obligation241 (241)— 
Stock withheld for payment of taxes(14)(486)(486)
Stock-based compensation58 1,001 1,001 
Other comprehensive loss(84,397)(84,397)
Balances, June 30, 202235,684 $723,956 587,739 (1,573)1,573 (249,352)1,062,343 
Three Months Ended June 30, 2023
Balances, April 1, 202340,987 $959,422 654,573 (1,608)1,608 (314,034)1,299,961 
Net income29,403 29,403 
Cash dividends declared ($0.22 per common share)(9,043)(9,043)
Change in Rabbi Trust Obligation243 (243)— 
Stock options exercised23 488 488 
Stock withheld for payment of taxes(6)(186)(186)
Stock-based compensation79 1,127 1,127 
Other comprehensive income(24,108)(24,108)
Balances, June 30, 202341,083 $960,851 674,933 (1,365)1,365 (338,142)1,297,642 

See accompanying notes to unaudited consolidated financial statements.

























Page 7
Index

First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity

($ in thousands, except share data - unaudited)Common StockRetained
Earnings		Stock in
Rabbi
Trust
Assumed
in
Acquisition		Rabbi
Trust
Obligation		Accumulated
Other
Comprehensive
Loss		Total
Shareholders’
Equity
SharesAmount
Six Months Ended June 30, 2022
Balances, January 1, 202235,629 $722,671 532,874 (1,803)1,803 (24,970)1,230,575 
Net income70,554 70,554 
Cash dividends declared ($0.44 per common share)(15,689)(15,689)
Change in Rabbi Trust Obligation230 (230)— 
Stock withheld for payment of taxes(17)(603)(603)
Stock-based compensation72 1,888 1,888 
Other comprehensive loss(224,382)(224,382)
Balances, June 30, 202235,684 $723,956 587,739 (1,573)1,573 (249,352)1,062,343 
Six Months Ended June 30, 2023
Balances, January 1, 202335,704 725,153 648,418 (1,585)1,585 (341,975)1,031,596 
Net income44,564 44,564 
Cash dividends declared ($0.44 per common share)(18,049)(18,049)
Change in Rabbi Trust Obligation220 (220)— 
Equity issued pursuant to acquisition5,033 229,489 229,489 
Stock options exercised193 3,703 3,703 
Stock withheld for payment of taxes(6)(186)(186)
Stock-based compensation159 2,692 2,692 
Other comprehensive income (loss)3,833 3,833 
Balances, June 30, 202341,083 $960,851 674,933 (1,365)1,365 (338,142)1,297,642 

See accompanying notes to unaudited consolidated financial statements.


Page 8
Index
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30,
($ in thousands-unaudited)20232022
Cash Flows From Operating Activities
Net income$44,564 70,554 
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses and unfunded commitments, net14,863 2,000 
Net security premium amortization4,731 6,579 
(Decrease) increase in net deferred tax asset(2,324)26,341 
Loan discount accretion(7,151)(3,216)
Other purchase accounting amortization and accretion, net2,317 (276)
Foreclosed property net gains(35)(372)
Other gains, net(561)(3,212)
Bank-owned life insurance income(2,112)(1,918)
Decrease in net deferred loan fees(590)(901)
Depreciation of premises and equipment3,778 3,436 
Amortization of operating lease right-of-use assets1,090 1,012 
Repayments of lease obligations(1,014)(912)
Stock-based compensation expense2,245 1,548 
Amortization of intangible assets4,194 1,970 
Amortization and impairment of SBA servicing assets494 1,531 
Fees/gains from sale of presold mortgages and SBA loans(1,914)(5,677)
Origination of presold mortgage loans in process of settlement(44,954)(78,141)
Proceeds from sales of presold mortgage loans in process of settlement42,316 94,052 
Origination of SBA loans for sale(19,163)(52,701)
Proceeds from sales of SBA and other loans15,053 101,801 
Increase (decrease) in accrued interest receivable2,001 (604)
Decrease (increase) in other assets4,048 (24,857)
Increase in accrued interest payable1,725 41 
Increase (decrease) in other liabilities1,553 (7,561)
Net cash provided by operating activities65,154 130,517 
Cash Flows From Investing Activities
Purchases of securities available for sale— (354,765)
Purchases of securities held to maturity— (39,004)
Proceeds from maturities/issuer calls of securities available for sale96,686 156,874 
Proceeds from maturities/issuer calls of securities held to maturity1,587 4,102 
Proceeds from sales of securities available for sale111,862 — 
Purchases of Federal Reserve and FHLB stock, net(15,285)(7,838)
Proceeds from bank owned life insurance death benefits137 5,827 
Net increase in loans(226,193)(143,223)
Proceeds from sales of foreclosed properties192 2,904 
Purchases of premises and equipment(1,854)(2,702)
Proceeds from sales of premises and equipment45 359 
Net cash received in acquisition activities22,610 — 
Net cash used by investing activities(10,213)(377,466)
Cash Flows From Financing Activities
Net (decrease) increase in deposits(106,165)235,521 
Net increase in short-term borrowings154,973 — 
Payments on long-term borrowings(42)(67)
Cash dividends paid – common stock(16,867)(14,961)
Proceeds from stock option exercises3,703 — 
Payment of taxes related to stock withheld(186)(603)
Net cash provided by financing activities35,416 219,890 
Increase in cash and cash equivalents90,357 (27,059)
Cash and cash equivalents, beginning of period270,318 461,162 
Cash and cash equivalents, end of period$360,675 434,103 
(Continued)







Page 9
Index



First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows



Six Months Ended June 30,
($ in thousands-unaudited)20232022
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest$54,694 4,644 
Cash paid during the period for income taxes12,917 15,719 
Non-cash: Unrealized gain (loss) on securities available for sale, net of taxes3,765 (224,450)
Non-cash: Foreclosed loans transferred to other real estate576 119 
Non-cash: Accrued dividends at end of period9,038 7,853 
Acquisition of GrandSouth BancorporationSee Note 2— 

See accompanying notes to consolidated financial statements.


Page 4

10
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.

 Page 5

Index

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.

 Page 6

Index

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.

 Page 7

Index

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.

 Page 8

Index

First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)For the Periods Ended September 30, 2017 and 2016

(unaudited)

Note 1 - Organization and Basis of Presentation


The consolidated financial statements include the accounts of First Bancorp (the “Company”) and its wholly owned subsidiary First Bank (the “Bank”). The Bank has three wholly owned subsidiaries that are fully consolidated, SBA Complete, Inc. (“SBA Complete”), Magnolia Financial, Inc. ("Magnolia Financial"), and First Troy SPE, LLC. All significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and notes necessary for complete financial statements in accordance with GAAP. 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 and2023, the consolidated results of operations for the three and six months ended June 30, 2023 and 2022, and the consolidated cash flows for the periodssix months ended SeptemberJune 30, 20172023 and 2016. All2022. Any such adjustments were of a normal, recurring nature. These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes in the Annual Report on Form 10-K for the year ended December 31, 2022. Operating results for interim period are not necessarily indicative of the results that may be expected for the full year.
Reference is made to Note 1 of the 20162022 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
Certain reclassifications have been made to the periods ended SeptemberJune 30, 20172022 and 2016 are not necessarily indicative of the resultsDecember 31, 2022 consolidated financial statements to be expected for the full year. comparable to June 30, 2023. These reclassifications had no effect on net income.
The Company has evaluated all subsequent events through the date the financial statements were issued.

Note 2 –

Accounting Policies

Note 1 to the 2016 Annual Report on Form 10-K filed with the SEC contains a description ofStandards Adopted in 2023

ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments contained in this Accounting Standards Update ("ASU") eliminate the accounting policies followedguidance for troubled debt restructurings ("TDR") by the Companycreditors, while enhancing disclosure requirements for certain loan refinancing and discussionrestructurings by creditors when a borrower is experiencing financial difficulty. This ASU also requires entities to disclose current period gross write-offs by year of recent accounting pronouncements. The following paragraphs update that information as necessary.

In May 2014, the Financial 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 customers in an amount equal to the consideration the entity receives or expects to receive.origination for financing receivables. The Company can apply the guidanceadopted ASU 2022-02 effective January 1, 2023 using a full retrospective approach or a modified retrospective approach.transition approach for the amendments related to the recognition and measurement of TDRs. The Company’s revenueimpact of the adoption resulted in an immaterial change to the allowance for credit losses ("ACL"), thus no adjustment to retained earnings was recorded. Disclosures have been updated to reflect information on loan modifications given to borrowers experiencing financial difficulty as presented in Note 4. TDR disclosures are presented for comparative periods only and are not required to be updated in current periods. Additionally, the current year vintage disclosure included in Note 4 has been updated to reflect gross charge-offs by year of origination for the six months ended June 30, 2023.

ASU 2022-03, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." This ASU clarifies that a contractual restriction on the sale of an equity security is comprisednot considered part of net interest incomethe unit of account of the equity security, and, noninterest income.therefore, is not considered in measuring fair value. The scopeCompany adopted ASU 2022-03 January 1, 2023 with no material impact on its financial statements.
ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." In 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provided optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The objective of the guidance explicitly excludes net interest income as well as many other revenues for financial assetsin Topic 848 was to provide relief during the temporary transition period and liabilities including loans, leases, securities, and derivatives. Accordingly, the majorityFASB included a sunset provision based on expectations of when the Company’s revenues will not be affected.London Interbank Offered Rate ("LIBOR") would cease being published. The guidance will be effective forUnited Kingdom Financial Conduct

Page 11
Index
Authority has announced that the Company for reporting periods beginning afterintended LIBOR cessation date has been extended from December 31, 2017.2021 to June 30, 2023. As such, ASU 2022-06 defers the sunset date previously set to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848; moreover, it applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2022-06 was adopted upon issuance. The Company does not expect these amendmentswill continue to have aelect various optional expedients for contract modifications affected by rate reference reform through the effective date of this guidance with no material effect on its financial statements.

In January 2016,

Accounting Standards Pending Adoption
ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the FASB amended the Financial Instruments topicProportional Amortization Method” permits reporting entities to elect to account for their tax equity investments, regardless of the Accounting Standards Codification to addresstax credit program from which the income tax credits are received, using the proportional amortization method if certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.conditions are met. 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, 2017,2023, 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 doesASU 2023-02 is not expect these amendmentsexpected 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.

 Page 9

Index

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 classificationsignificant impact 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 itsCompany's consolidated 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.

 Page 10

Index

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 be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect this amendment to have a material effect on its financial statements.

In March 2017, the FASB amended the requirements in the Compensation—Retirement Benefits topic of the Accounting Standards Codification related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The amendments require that an employer report the service cost component in the same line item or items 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. The amendments will be effective for the Company for interim and 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.

In March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs topic of the Accounting Standards Codification related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments will be effective for the Company for interim and annual 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.

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.

Note 3 – Reclassifications

Certain amounts reported in the period ended September 30, 2016 have been reclassified to conform to the presentation for September 30, 2017. These reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

Note 42 – Acquisitions

Since

On January 1, 2016,2023, the Company completed its acquisition of GrandSouth Bancorporation ("GrandSouth"), in an all-stock transaction pursuant to the acquisitions described below.Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), dated June 21, 2022, between the Company and GrandSouth. At the closing of the transaction, GrandSouth merged into the Company. Following the merger of the Company and GrandSouth, GrandSouth Bank, a wholly-owned subsidiary of GrandSouth, merged into the Bank with the Bank being the surviving entity. The results of GrandSouth are included beginning on the January 1, 2023 acquisition date.

Pursuant to the Merger Agreement, each acquired company/branch areshare of common and preferred stock of GrandSouth issued and outstanding immediately prior to the effective time of the acquisition was converted into 0.91 shares of the Company's common stock. As a result, the Company issued 5,032,834 shares of the Company common stock effective January 1, 2023. In addition, GrandSouth common stock options outstanding at the merger effective time were converted to options to acquire 0.91 shares of the Company's common stock resulting in 542,345 options with an average exercise price of approximately $20.14. The total consideration transferred at the close of the transaction was $229.5 million which was determined based on the number of shares issued and the closing market price of the Company's stock immediately prior to the merger effective time of $42.84. In addition to the stock issued, the fair value of the converted stock options calculated in accordance with FASB Accounting Standards Codification ("ASC") 805-30-55 was 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.

 Page 11

total consideration of the transaction.
Index

Bankingport was an insurance agency based

As a result of the merger, eight branches in Sanford, North Carolina. This acquisition represented an opportunitySouth Carolina were added 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 bankCompany's branch network. The deal value was $2.2 millionacquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the the high-growth markets of the state including Greenville, Charleston and Columbia. Significant synergies are anticipated to be gained from the acquisition, with asset growth and revenue enhancement opportunities from the new markets and expanded customer base. Accordingly, the Company recognized goodwill in the transaction was completed on January 1, 2016 withrelated primarily to the Company paying $0.7 million in cash and issuing 79,012 sharesreasons noted, as well as the positive earnings 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.

GrandSouth.

This acquisitiontransaction was accounted for using the purchaseacquisition method of accounting for business combinations, and accordingly, the assets acquired, intangible assets identified, and liabilities assumed of BankingportGrandSouth were recorded based on estimates of fair values as of January 1, 2016. In connection with this transaction, the Company recorded $1.7 million2023. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in goodwill, which is non-deductible for tax purposes,nature 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 forsubject to change. Estimated fair values were based on management’s best estimates, using the purchase methodinformation available at the date of accounting for business combinations, and accordingly,acquisition, including the use of third-party valuation specialists. Management has finalized the valuations of all acquired 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 monthsassumed in the GrandSouth acquisition.

The following table summarizes 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 aestimated 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 depositassets, identified 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 assumed as of January 1, 2023. Following the acquired branches were recorded ontable is a discussion of valuation approaches utilized in


Page 12
Index
estimating 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.in accordance with ASC 805-10, "Business Combinations." 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.

 Page 12

Index

(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$114.5 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
($ in thousands)Fair Value Estimate
Assets acquired:
Cash and cash equivalents$22,610 
Securities available for sale112,363 
Loans, gross996,833 
Allowance for loan losses(5,610)
Premises and equipment20,268 
Core deposit intangible28,840 
Operating right-of-use lease assets732 
Other assets27,163 
Total1,203,199 
Liabilities assumed:
Deposits1,045,308 
Borrowings38,800 
Other liabilities4,089 
Total1,088,197 
Net identifiable assets acquired115,002 
Less: Total consideration229,489 
Goodwill recorded related to a short-term investment to its estimated fair value.acquisition of GrandSouth$114,487 

The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed included in the table above.

Cash and cash equivalents: This consists primarily of cash and due from banks, and interest-bearing deposits with banks. The carrying amount of these assets was a reasonable estimate of fair value based on the short-term nature of these assets.

Securities available for sale: Fair value of securities was measured based on quoted market prices, where available. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. Substantially all of the securities acquired from GrandSouth were liquidated at their recorded fair value upon close of the transaction or shortly thereafter. There was no gain or loss recorded on the sale of acquired securities.

Loans: Fair value of loans acquired was based on a discounted cash flow methodology that considered factors including loan type and related collateral, classification status, remaining term of the loan, fixed or variable interest rate, amortization status, and current discount rates. Expected cash flows were derived using inputs consistent with management's assessment of credit risk for allowance measurement, including estimated future credit losses and estimated prepayments. A total fair value mark of $29.5 million was recorded. Purchased loans with financial deterioration ("PCD loans") were determined based primarily on internal grades, delinquency status, and other evidence of credit deterioration. The Company calculated the "Day 1" allowance of $5.6 million on PCD loans in accordance with its current expected credit loss model ("CECL") and reclassified that amount from the fair value mark to establish the initial ACL on PCD loans. The following table presents additional information related to the acquired loan portfolio at the acquisition date:


Page 13
Index
(b)This fair
($ in thousands)January 1, 2023
PCD Loans:
Par value adjustment was recorded$152,487 
Allowance for credit losses(5,610)
Non-credit discount(1,370)
Purchase price145,507 
Non-PCD Loans:
Fair Value845,716 
Gross contractual amounts receivable865,132 
Estimate of contractual cash flows not expected to adjust the securities portfolio to its estimated fair value.be collected22,542 
(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.

 Page 13

Index
(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
Premises: Land and buildings held for use were valued at appraised values, which reflected considerations of recent disposition values for similar property types with adjustments for characteristics of individual properties.

Intangible assets: Core deposit intangible ("CDI") asset 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 ofrelationships with deposit customers. The fair value for the core deposit intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of deposit base, net maintenance cost attributable to customer deposits and related income tax effects.an estimate of the cost associated with alternative funding sources. The discount rates used for CDI assets were based on market rates. The CDI is being amortized over 10 years utilizing the sum of the months digits accelerated method, which results in a weighted-average amortization period of approximately 41 months.


Lease Assets and Lease Liabilities: Lease assets and lease liabilities were measured using a methodology that involved estimating the future lease payments over the remaining lease term with discounting using a discount rate. The lease term was determined for individual leases based on management's assessment of the probability of exercising existing renewal options.

Deposits: The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. Fair values for time deposits were estimated using a discounted cash flow analysis applying interest rates currently offered to the contractual interest rates on such time deposits.

Borrowings: The fair values of long-term debt instruments were estimated based on quoted market prices for instrument if available, or for similar instruments if not available.

Supplemental Pro Forma Financial Information

The following table presents certain pro forma financial information does not necessarily reflectas if GrandSouth had been acquired on January 1, 2022. These results combine the historical results of operations thatGrandSouth with the Company’s results and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2022.

Merger-related costs related to this acquisition of $1.3 million and $13.5 million for the three and six months ended June 30, 2023 were recorded by 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 ofwere excluded from the supplemental pro forma information merger-related expensesbelow. In addition, no adjustments have been made to such pro forma information to eliminate the provision for loan losses recorded by GrandSouth in the amount of $4.4$0.1 million that wereand $0.4 million for the three and six months ended June 30, 2022.


Pro forma information for the three and six months ended June 30, 2023was adjusted to eliminate the following: 1) the non-PCD provision for loan losses recorded on the acquisition date of $12.2 million and 2) the initial recording of a provision for credit losses associated with GrandSouth’s unfunded commitments of $1.9 million. If the GrandSouth acquisition had occurred at the beginning of 2022, the acquisition date credit loss reserve amounts would have been included in the fair value measurements of GrandSouth and also included in the goodwill calculation.

The following table also discloses the impact of the acquisition of GrandSouth from the acquisition date of January 1, 2023 through June 30, 2023. These amounts are included in the Company’s consolidated financial 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.

 Page 14

Index

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 and $146,000 for the three and six months ended SeptemberJune 30, 2017 and 2016, respectively, and $860,000 and $527,000 for the nine months ended September 30, 2017 and 2016, respectively. Of the $860,000 in expense that was recorded in 2017, approximately $320,000 related to the June 1, 2017 director grants, and is classified 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 flows2023. Merger-related costs have been excluded from operating activities on the Company’s Consolidated Statement of Cash Flows. The Company recognized $318,000 and $206,000 of income tax benefits related to stock based compensation expense in the income statement for the nine months ended September 30, 2017 and 2016, respectively.

At September 30, 2017, the Company had the following equity-based compensation plans: the First Bancorp 2014 Equity Planthese


Page 14
Index
amounts and the First Bancorp 2007 Equity Plan. The Company’s shareholders approved all equity-based compensation plans. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of September 30, 2017, the First Bancorp 2014 Equity Plan was the only plan that had shares availableprovisions for future grants, and there were 803,946 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’ 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 grants to employees have either had performance vesting conditions, service vesting conditions, or both. Compensation expense for these grants is recorded over the various 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 and any previously recognized compensation cost will be reversed. The Company issues new shares of common stock when options are exercised.

Certain of the Company’s stock option 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 minimalcredit loss amounts of forfeitures, and therefore the Company assumes that all awards granted without performance conditions will become vested.

The Company typically grants shares of common stock to each non-employee director in June of each year. On June 1, 2017, the Company granted 11,190 shares of common stock to non-employee directors (1,119 shares per director), at a fair market value of $28.59 per share, which was the closing price of the Company’s common stock on that date, which resulted in $320,000 in expense. On June 1, 2016, the Company granted 6,584 shares of common stock to non-employee directors (823 shares per director), at a fair market value of $19.56 per share, which was the closing price of the Company’s common stock on that date, which resulted in $129,000 in expense.

 Page 15

Index

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 those grants was $758,000non-PCD loans and is being recognized over 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 quarter 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.

The following table presents information regarding the activity for the first nine months of 2017 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 to 2009, stock options were the primary form of equity grant utilized by the Company. The 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 

 Page 16

Index

During the three and nine months ended September 30, 2017, the Company received $0 and $287,000, respectively, as a result of stock option exercises. During the three and nine months ended September 30, 2016, the Company received $0 and $375,000, respectively, as a result of stock option exercises.

Note 6 – Earnings Per Common Share

Basic Earnings Per Common Share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding 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.

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 number of 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. 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 preferred shares assumed to be converted were included in the number of shares outstanding.

If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common stock issuance is disregarded.

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

Index

For both the three and nine months ended September 30, 2017, there were no optionsunfunded commitments 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.

discussed above have also been excluded.


($ in thousands)For the three months endedFor the six months ended
June 30, 2023June 30, 2023
RevenueNet IncomeRevenueNet Income
Actual GrandSouth results included in statement of income since acquisition date$13,767 $5,132 $29,307 $10,951 
($ in thousands)For the three months endedFor the six months ended
June 30, 2022June 30, 2022
RevenueNet IncomeRevenueNet Income
Supplemental consolidated pro forma for the Company as if GrandSouth had been acquired on January 1, 2022110,248 39,746 220,672 77,213 

Note 73 – Securities


The book values and approximate fair values of investment securities at SeptemberJune 30, 20172023 and December 31, 20162022 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, 2023December 31, 2022
Amortized
Cost		Fair
Value		UnrealizedAmortized
Cost		Fair
Value		Unrealized
Gains(Losses)Gains(Losses)
Securities available for sale:
U.S. Treasuries$174,601 169,613 — (4,988)174,420 168,758 — (5,662)
Government-sponsored enterprise securities71,960 58,511 — (13,449)71,957 57,456 — (14,501)
Mortgage-backed securities2,393,696 1,973,539 1 (420,158)2,467,839 2,045,000 4 (422,843)
Corporate bonds19,674 18,123 — (1,551)44,340 43,279 — (1,061)
Total available for sale$2,659,931 2,219,786 1 (440,146)2,758,556 2,314,493 4 (444,067)
Securities held to maturity:
Mortgage-backed securities$13,502 12,610 — (892)15,150 14,221 — (929)
State and local governments524,319 429,271 6 (95,054)526,550 418,307 7 (108,250)
Total held to maturity$537,821 441,881 6 (95,946)541,700 432,528 7 (109,179)

All of the Company’s mortgage-backed securities were issued by government-sponsored corporations,enterprises ("GSE"), except for one private mortgage-backed securitysecurities with a fair value of $490,000 at September$0.8 million and $0.8 million as of June 30, 2017.

2023 and December 31, 2022, respectively.


The following table presents information regarding all 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 

2023:


Page 15
Index
Securities in an Unrealized
Loss Position for
Less than 12 Months		Securities in an Unrealized
Loss Position for
More than 12 Months		Total
($ in thousands)Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
U.S. Treasuries$— — 169,613 4,988 169,613 4,988 
Government-sponsored enterprise securities— — 58,511 13,449 58,511 13,449 
Mortgage-backed securities39,491 1,836 1,945,483 419,214 1,984,974 421,050 
Corporate bonds2,618 306 13,754 1,245 16,372 1,551 
State and local governments5,240 38 423,008 95,016 428,248 95,054 
Total unrealized loss position$47,349 2,180 2,610,369 533,912 2,657,718 536,092 

The following table presents information regarding all 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 

 Page 18

2022:
Index
Securities in an Unrealized
Loss Position for
Less than 12 Months		Securities in an Unrealized
Loss Position for
More than 12 Months		Total
($ in thousands)Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
US Treasury securities$168,758 5,662 — — 168,758 5,662 
Government-sponsored enterprise securities— — 57,456 14,501 57,456 14,501 
Mortgage-backed securities221,006 18,215 1,835,958 405,557 2,056,964 423,772 
Corporate bonds40,644 947 886 114 41,530 1,061 
State and local governments48,385 8,323 368,897 99,927 417,282 108,250 
Total unrealized loss position$478,793 33,147 2,263,197 520,099 2,741,990 553,246 

As of June 30, 2023, the Company's securities portfolio held 657 securities of which 645 securities were in an unrealized loss position. As of December 31, 2022, the Company's securities portfolio held 666 securities of which 644 securities were in an unrealized loss position.
In the above tables, all of the non-equity securities that were in an unrealized loss position at SeptemberJune 30, 20172023 and December 31, 20162022 are bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. In arriving at this conclusion, the Company reviewed third-party credit ratings and considered the severity of the impairment. The state and local government investments are comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation. The Company has evaluatedno significant concentrations of bond holdings from one state or local government entity. Nearly all of our mortgage-backed securities were issued by Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA"), or the collectability ofSmall Business Administration ("SBA"), each of these bondswhich is a government agency or GSE and has concluded that there is no other-than-temporary impairment.guarantees the repayment of the securities. 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 that each of the equity securities in an unrealized loss position at

At June 30, 2023 and December 31, 2016 was in such a position due2022, the Company determined that expected credit losses associated with held to temporary fluctuations in the market prices of the securities. The Company’s policy is to record an impairment charge for any of these equitymaturity debt securities that remains in an unrealized loss position for twelve consecutive months unless the amount iswere insignificant.

The book values and approximate fair values of investment securities at SeptemberJune 30, 2017,2023, 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 


Page 16
Index
 Securities Available for SaleSecurities Held to Maturity
($ in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Due within one year$99,944 97,508 — — 
Due after one year but within five years77,166 74,338 996 887 
Due after five years but within ten years88,125 73,458 92,917 77,987 
Due after ten years1,000 943 430,406 350,397 
Mortgage-backed securities2,393,696 1,973,539 13,502 12,610 
Total securities$2,659,931 2,219,786 537,821 441,881 
At SeptemberJune 30, 20172023 and December 31, 2016,2022, investment securities with carrying values of $213,825,000$1.6 billion and $147,009,000,$758.0 million, respectively, were pledged as collateral for public deposits.

Indeposits or at the first nine monthsFederal Reserve Bank of 2017, the Company received proceeds from salesRichmond ("Federal Reserve") as security on lines of credit.

At June 30, 2023 and December 31, 2022, there were no holdings of securities of $45,601,000any one issuer, other than U.S. Government and recorded lossesits agencies or GSEs, in an amount greater than 10% of $235,000 from the sales. In the first nine months of 2016, the Company received proceeds fromshareholders' equity.
There were no sales of investment securities of $8,000 and recorded $3,000 in gains fromduring the sales.

three or six months ended June 30, 2023.

Included in “other“Other assets” in the Consolidated Balance Sheets are cost method investments in Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank of Richmond (“FRB”) stock totaling $30,198,000$54.9 million and $19,826,000$39.6 million at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. These investments do not have readily determinable fair values. The FHLB stock had a cost and fair value of $18,507,000$22.1 million and $12,588,000$14.7 million at SeptemberJune 30, 20172023 and December 31, 2016,2022, 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 FRBFederal Reserve stock had a cost and fair value of $11,691,000$32.7 million and $7,238,000$24.9 million at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively, and is a requirement for FRBFederal Reserve member bank qualification. Periodically, both the FHLB and FRBFederal Reserve 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, 2023 was approximately 1.59, which means the Company would have received approximately 19,649 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 their 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 17
Index
Note 84 – Loans, Allowance for Credit Losses, and Asset Quality Information

Prior to September 22, 2016, the Company’s banking subsidiary, First Bank, had certain loans and foreclosed real estate that were covered by loss share agreements between the FDIC and First Bank which afforded First Bank significant loss protection - see Note 2 to the financial statements included in the Company’s 2011 Annual Report on Form 10-K for detailed information regarding FDIC-assisted purchase transactions. On September 22, 2016, 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 banks 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 classified 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 this acquisition, the Company recorded loans with a fair value of $497.5 million. Of those loans, $19.3 million 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 are considered to be purchased non-impaired loans and their related fair value discount or premium is recognized as an adjustment to yield over the remaining life of each loan.

The following table relates 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 provides 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 summary 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     

The following

($ in thousands)June 30, 2023December 31, 2022
 AmountPercentageAmountPercentage
Commercial and industrial$888,391 11 %$641,941 9 %
Construction, development & other land loans1,109,769 14 %934,176 14 %
Commercial real estate - owner occupied1,222,189 16 %1,036,270 16 %
Commercial real estate - non owner occupied2,423,262 31 %2,123,811 32 %
Multi-family real estate392,120 5 %350,180 5 %
Residential 1-4 family real estate1,461,068 18 %1,195,785 18 %
Home equity loans/lines of credit334,566 4 %323,726 5 %
Consumer loans67,077 1 %60,659 1 %
Subtotal7,898,442 100 %6,666,548 100 %
Unamortized net deferred loan fees(813)(1,403)
Total loans$7,897,629 $6,665,145 

Also included in the table presentsabove are various SBA loans, generally originated under the SBA 7A program, with additional information regarding covered purchased non-impairedon these loans since January 1, 2016. The amounts include principal onlypresented in the table below.
($ in thousands)June 30, 2023December 31, 2022
Guaranteed portions of SBA loans included in table above$39,339 31,893 
Unguaranteed portions of SBA loans included in table above114,643 116,910 
Total SBA loans included in the table above$153,982 148,803 
Sold portions of SBA loans with servicing retained - not included in tables above$371,943 392,370 

At June 30, 2023 and do not reflect accrued interestDecember 31, 2022, there were remaining unaccreted discounts on the retained portion of sold SBA loans amounting to $3.8 million and $4.3 milion, respectively.

At June 30, 2023 and December 31, 2022, loans in the amount of $6.1 billion and $5.3 billion, respectively, were pledged as collateral for certain borrowings.

At June 30, 2023 and December 31, 2022, total loans included loans to executive officers and directors of the dateCompany, and their associates, totaling approximately $5.8 million and $6.0 million, respectively. There were two new loans and advances on existing loans totaling approximately $0.1 million for the six months ended June 30, 2023 and repayments amounted to $0.3 million for that period. Available credit on related party loans totaled $1.2 million at June 30, 2023 and December 31, 2022. Management does not believe these loans involve more than the normal risk of collectability or present other unfavorable features.
As of June 30, 2023 and December 31, 2022, unamortized discounts on all acquired loans totaled $29.2 million and $11.6 million, respectively. Loan discounts are generally amortized as yield adjustments over the respective lives of the acquisition or beyond. All balances of covered loans, were transferred to non-coveredso long 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 $— 

The following table presents information regarding all 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 

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

 Page 21

perform.
Index

Nonperforming assets ("NPA") are defined as nonaccrual loans, restructured loans,modifications to borrowers in financial distress, 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   —   — 

(1) Inestate, and prior to the March 3, 2017 acquisitionadoption of Carolina Bank Holdings, Inc.,ASU 2022-02 on January 1, 2023, TDRs.


Page 18
Index
The following table summarizes the Company acquired $19.3 million in purchased credit impaired loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.4 million in purchased credit impaired loans at SeptemberNPAs for each period presented.
($ in thousands)June 30,
2023		December 31,
2022
Nonaccrual loans$29,876 28,514 
Modifications to borrowers in financial distress4,862 — 
TDRs - accruing— 9,121 
Total nonperforming loans34,738 37,635 
Foreclosed real estate1,077 658 
Total nonperforming assets$35,815 38,293 
At June 30, 2017 that are contractually past due 90 days or more.

At September 30, 20172023 and December 31, 2016,2022, the Company had $0.9$2.7 million and $1.7$0.8 million, respectively, in residential mortgage loans in the process of foreclosure, respectively.

foreclosure.

At both June 30, 2023 and December 31, 2022, there was one loan, respectively, with an immaterial commitment to lend additional funds to borrowers whose loans were nonperforming.
The following table 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 
         

categories as of June 30, 2023:

($ in thousands)Nonaccrual Loans with No AllowanceNonaccrual Loans with an AllowanceTotal Nonaccrual Loans
Commercial and industrial$— 11,299 11,299 
Construction, development & other land loans— 265 265 
Commercial real estate - owner occupied3,277 7,988 11,265 
Commercial real estate - non owner occupied673 1,153 1,826 
Multi-family real estate— — — 
Residential 1-4 family real estate— 3,198 3,198 
Home equity loans/lines of credit— 1,867 1,867 
Consumer loans— 156 156 
Total$3,950 25,926 29,876 


The following table is a summary of the Company’s nonaccrual loans by major categories as of December 31, 2022:
($ in thousands)Nonaccrual Loans with No AllowanceNonaccrual Loans with an AllowanceTotal Nonaccrual Loans
Commercial and industrial$3,855 6,374 10,229 
Construction, development & other land loans— 1,009 1,009 
Commercial real estate - owner occupied3,903 5,770 9,673 
Commercial real estate - non owner occupied1,107 1,725 2,832 
Multi-family real estate— — — 
Residential 1-4 family real estate157 3,132 3,289 
Home equity loans/lines of credit— 1,397 1,397 
Consumer loans— 85 85 
Total$9,022 19,492 28,514 

There was no interest income recognized during the periods presented on nonaccrual loans. The Company follows its nonaccrual policy of reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status.


Page 22

19
Index

The following table represents the accrued interest receivables written off by reversing interest income during each period indicated:
($ in thousands)Six Months Ended June 30, 2023For the Year Ended December 31, 2022Six Months Ended June 30, 2022
Commercial and industrial$162 102 33 
Construction, development & other land loans2 16 16 
Commercial real estate - owner occupied64 123 100 
Commercial real estate - non owner occupied7 15 2 
Multi-family real estate— 1 — 
Residential 1-4 family real estate20 45 25 
Home equity loans/lines of credit16 20 6 
Consumer loans1 2 2 
Total$272 324 184 

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 

2023:

($ 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 and industrial$702 1,127 — 11,299 875,263 888,391 
Construction, development & other land loans585 22 — 265 1,108,897 1,109,769 
Commercial real estate - owner occupied525 400 — 11,265 1,209,999 1,222,189 
Commercial real estate - non owner occupied61 634 — 1,826 2,420,741 2,423,262 
Multi-family real estate— — — — 392,120 392,120 
Residential 1-4 family real estate1,027 1,814 — 3,198 1,455,029 1,461,068 
Home equity loans/lines of credit550 673 — 1,867 331,476 334,566 
Consumer loans229 56 — 156 66,636 67,077 
Total$3,679 4,726 — 29,876 7,860,161 7,898,442 
Unamortized net deferred loan fees(813)
Total loans7,897,629 



Page 20
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 

 Page 23

2022:
Index
($ 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 and industrial$438 565 — 10,229 630,709 641,941 
Construction, development & other land loans238 1,687 — 1,009 931,242 934,176 
Commercial real estate - owner occupied124 48 — 9,673 1,026,425 1,036,270 
Commercial real estate - non owner occupied496 49 — 2,832 2,120,434 2,123,811 
Multi-family real estate— — — — 350,180 350,180 
Residential 1-4 family real estate3,415 25 — 3,289 1,189,056 1,195,785 
Home equity loans/lines of credit457 371 — 1,397 321,501 323,726 
Consumer loans249 66 — 85 60,259 60,659 
Total$5,417 2,811 — 28,514 6,629,806 6,666,548 
Unamortized net deferred loan fees(1,403)
Total loans$6,665,145 

Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans on nonaccrual with a net book balance of $500,000 or greater for designation as collateral dependent loans, as well as certain other loans that may still be accruing interest and/or are less than $500,000 in size that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the ACL.
The following table presents an analysis of collateral dependent loans of the Company as of June 30, 2023:
($ in thousands)Residential PropertyBusiness AssetsLandCommercial PropertyTotal Collateral-Dependent Loans
Commercial and industrial$— 1,626 — — 1,626 
Commercial real estate - owner occupied— — — 5,830 5,830 
Commercial real estate - non owner occupied— — — 673 673 
Total$— 1,626 — 6,503 8,129 

The following table presents an analysis of collateral dependent loans of the Company as of December 31, 2022:
($ in thousands)Residential PropertyBusiness AssetsLandCommercial PropertyTotal Collateral-Dependent Loans
Commercial and industrial$— 6,394 — — 6,394 
Commercial real estate - owner occupied— — — 4,578 4,578 
Commercial real estate - non owner occupied— — — 2,145 2,145 
Residential 1-4 family real estate157 — — — 157 
Total$157 6,394 — 6,723 13,274 

Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the ACL based on the fair value of collateral. The ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The Company's policy is to obtain third-party appraisals on any significant pieces of collateral. For loans secured by real estate, the Company's policy is to write nonaccrual loans down to 90% of the appraised value, which considers estimated selling costs that are usually incurred when disposing of real estate collateral. For real estate collateral that is in industries which may be undergoing heightened stress due to economic or other external factors, the Company may reduce the collateral values by an additional 10-25% of appraised value to recognize additional discounts that are estimated to be incurred in a near-term sale. For non real estate collateral secured loans, the

Page 21
Index
Company generally writes nonaccrual loans down to 75% of the appraised value, which provides for selling costs and liquidity discounts that are usually incurred when disposing of non real estate collateral. For reviewed loans that are not on nonaccrual basis, the Company assigns a specific allowance based on the parameters noted above.

The Company does not believe that there is significant excess collateral for any of the loan types noted above.

The following tables presents the activity in the allowance for loan losses for allACL on loans for each of the threeperiods indicated. Fluctuations in the ACL each period are based on loan mix and ninegrowth, changes in the levels of nonperforming loans, economic forecasts impacting loss drivers, other assumptions and inputs to the CECL model, and as occurred in 2023, adjustments for acquired loan portfolios. Much of the change to the level of ACL during the six 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 

 Page 24

Index

The following table presents2023 is attributed to the activityacquisition of GrandSouth. In addition to the "Day 1" allowance recorded for PCD loans of $5.6 million, the Company recorded a "Day 2" initial provision of $12.2 million related to the non-PCD loans in the allowance for loan losses forGrandSouth portfolio. The balance of 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 transferredchange was a result of updated economic forecast inputs 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 

 Page 25

Index

The following table presents the activityour CECL model driving higher loss rate assumptions, primarily due to some deterioration in the allowance for loan losses for the three and nine months ended September 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 

commercial real estate index.


($ in thousands)Beginning balance"Day 1" ACL for acquired PCD loansCharge-offsRecoveriesProvisions / (Reversals)Ending balance
As of and for the three months ended June 30, 2023
Commercial and industrial$23,073 — (1,534)492 1,411 23,442 
Construction, development & other land loans18,986 — — 158 (667)18,477 
Commercial real estate - owner occupied16,082 — — 34 265 16,381 
Commercial real estate - non owner occupied25,990 — — 38 246 26,274 
Multi-family real estate3,204 — — 3 739 3,946 
Residential 1-4 family real estate12,285 — — 79 1,941 14,305 
Home equity loans/lines of credit3,481 — — 40 196 3,717 
Consumer loans3,295 — (217)41 (431)2,688 
Total$106,396 — (1,751)885 3,700 109,230 
As of and for the six months ended June 30, 2023
Commercial and industrial$17,718 5,197 (3,711)766 3,472 23,442 
Construction, development & other land loans15,128 49 — 223 3,077 18,477 
Commercial real estate - owner occupied14,972 191 — 70 1,148 16,381 
Commercial real estate - non owner occupied22,780 51 (235)432 3,246 26,274 
Multi-family real estate2,957 — — 7 982 3,946 
Residential 1-4 family real estate11,354 113 — 225 2,613 14,305 
Home equity loans/lines of credit3,158 8 (2)74 479 3,717 
Consumer loans2,900 1 (424)77 134 2,688 
Total$90,967 5,610 (4,372)1,874 15,151 109,230 



Page 26

22
Index

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of September 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 

Interest income on impaired loans recognized during the nine months ended September 30, 2017 was insignificant.

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 

Interest income on impaired loans recognized during the year ended December 31, 2016 was insignificant.

($ in thousands)Beginning balanceCharge-offsRecoveriesProvisions / (Reversals)Ending balance
As of and for the year ended December 31, 2022
Commercial and industrial$16,249 (2,519)756 3,232 17,718 
Construction, development & other land loans16,519 — 480 (1,871)15,128 
Commercial real estate - owner occupied12,317 (214)691 2,178 14,972 
Commercial real estate - non owner occupied16,789 (849)1,281 5,559 22,780 
Multi-family real estate1,236 — 11 1,710 2,957 
Residential 1-4 family real estate8,686 — 17 2,651 11,354 
Home equity loans/lines of credit4,337 (43)600 (1,736)3,158 
Consumer loans2,656 (840)207 877 2,900 
Total$78,789 (4,465)4,043 12,600 90,967 



($ in thousands)Beginning balanceCharge-offsRecoveriesProvisions / (Reversals)Ending balance
As of and for the three months ended June 30, 2022
Commercial and industrial$16,013 (728)223 (58)15,450 
Construction, development & other land loans16,057 — 130 (16)16,171 
Commercial real estate - owner occupied15,274 (18)529 (864)14,921 
Commercial real estate - non owner occupied19,440 (800)768 716 20,124 
Multi-family real estate2,613 — 3 (467)2,149 
Residential 1-4 family real estate8,159 — 11 480 8,650 
Home equity loans/lines of credit2,074 — 128 (116)2,086 
Consumer loans2,439 (214)80 325 2,630 
Total$82,069 (1,760)1,872 — 82,181 
As of and for the six months ended June 30, 2022
Commercial and industrial$16,249 (1,518)470 249 15,450 
Construction, development & other land loans16,519 — 267 (615)16,171 
Commercial real estate - owner occupied12,317 (18)560 2,062 14,921 
Commercial real estate - non owner occupied16,789 (845)889 3,291 20,124 
Multi-family real estate1,236 — 6 907 2,149 
Residential 1-4 family real estate8,686 — 15 (51)8,650 
Home equity loans/lines of credit4,337 (41)361 (2,571)2,086 
Consumer loans2,656 (381)127 228 2,630 
Total$78,789 (2,803)2,695 3,500 82,181 




Page 27

23
Index

Credit Quality Indicators
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.

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

Risk GradeDescription
Pass:Risk GradeDescription
Pass:1
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

In the tables that follow, substantially all of the "Classified" loans have grades of 7 or Fail, with those categories having similar levels of risk.

The following table presentstables below present the Company’s recorded investment in loans by credit quality indicators by year of origination or renewal as of Septemberthe periods indicated. Acquired loans are presented in the year originated, not in the year of acquisition.

Page 24
Term Loans by Year of Origination
($ in thousands)20232022202120202019PriorRevolvingTotal
As of June 30, 2023
Commercial and industrial
Pass$74,660 181,469 115,551 84,957 48,034 67,670 298,082 870,423 
Special Mention347 486 335 502 1,094 889 1,068 4,721 
Classified297 1,244 1,991 1,601 1,252 5,274 1,588 13,247 
Total commercial and industrial75,304 183,199 117,877 87,060 50,380 73,833 300,738 888,391 
Gross charge-offs, YTD— 146 696 32 556 764 1,517 3,711 
Construction, development & other land loans
Pass310,613 466,562 214,178 22,440 15,743 9,253 67,372 1,106,161 
Special Mention387 2,212 — 22 — 99 23 2,743 
Classified404 104 81 8 16 228 24 865 
Total construction, development & other land loans311,404 468,878 214,259 22,470 15,759 9,580 67,419 1,109,769 
Gross charge-offs, YTD— — — — — — — — 
Commercial real estate - owner occupied
Pass93,809 316,395 325,281 210,414 101,728 123,372 17,491 1,188,490 
Special Mention730 279 720 3,798 5,949 5,850 635 17,961 
Classified425 3,128 1,749 267 2,443 7,636 90 15,738 
Total commercial real estate - owner occupied94,964 319,802 327,750 214,479 110,120 136,858 18,216 1,222,189 
Gross charge-offs, YTD— — — — — — — — 
Commercial real estate - non owner occupied
Pass263,968 750,657 781,011 326,322 144,933 115,805 23,895 2,406,591 
Special Mention373 218 40 4,604 1,348 6,087 — 12,670 
Classified96 1,090 16 — 1,425 1,374 — 4,001 
Total commercial real estate - non owner occupied264,437 751,965 781,067 330,926 147,706 123,266 23,895 2,423,262 
Gross charge-offs, YTD— — 235 — — — — 235 
Multi-family real estate
Pass35,169 146,618 135,882 45,914 12,650 11,561 4,326 392,120 
Special Mention— — — — — — — — 
Classified— — — — — — — — 
Total multi-family real estate35,169 146,618 135,882 45,914 12,650 11,561 4,326 392,120 
Gross charge-offs, YTD— — — — — — — — 
Residential 1-4 family real estate
Pass153,127 393,590 318,229 198,500 98,969 281,467 1,715 1,445,597 
Special Mention697 44 196 151 607 2,036 19 3,750 
Classified312 245 374 811 436 8,928 615 11,721 
Total residential 1-4 family real estate154,136 393,879 318,799 199,462 100,012 292,431 2,349 1,461,068 
Gross charge-offs, YTD— — — — — — — — 
Home equity loans/lines of credit
Pass1,770 3,404 1,275 298 606 1,752 315,797 324,902 
Special Mention223 — 120 — — 17 77 437 
Classified107 66 151 93 98 125 8,587 9,227 
Total home equity loans/lines of credit2,100 3,470 1,546 391 704 1,894 324,461 334,566 
Gross charge-offs, YTD— — — — — — 2 2 
Consumer loans
Pass9,298 16,548 6,956 3,097 808 826 28,963 66,496 
Special Mention— — — — — — — — 
Classified233 146 77 13 5 12 95 581 
Total consumer loans9,531 16,694 7,033 3,110 813 838 29,058 67,077 
Gross charge-offs, YTD5 8 22 3 — — 386 424 
Total loans$947,045 2,284,505 1,904,213 903,812 438,144 650,261 770,462 7,898,442 
Unamortized net deferred loan fees(813)
Total loans, net of deferred loan fees7,897,629 
Total gross charge-offs, year to date$5 154 953 35 556 764 1,905 4,372 


Page 25


Term Loans by Year of Origination
($ in thousands)20222021202020192018PriorRevolvingTotal
As of December 31, 2022
Commercial and industrial
Pass$185,167 107,747 85,110 51,274 590 76,588 120,590 627,066 
Special Mention342 166 648 1,312 — 990 332 3,790 
Classified734 1,909 808 1,384 — 5,762 488 11,085 
Total commercial and industrial186,243 109,822 86,566 53,970 590 83,340 121,410 641,941 
Construction, development & other land loans
Pass550,752 267,096 42,421 30,973 — 12,722 19,519 923,483 
Special Mention5,128 5 3,679 — — 100 13 8,925 
Classified656 107 38 899 — 44 24 1,768 
Total construction, development & other land loans556,536 267,208 46,138 31,872 — 12,866 19,556 934,176 
Commercial real estate - owner occupied
Pass258,025 305,324 190,464 96,495 179 141,053 15,499 1,007,039 
Special Mention1,170 1,070 4,042 6,926 — 3,277 665 17,150 
Classified3,060 208 84 1,572 — 6,790 367 12,081 
Total commercial real estate - owner occupied262,255 306,602 194,590 104,993 179 151,120 16,531 1,036,270 
Commercial real estate - non owner occupied
Pass718,696 747,653 319,708 141,284 — 168,096 21,159 2,116,596 
Special Mention545 44 394 1,363 — 1,180 — 3,526 
Classified420 1,057 — 884 — 1,328 — 3,689 
Total commercial real estate - non owner occupied719,661 748,754 320,102 143,531 — 170,604 21,159 2,123,811 
Multi-family real estate
Pass119,922 133,701 59,452 9,669 — 15,212 12,224 350,180 
Special Mention— — — — — — — — 
Classified— — — — — — — — 
Total multi-family real estate119,922 133,701 59,452 9,669 — 15,212 12,224 350,180 
Residential 1-4 family real estate
Pass317,282 274,756 186,102 98,559 185 301,885 1,379 1,180,148 
Special Mention1,189 127 110 470 — 2,416 — 4,312 
Classified763 251 221 359 — 9,072 659 11,325 
Total residential 1-4 family real estate319,234 275,134 186,433 99,388 185 313,373 2,038 1,195,785 
Home equity loans/lines of credit
Pass869 1,091 349 237 — 2,020 309,786 314,352 
Special Mention175 — — — — 18 1,072 1,265 
Classified106 156 94 87 — 213 7,453 8,109 
Total home equity loans/lines of credit1,150 1,247 443 324 — 2,251 318,311 323,726 
Consumer loans
Pass35,406 7,946 3,610 1,056 3 1,250 10,953 60,224 
Special Mention— — — — — — — — 
Classified320 31 3 1 — 25 55 435 
Total consumer loans35,726 7,977 3,613 1,057 3 1,275 11,008 60,659 
Total loans$2,200,727 1,850,445 897,337 444,804 957 750,041 522,237 6,666,548 
Unamortized net deferred loan fees(1,403)
Total loans, net of deferred loan fees6,665,145 

Page 26
Loan Modifications to Borrowers Experiencing Financial Difficulty
Effective January 1, 2023, we adopted ASU 2022-02 which eliminated the accounting guidance for TDRs and requires disclosures for certain loan modifications when a borrower is experiencing financial difficulty.
Occasionally, the Company modifies loans to borrowers in financial distress as a part of our loss mitigation activities. Various types of modification may be offered including principal forgiveness, term extension, payment delays, or interest rate reductions. In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession may be granted. For loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period.

The followings tables present the amortized cost basis at June 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 

2023 of the loans modified during the three and six months then ended for borrowers experiencing financial difficulty, by loan category and type of concession granted. Percentages labeled as "NM" are not measurable to the class of financing receivable, as they are less than 0.1% of the total class.


($ in thousands)Payment DelayTerm ExtensionCombination - Interest Rate Reduction and Term ExtensionTotalPercent of Total Class of Loans
As of and for the three months ended June 30, 2023
Commercial and industrial$1,363 30 — 1,393 0.16 %
Commercial real estate - owner occupied188 287 — 475 0.04 %
Residential 1-4 family real estate— 469 — 469 0.03 %
Home equity loans/lines of credit— 1,317 — 1,317 0.39 %
Total$1,551 2,103 — 3,654 0.05 %
As of and for the six months ended June 30, 2023
Commercial and industrial$1,513 105 — 1,618 0.18 %
Construction, development & other land loans— 502 12 514 0.05 %
Commercial real estate - owner occupied188 287 — 475 0.04 %
Commercial real estate - non owner occupied— 96 — 96 NM
Residential 1-4 family real estate— 515 — 515 0.04 %
Home equity loans/lines of credit— 1,416 — 1,416 0.42 %
Consumer loans— 228 — 228 0.34 %
Total$1,701 3,149 12 4,862 0.06 %
For the three and six months ended June 30, 2023, there were no modifications for borrowers experiencing financial difficulty with principal forgiveness concessions.
The following tables describes the financial effect for the three and six months ended June 30, 2023 of the modifications made for borrowers experiencing financial difficulty:

Page 27
Financial Effect of Modification to Borrowers Experiencing Financial Difficulty
Weighted Average Interest Rate ReductionWeighted Average Payment Delay
(in months)		Weighted Average Term Extension
(in months)
For the three months ended June 30, 2023
Commercial and industrial—%225
Commercial real estate - owner occupied—%1249
Residential 1-4 family real estate—%025
Home equity loans/lines of credit—%042
For the six months ended June 30, 2023
Commercial and industrial—%213
Construction, development & other land loans1.50%07
Commercial real estate - owner occupied—%1249
Commercial real estate - non owner occupied—%015
Residential 1-4 family real estate—%024
Home equity loans/lines of credit—%040
Consumer loans—%06
The Company closely monitors the performance of the loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presentsdepicts the performance of loans that have been modified in the last 12 months as of June 30, 2023:
Payment Status (Amortized Cost Basis)
($ in thousands)Current30-59 Days Past Due60-89 Days Past Due90+ Days Past Due
Commercial and industrial$1,618 — — — 
Construction, development & other land loans514 — — — 
Commercial real estate - owner occupied475 — — — 
Commercial real estate - non owner occupied96 — — — 
Multi-family real estate— — — — 
Residential 1-4 family real estate345 — 170 — 
Home equity loans/lines of credit1,416 — — — 
Consumer loans228 — — — 
$4,692 — 170 — 
None of the modifications made for borrowers experiencing financial difficulty during the three and six months ended June 30, 2023 are considered to have had a payment default.
Upon the Company’s recorded investment in loansdetermination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by credit quality indicators asthe uncollectible amount and the ACL is adjusted by the same amount.
TDR Disclosures Prior to the Adoption 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 

Troubled Debt Restructurings

ASU 2022-02

The restructuring of a loan iswas considered a “troubled debt restructuring”TDR if both (i) the borrower iswas experiencing financial difficulties and (ii) the creditor hashad granted a concession. Concessions may includehave included interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedulesextension of terms and other actions intended to minimize potential losses.

The vast majority of the Company’s troubled debt restructuringsTDRs modified during the periods ended June 30, 2022 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 beTDRs are classified as either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructuringsTDRs that arewere nonaccrual arewere reported within the nonaccrual loan totals presented previously.


Page 29

28

The following table presents information related to loans modified in a troubled debt restructuringTDR during the three and six months ended SeptemberJune 30, 2017 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  —  $—  $—   —  $—  $— 

 Page 30

2022.
Index
For the three months ended
June 30, 2022		For the six months ended
June 30, 2022
($ in thousands)Number of ContractsPre-Modification Restructured BalancesPost-Modification Restructured BalancesNumber of ContractsPre-Modification Restructured BalancesPost-Modification Restructured Balances
TDRs - Accruing
Commercial and industrial1 $161 161 1 $161 161 
Construction, development & other land loans1 131 131 1 131 131 
Residential 1-4 family real estate— — — 1 36 36 
Home equity loans/lines of credit2 203 203 2 203 203 
TDRs - Nonaccrual
Commercial and industrial2 259 259 3 300 300 
Commercial real estate - owner occupied1 244 244 2 784 784 
Residential 1-4 family real estate— — — 1 36 36 
Total TDRs arising during period7 $998 998 11 $1,651 1,651 

The following table presents information related to loans modified in a troubled debt restructuring during the nine months ended September 30, 2017 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  —  $—  $—   —  $—  $— 

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended September 30, 2017 and 2016 are presented in the table below.

The Company considersconsidered a TDR loan to have defaulted when it becomesbecame 90 or more days delinquent under the modified terms, hashad been transferred to nonaccrual status, or hashad 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 There were no accruing TDRs that subsequently defaulted—$——$—
Total covered accruing TDRs that subsequently defaulted included above—$——$—

 Page 31

Index

Accruing restructured loans that were modified in the previous 12twelve months and that defaulted during the ninethree and six months ended SeptemberJune 30, 2017 and 2016 are presented2022.

Concentration of Credit Risk
Most of the Company's business activity is with customers located within the markets where it has banking operations. Therefore, the Company’s exposure to credit risk is significantly affected by changes 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 – Deferredeconomy within its markets. Approximately 88% of the Company's loan portfolio is secured by real estate and is therefore susceptible to changes in real estate valuations.

Allowance for Credit Losses - Unfunded Loan (Fees) Costs

Commitments

In addition to the ACL on loans, the Company maintains an ACL for lending-related commitments such as unfunded loan commitments and letters of credit. The amountCompany estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for lending-related commitments on off-balance sheet credit exposures is adjusted as a provision for unfunded commitments expense. The estimate includes consideration of loans shownthe likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the ACL on loans. The ACL for unfunded loan commitments of $13.0 million and $13.3 million at June 30, 2023 and December 31, 2022, respectively, were separately classified on the Consolidated Balance Sheets includes net deferredwithin "Other liabilities."
The following table presents the balance and activity in the allowance for credit losses for unfunded loan (fees) costs of approximately ($437,000), ($49,000),commitments for the six months ended June 30, 2023 and $198,000 at September 30, 2017,2022 and for the twelve months ended December 31, 2016,2022:

Page 29
($ in thousands)June 30, 2023December 31, 2022June 30, 2022
Beginning balance$13,306 13,506 13,506 
"Day 2" provision for credit losses on unfunded commitments acquired from GrandSouth1,921 — — 
Charge-offs— — — 
Recoveries— — — 
Reversal of provision for unfunded commitments(2,209)(200)(1,500)
Ending balance$13,018 13,306 12,006 

Allowance for Credit Losses - Securities Held to Maturity
The ACL for securities held to maturity was insignificant at June 30, 2023 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 $— 
December 31, 2022.

Note 115 – 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, 2017,2023 and December 31, 2016, and September 30, 20162022, 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     

 Page 32

Index
June 30, 2023December 31, 2022
($ in thousands)Gross Carrying
Amount		Accumulated
Amortization		Gross Carrying
Amount		Accumulated
Amortization
Amortizable intangible assets:
Customer lists$2,700 2,007 2,700 1,847 
Core deposit intangibles57,890 25,296 29,050 21,274 
Other intangibles100 71 100 58 
Intangibles before servicing assets60,690 27,374 31,850 23,179 
SBA servicing assets13,536 9,755 13,264 9,260 
Total amortizable intangible assets$74,226 37,129 45,114 32,439 
Unamortizable intangible assets:
Goodwill$478,750 364,263 

Activity related to transactions during

Customer lists are generally amortized over five years and core deposit intangibles are generally amortized over 10 years, both at an accelerated rate.
Amortization expense of all other intangible assets, excluding the periods presented includes the following (See Note 4 to the Consolidated Financial Statements 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, the Company recorded $415,000 in net servicing assets, associated withtotaled $2.0 million and $1.0 million for the guaranteed portionthree months ended June 30, 2023 and 2022, respectively, and $4.2 million and $2.0 million for the six months ended June 30, 2023 and 2022, respectively.

SBA servicing assets are recorded for the portions of SBA loans originated and sold during the third and fourth quarters of 2016. During the first nine months of 2017,that the Company recorded an additional $1,003,000 in servicing assets, as well as $112,000 in amortization expense.has sold but continues to service for a fee. Servicing assets are initially recorded at fair value and amortized over the expected lives of the related loans.

Amortizationloans and are tested for impairment on a quarterly basis. SBA servicing asset amortization expense of all intangibleis recorded within noninterest income as an offset to SBA servicing fees within the line item "Other service charges, commissions, and fees."



Page 30
The following table presents the changes in the SBA servicing assets totaled $902,000 and $387,000SBA servicing income for the three and six months ended SeptemberJune 30, 20172023 and 2016,2022:
Three months ended June 30,Six months ended June 30,
($ in thousands)2023202220232022
Beginning balance, net$3,897 5,591 4,004 5,472 
Add: New servicing assets195 281 271 1,026 
Less: Amortization and impairment expense311 905 494 1,531 
Ending balance, net$3,781 4,967 3,781 4,967 
SBA guaranteed servicing income$863 992 1,847 1,781 
At June 30, 2023 and December 31, 2022, the Company serviced SBA loans totaling $371.9 million and $392.4 million, respectively, for others. There were no other loans serviced in any period presented.
Goodwill is evaluated for impairment on at least an annual basis, with the annual evaluation occurring as of October 31 of each year. Goodwill is also evaluated for impairment any time there is a triggering event indicating that impairment may have occurred. No triggering events were identified during 2023 to date or in 2022, and $2,509,000 and $834,000therefore, the Company did not perform interim impairment evaluations in either of those periods. Each of the Company's goodwill impairment evaluations for the nine months ended September 30, 2017 and 2016, respectively.

periods presented, including the most recent October 2022 evaluation, indicated that there was no goodwill impairment.


The following table presents the changes in carrying amounts of goodwill:
($ in thousands)Total Goodwill
Balance at December 31, 2021$364,263 
Net activity during 2022— 
Balance at December 31, 2022364,263 
Additions from acquisition of GrandSouth114,487 
Balance at June 30, 2023$478,750 
In connection with the GrandSouth acquisition on January 1, 2023, the Company recorded $28.8 million in core deposit intangibles.
The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets, excluding the 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 
     

($ in thousands)Estimated Amortization
Expense
July 1, 2023 to December 31, 2023$3,808 
20246,604 
20255,672 
20264,705 
20273,951 
Thereafter8,576 
Total$33,316 


Page 31
Note 6 - Borrowings
The following tables present information regarding the Company’s outstanding borrowings at June 30, 2023 and December 31, 2022 (dollars in thousands):
DescriptionDue dateCall FeatureJune 30, 2023Interest Rate
FHLB Principal Reducing Credit7/24/2023None$8 1.00% fixed
FHLB Principal Reducing Credit12/22/2023None891 1.25% fixed
FHLB Principal Reducing Credit6/26/2028None208 0.25% fixed
FHLB Principal Reducing Credit7/17/2028None34 0.00% fixed
FHLB Principal Reducing Credit8/18/2028None155 1.00% fixed
FHLB Principal Reducing Credit8/22/2028None155 1.00% fixed
FHLB Principal Reducing Credit12/20/2028None322 0.50% fixed
FHLB Daily Rate Credit7/13/2023None75,000 5.24% fixed
FHLB Fixed Rate Credit9/13/2023None300,000 5.17% fixed
FHLB Fixed Rate Hybrid9/29/2023None5,000 0.40% fixed
Trust Preferred Securities1/23/2034Quarterly by Company
beginning 1/23/2009		10,310 
7.95% at 6/30/23
adjustable rate
3 month LIBOR + 2.65%
Trust Preferred Securities1/23/2034Quarterly by Company
beginning 1/23/2009		10,310 
 8.05% at 6/30/23 adjustable rate
 3 month LIBOR + 2.75%
Trust Preferred Securities9/20/2034Quarterly by Company
beginning 9/20/2009		12,372 
7.66% at 6/30/23
adjustable rate
3 month LIBOR + 2.15%
Trust Preferred Securities1/7/2035Quarterly by Company
beginning 1/7/2010		10,310 
7.26% at 6/30/23
adjustable rate
3 month LIBOR + 2.00%
Trust Preferred Securities6/15/2036Quarterly by Company
beginning 6/15/2011		25,774 
6.26% at 6/30/23
adjustable rate
3 month LIBOR + 1.39%
Trust Preferred Securities6/23/2036Quarterly by the Company beginning 6/23/20118,248 
7.39% at 6/30/23
adjustable rate
3 month LIBOR + 1.85%
Subordinated Debentures11/30/2028Semi-annually by Company beginning 11/30/202310,000 6.50% fixed
Subordinated Debentures11/15/2030Semi-annually by Company beginning 11/15/202518,000 4.38% fixed
Total borrowings / weighted average rate as of June 30, 2023487,097 5.44%
Unamortized discount on acquired borrowings(5,439)
Total borrowings$481,658 

As discussed in Note 1, with the June 30, 2023 cessation of LIBOR, the index for the interest rates on the Company's trust preferred securities will automatically convert to the 3-month CME Term SOFR plus a spread intended to approximate the current interest rate. No material impact on the Company's financial statements is anticipated upon the next interest rate reset based on the SOFR index.


Page 32
DescriptionDue dateCall FeatureDecember 31, 2022Interest Rate
FHLB Principal Reducing Credit7/24/2023None$32 1.00% fixed
FHLB Principal Reducing Credit12/22/2023None912 1.25% fixed
FHLB Principal Reducing Credit6/26/2028None214 0.25% fixed
FHLB Principal Reducing Credit7/17/2028None38 0.00% fixed
FHLB Principal Reducing Credit8/18/2028None158 1.00% fixed
FHLB Principal Reducing Credit8/22/2028None159 1.00% fixed
FHLB Principal Reducing Credit12/20/2028None329 0.50% fixed
FHLB Daily Rate Credit8/23/2023None40,000 4.57% fixed
FHLB Fixed Rate Credit1/9/2023None50,000 4.15% fixed
FHLB Fixed Rate Credit2/1/2023None80,000 4.25% fixed
FHLB Fixed Rate Credit2/9/2023None50,000 4.35% fixed
Trust Preferred Securities1/23/2034Quarterly by Company
beginning 1/23/2009		10,310 
7.06% at 12/31/22
adjustable rate
3 month LIBOR + 2.65%
Trust Preferred Securities1/23/2034Quarterly by Company
beginning 1/23/2009		10,310 
 7.16% at 12/31/22
adjustable rate
3 month LIBOR + 2.75%
Trust Preferred Securities6/15/2036Quarterly by Company
beginning 6/15/2011		25,774 
6.16% at 12/31/22
adjustable rate
3 month LIBOR + 1.39%
Trust Preferred Securities9/20/2034Quarterly by Company
beginning 9/20/2009		12,372 
6.90% at 12/31/22
adjustable rate
3 month LIBOR + 2.15%
Trust Preferred Securities1/7/2035Quarterly by Company
beginning 1/7/2010		10,310 
6.08% at 12/31/22
adjustable rate
3 month LIBOR + 2.00%
Total borrowings / weighted average rate as of December 31, 2022290,918 4.82%
Unamortized discount on acquired borrowings(3,411)
Total borrowings$287,507 
Note 7 – Leases
The Company enters into leases in the normal course of business. As of June 30, 2023, the Company leased 17 branch offices for which the land and buildings are leased and 10 branch offices for which the land is leased but the buildings are 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 July 2023 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 19.3 years as of June 30, 2023. Certain of the Company's lease agreements include variable lease payments based on changes in inflation, with the impact of that factor being insignificant to the Company's total lease expense. 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. The short-term lease cost for each period presented was insignificant.
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 applicable lease term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

Page 33

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 3.07% as of June 30, 2023.
Total operating lease expenses were $0.8 million and $0.7 million for the three months ended June 30, 2023 and 2022, respectively, and $1.5 million and $1.6 million for the six months ended June 30, 2023 and 2022, respectively. The right-of-use assets and lease liabilities were $18.4 million and $19.1 million as of June 30, 2023, respectively, and were $18.7 million and $19.4 million as of December 31, 2022, respectively.
Future undiscounted lease payments for operating leases with initial terms of one year or more as of June 30, 2023 are as follows.
($ in thousands)
July 1, 2023 to December 31, 2023$1,180 
20242,163 
20251,706 
20261,685 
20271,547 
Thereafter18,441 
Total undiscounted lease payments26,722 
Less effect of discounting(7,613)
Present value of estimated lease payments (lease liability)$19,109 
Note 128 – Pension Plans

The Company has historically sponsored two defined benefit pension plans – a qualified retirement plan (the “Pension Plan”) which was generally available to all employees, and a Supplemental Executive Retirement Plan (the “SERP”), which was for the benefit of certain senior management executives of the Company. Effective December 31, 2012, the Company froze both plans for all participants. Although no previously accrued benefits were lost, employees no longer accrueadditional accruals of benefits under these plans for service subsequent to 2012.

2012 have been made.

The Company recorded periodic pension incomecost totaling $202,000$50,000 and $163,000$51,000 for the three months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, which primarily related to investment income fromand $101,000 and $102,000 for the Pension Plan’s assets.six months ended June 30, 2023 and 2022, 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,
20232022
($ in thousands)Pension PlanSERPTotal Both PlansPension PlanSERPTotal Both Plans
Service cost$— — — — — — 
Interest cost266 28 294 267 28 295 
Expected return on plan assets(288)— (288)(288)— (288)
Amortization of net loss (gain)180 (136)44 180 (136)44 
Net periodic pension cost$158 (108)50 159 (108)51 
 For the Six Months Ended June 30,
20232022
($ in thousands)Pension PlanSERPTotal Both PlansPension PlanSERPTotal Both Plans
Service cost$— — — — — — 
Interest cost533 56 589 534 56 590 
Expected return on plan assets(576)— (576)(576)— (576)
Amortization of net (gain)/loss360 (272)88 360 (272)88 
Net periodic pension cost$317 (216)101 318 (216)102 


Page 34
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 not contribute to provide for benefits under the Pension Plan. The CompanyPlan in the first six months of 2023 and does not expect to contribute to the Pension Plan in 2017.

the remainder of 2023. Effective March 31, 2023, the Company determined that the Pension Plan will be terminated during 2023 and a termination cost estimate of $2.4 million is included in the accompanying consolidated income statement.

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


Note 139 – Comprehensive Income (Loss)

Comprehensive income (loss)Fair Value

Fair value is defined as the changeexchange price that would be received for an asset or paid to transfer a liability (exit price) in equity during a period for non-owner transactionsthe principal 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)most advantageous market for the Companyasset or liability in an orderly transaction between market participants on the measurement date. There 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)

The following table discloses the changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2017 (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)

The following table discloses the changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2016 (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)

Note 14 – Fair Value

Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes 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 

2023:

($ in thousands)

Description of Financial Instruments
Fair Value at June 30, 2023Quoted 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:
U.S. Treasury$169,613 — 169,613 — 
Government-sponsored enterprise securities58,511 — 58,511 — 
Mortgage-backed securities1,973,539 — 1,973,539 — 
Corporate bonds18,123 — 18,123 — 
Total available for sale securities$2,219,786 — 2,219,786 — 
Presold mortgages in process of settlement$4,953 4,953 — — 
Nonrecurring
Individually evaluated loans$2,399 — — 2,399 

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 

2022:


Page 35
($ in thousands)

Description of Financial Instruments
Fair Value at December 31, 2022Quoted 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:
US Treasury securities$168,758 — 168,758 — 
Government-sponsored enterprise securities57,456 — 57,456 — 
Mortgage-backed securities2,045,000 — 2,045,000 — 
Corporate bonds43,279 — 43,279 — 
Total available for sale securities$2,314,493 — 2,314,493 — 
Presold mortgages in process of settlement$1,282 1,282 — — 
Nonrecurring
Individually evaluated loans$9,590 — — 9,590 
Foreclosed real estate38 — — 38 
The following is a description of the valuation methodologies used for financial 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 onin 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 U.S. Treasury bonds, mortgage-backed securities, collateralized mortgagecommercial mortgage-backed obligations, government-sponsored enterprise securities,GSEs, 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.

 Page 36

Index

ImpairedIndividually evaluated loans — Fair values for impairedindividually evaluated loans in the above table are measured on a non-recurring basis and are based on (1) the underlying collateral values securing the loans, adjusted for estimated selling costs, or (2) 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 loancredit losses on the Consolidated Statements of Income.

Foreclosed real estate – — Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). Appraisals used in this analysis are generally obtained at least annually based on when the assets were acquired, and thus the appraisals are not necessarily as of the period ends presented. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.ACL. For any real estate valuations

Page 36
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, 2017,2023, 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)Fair Value at June 30, 2023Valuation
Technique		Significant Unobservable
Inputs		Range (Weighted Average)
Individually evaluated loans - collateral-dependent$2,399 Appraised valueDiscounts applied for estimated costs to sell10%
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2016,2022, 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.

 Page 37

Index
($ in thousands)Fair Value at December 31, 2022Valuation
Technique		Significant Unobservable
Inputs		Range (Weighted Average)
Individually evaluated loans - collateral-dependent$5,680 Appraised valueDiscounts applied for estimated costs to sell10%
Individually evaluated loans - cash-flow dependent3,910 PV of expected cash flowsDiscount rates used in the calculation of PV of expected cash flows5.5%-11.1% (6.76%)
Foreclosed real estate38 Appraised valueDiscounts applied for estimated costs to sell10%

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, 20172023 and December 31, 2016 are2022 were 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, 2023December 31, 2022
($ 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$101,215 101,215 101,133 101,133 
Due from banks, interest-bearingLevel 1259,460 259,460 169,185 169,185 
Securities held to maturityLevel 2537,821 441,881 541,700 432,528 
Total loans, net of allowanceLevel 37,788,399 7,339,310 6,574,178 6,240,870 
Accrued interest receivableLevel 133,446 33,446 29,710 29,710 
Bank-owned life insuranceLevel 1181,659 181,659 164,592 164,592 
SBA Servicing AssetLevel 33,781 4,664 4,004 4,721 
DepositsLevel 210,168,569 10,156,818 9,227,529 9,218,945 
BorrowingsLevel 2481,658 467,096 287,507 277,146 
Accrued interest payableLevel 14,845 4,845 2,738 2,738 
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.

 Page 38

Index

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


Page 37
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.

Note 1510 – Series C Preferred Stock

On December 21, 2012,Stock-Based Compensation

The Company recorded total stock-based compensation expense of $1.1 million and $0.6 million for the three months ended June 30, 2023 and 2022, respectively, and $2.2 million and $1.5 million for the six months ended June 30, 2023 and 2022, respectively. In addition, the Company issued 2,656,294recognized $261,000 and $149,000 of income tax benefits related to stock-based compensation expense for the three months ended June 30, 2023 and 2022, respectively, and $520,000 and $275,000 for the six months ended June 30, 2023 and 2022, respectively.
At June 30, 2023, the sole equity-based compensation plan of the Company was the First Bancorp 2014 Equity Plan (the "Equity Plan"), which was approved by shareholders on May 8, 2014. As of June 30, 2023, the Equity Plan had 205,498 shares remaining available for grant.
The Equity Plan is intended to serve as a means to attract, retain and motivate key employees and directors and to associate the interests of the plans' participants with those of the Company and its shareholders. The Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.
Recent equity awards to employees have been made in the form of shares of itsrestricted stock awards with service vesting conditions only. Compensation expense for these awards is recorded over the requisite service periods. Upon forfeiture, any previously recognized compensation cost is reversed. Upon a change in control (as defined in the Equity Plan), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.
Certain of the Company’s equity grants contain terms that provide for an annual or cliff vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company recognizes compensation expense for awards with vesting schedules on a straight-line basis over the requisite service period for each incremental award. Compensation expense is based on the estimated number of stock awards that will ultimately vest. Over the past five years, there have been insignificant amounts of forfeitures, and therefore the Company assumes that all awards granted with service conditions only will vest.
In addition to employee equity awards, the Company's practice is to grant common shares, valued at approximately $37,500 for the current year, to each non-employee director (currently 14 in total) in June of each year. Compensation expense associated with these director awards is recognized on the date of award since there are no vesting conditions.
The following table presents information regarding the activity for the first six months of 2023 related to the Company’s outstanding restricted stock awards:
Long-Term Restricted Stock Awards
Number of UnitsWeighted-Average
Grant-Date Fair Value
Nonvested at January 1, 2023223,012 $36.14 
Granted during the period143,380 37.08 
Vested during the period(25,811)24.52 
Forfeited or expired during the period(791)37.88 
Nonvested at June 30, 2023339,790 $37.15 
Total unrecognized compensation expense as of June 30, 2023 amounted to $7.3 million with a weighted-average remaining term of 2.2 years. For the nonvested awards that are outstanding at June 30, 2023, the Company expects to record $4.0 million in compensation expense in the next 12 months, $2.4 million of which is expected to be recorded in the remaining quarters of 2023.

Page 38
As discussed in Note 2, in conjunction with the GrandSouth acquisition, GrandSouth common stock options outstanding at January 1, 2023 became fully vested under the change in control provisions in the GrandSouth option plans and 728,706were converted into replacement options to acquire 0.91 shares of the Company's common stock.
Stock option activity and related information is presented below as of and for the periods indicated:
Options Outstanding
Number of SharesWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Life (years)Aggregate Intrinsic Value
($ in thousands)
Balance at January 1, 2023— $— 
Replacement options issued in conjunction with acquisition of GrandSouth542,345 20.14 
Exercised during the period(192,178)19.27 
Forfeited or expired during the period— — 
Outstanding at June 30, 2023350,167 20.62 6.27$3,270 
Exercisable at June 30, 2023350,167 $20.62 6.27$3,270 

Stock options outstanding are summarized as follows as of June 30, 2023:
SharesRangeWeighted Average PriceWeighted Average Remaining Life in Years
112,822 $13.79 - 18.1815.634.65
121,320 $18.1918.195.98
116,025 $18.20 - 31.3228.00 8.16
350,167 20.62 6.27
In accordance with ASC 805-30, the fair value of the replacement options issued in conjunction with the GrandSouth acquisition as of January 1, 2023 was measured using the Black-Scholes option pricing model and the weighted average fair value of replacement options was $24.85.
The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted:
For the Six Months Ended
June 30, 2023
Fair value per option, weighted average$24.85 
Expected life (years)1.4 - 4.7
Expected stock price volatility, weighted average46.39 %
Expected dividend yield2.05 %
Risk-free interest rate, weighted average4.18 %
Expected forfeiture rate— %
The expected life is based on historical exercises and forfeitures experience of the grantees. The volatility is based on historical price volatility.The risk-free interest rate is based on a U.S. Treasury instrument with a life that is similar to the expected life of the option grant.
At June 30, 2023, the Company had no unrecognized compensation expense related to stock options. All unexercised options expire 10 years after the applicable original grant dates under the GrandSouth stock option plan.



Page 39
Note 11 – Earnings Per Share
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings Per Common Share ("EPS"):
 For the Three Months Ended June 30,
 20232022
($ in thousands except per
share amounts)		Income
(Numerator)		Shares
(Denominator)		Per Share
Amount		Income
(Numerator)		Shares
(Denominator)		Per Share
Amount
Basic EPS:
Net income$29,403 $36,585 
Less: income allocated to restricted stock(201)(172)
Basic EPS per common share$29,202 40,721,840 $0.72 $36,413 35,474,664 $1.03 
Diluted EPS:
Net income$29,403 40,721,840 $36,585 35,474,664 
Effect of dilutive securities— 407,260 — 167,807 
Diluted EPS per common share$29,403 41,129,100 $0.71 $36,585 35,642,471 $1.03 
 Six Months Ended June 30,
 20232022
($ in thousands except per
share amounts)		Income
(Numerator)		Shares
(Denominator)		Per Share
Amount		Income
(Numerator)		Shares
(Denominator)		Per Share
Amount
Basic EPS:
Net income$44,564 $70,554 
Less: income allocated to restricted stock(299)(326)
Basic EPS per common share$44,265 40,665,172 $1.09 $70,228 35,476,902 $1.98 
Diluted EPS:
Net income$44,564 40,665,172 $70,554 35,476,902 
Effect of dilutive securities— 458,697 — 164,826 
Diluted EPS per common share$44,564 41,123,869 $1.08 $70,554 35,641,728 $1.98 


Page 40
Note 12 – Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) ("AOCI") for the Company are as follows:
($ in thousands)June 30, 2023December 31, 2022
Unrealized loss on securities available for sale$(440,145)(444,063)
Deferred tax asset101,894 102,046 
Net unrealized loss on securities available for sale(338,251)(342,017)
Postretirement plans liability143 54 
Deferred tax asset(34)(12)
Net postretirement plans liability109 42 
Total accumulated other comprehensive loss$(338,142)(341,975)
The following tables disclose the changes in AOCI for the three and six months ended June 30, 2023 and 2022 (all amounts are net of tax):
For the Three Months Ended June 30, 2023
($ in thousands)Unrealized Loss on
Securities
Available for Sale		Postretirement Plans Asset
(Liability)		Total
Beginning balance$(314,109)75 (314,034)
Other comprehensive loss before reclassifications(24,142)— (24,142)
Amounts reclassified from accumulated other comprehensive income— 34 34 
Net current period other comprehensive (loss) income(24,142)34 (24,108)
Ending balance$(338,251)109 (338,142)
For the Three Months Ended June 30, 2022
($ in thousands)Unrealized Loss on
Securities
Available for Sale		Postretirement Plans Asset
(Liability)		Total
Beginning balance$(164,717)(238)(164,955)
Other comprehensive loss before reclassifications(84,431)— (84,431)
Amounts reclassified from accumulated other comprehensive income— 34 34 
Net current period other comprehensive (loss) income(84,431)34 (84,397)
Ending balance$(249,148)(204)(249,352)

Page 41
For the Six Months Ended June 30, 2023
($ in thousands)Unrealized Loss on
Securities
Available for Sale		Postretirement Plans Asset
(Liability)		Total
Beginning balance$(342,017)42 (341,975)
Other comprehensive gain before reclassifications3,766 — 3,766 
Amounts reclassified from accumulated other comprehensive income— 67 67 
Net current-period other comprehensive income3,766 67 3,833 
Ending balance$(338,251)109 (338,142)
For the Six Months Ended June 30, 2022
($ in thousands)Unrealized Loss on
Securities
Available for Sale		Postretirement Plans Asset
(Liability)		Total
Beginning balance$(24,698)(272)(24,970)
Other comprehensive loss before reclassifications(224,450)— (224,450)
Amounts reclassified from accumulated other comprehensive income— 68 68 
Net current-period other comprehensive (loss) income(224,450)68 (224,382)
Ending balance$(249,148)(204)(249,352)
Amounts reclassified from AOCI for unrealized gain (loss) on securities available for sale represent realized securities gains or losses, net of tax effects. There were no security sales in any period presented. Amounts reclassified from AOCI for postretirement plans asset (liability) represent amortization of amounts included in AOCI, net of taxes, and are recorded in the "Other operating expenses" line item of the Consolidated Statements of Income.

Note 13 – Revenue 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, 2023 and 2022. Items outside the scope of ASC 606 are noted as such.
For the Three Months EndedFor the Six Months Ended
($ in thousands)June 30, 2023June 30, 2022June 30, 2023June 30, 2022
Noninterest Income: In-scope of ASC 606:
Service charges on deposit accounts$4,114 3,700 8,008 7,241 
Other service charges and fees:
Bankcard interchange income, net2,368 4,812 4,950 9,523 
Other service charges and fees3,255 1,490 6,572 2,753 
Commissions from sales of financial products1,413 1,151 2,719 2,096 
SBA consulting fees409 704 930 1,484 
Noninterest income (in-scope of ASC 606)11,559 11,857 23,179 23,097 
Noninterest income (out-of-scope of ASC 606)2,676 5,407 4,592 13,418 
Total noninterest income$14,235 17,264 27,771 36,515 
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

Page 42
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 and fees: The Company earns interchange income on its customers’ debit and credit card usage and earns fees from other services utilized by its customers. Interchange income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange fees are offset with interchange expenses and are presented on a private placement transaction. Net proceedsnet basis. 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 sales of financial products: The Company earns commissions from the sale of common and preferred stock were $33.8 million and were usedwealth management products which primarily consist of commissions received on financial product sales, such as annuities. The Company’s performance obligation is generally satisfied upon the issuance of the financial product. 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. The Company also earns some fees from asset management, which is billed quarterly for services rendered in the most recent period, for which the performance obligation has been satisfied.

SBA consulting fees: The Company earns fees for its consulting services related to the origination of SBA loans. Fees are based on a percentage of the Series C Preferred Stock entered into an agreement to effectively convertdollar amount of the preferred stock into common stock. originated loans and are recorded when the performance obligation has been satisfied.
The Company exchanged 728,706 shares of preferred stock forhas made no significant judgments in applying the same number of sharesrevenue guidance prescribed in ASC 606 that affect the determination of the Company’s common stock. As a resultamount and timing of revenue from the exchange, the Company has no shares of preferred stock currently outstanding.

The Series C Preferred Stock qualified as Tier 1 capital and was Convertible Perpetual Preferred Stock,above-described contracts with dividend rights equal to the Company’s Common Stock. The Series C Preferred Stock was non-voting, except 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.

 Page 39

customers.
Index

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

Recent Developments and Acquisitions
On January 1, 2023, we acquired GrandSouth, a community bank headquartered in Greenville, South Carolina, in an all-stock transaction. The terms of the Merger Agreement provided that each share of common and preferred stock of GrandSouth issued and outstanding immediately prior to the effective time of the acquisition was converted into 0.91 shares of the Company's common stock. As a result, the Company issued 5,032,834 shares of the Company common stock effective January 1, 2023. In addition, GrandSouth common stock options outstanding at the merger effective time were converted to options to acquire 0.91 shares of the Company's common stock resulting in 542,345 options with an average exercise price of approximately $20.14.

The GrandSouth acquisition contributed $1.02 billion in loans and $1.05 billion in deposits, with eight branches in South Carolina being added to the Company's branch network. The acquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the the high-growth markets of the state including Greenville, Charleston and Columbia.

Highlights of the results for the quarter and year-to-date period are presented below (refer also to additional discussion in the "Results of Operations" and "Financial Condition" sections following). Comparisons for the financial periods presented are impacted by the GrandSouth acquisition.

Overview and Highlights at and for Three Months Ended June 30, 2023

We earned net income of $29.4 million, or $0.71 diluted EPS, during the three months ended June 30, 2023 compared to net income of $36.6 million, or $1.03 diluted EPS, for the three months ended June 30, 2022. Higher cost of funds was the primary driver to the lower income for the current year as compared to the prior year.


Page 43
•Net interest income for the second quarter of 2023 was $87.0 million, an 11.1% increase from the $78.3 million recorded in the second quarter of 2022. The increase in net interest income from the prior year period was driven by higher earning assets related to both the GrandSouth acquisition and organic growth.
•Net interest margin ("NIM") on a tax-equivalent basis decreased in the second quarter of 2023 to 3.08% from 3.18% for the second quarter of 2022 related to the higher cost of funds, partially offset by increases in market interest rates driving higher yields on loans and increased loan accretion.
•For the three months ended June 30, 2023, the Company recorded $3.7 million in provision for credit losses while no provision was recognized for the second quarter of 2022. The amount recorded for the current quarter was driven in part by the loan growth experienced during the quarter, combined with updated economic forecasts projecting some deterioration in the key factors utilized in our CECL model calculation, primarily the commercial real estate index.
•Noninterest income for the three months ended June 30, 2023 decreased $3.0 million, or 17.5%, from the comparable period of 2022 primarily related to lower bankcard revenues and lower other gains.
•Noninterest expense increased $12.2 million, or 24.7%, for the quarter ended June 30, 2023, as compared to the prior year period driven by higher personnel expense, intangible amortization, merger expenses, and increased general operating expenses resulting from the GrandSouth acquisition.

Overview and Highlights at and for Six Months Ended June 30, 2023

We earned net income of $44.6 million, or $1.08 diluted EPS, during the six months ended June 30, 2023 compared to net income of $70.6 million, or $1.98 diluted EPS, for the six months ended June 30, 2022.
•Net interest income for six months ended June 30, 2023 was $179.5 million, a 15.7% increase from the $155.1 million recorded for the comparable period of 2022. The increase in net interest income was driven by higher earning assets related to both the GrandSouth acquisition and organic growth.
•NIM on a tax-equivalent basis was unchanged at 3.19% for both the six months ended June 30, 2023 and 2022 as higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion was offset by the higher cost of funds, also driven by increases in market rates and competition for deposits.
•For the six months ended June 30, 2023, the Company recorded $14.9 million in provision for credit losses which was directly related to: (1) a one-time provision of $12.2 million for non-credit deteriorated loans; and (2) a one-time initial provision for unfunded commitments of $1.9 million for loans acquired from GrandSouth. The acquired loan provisions were partially offset by fluctuations in our CECL model calculation for loan balance changes and updated economic forecasts during the period.
•Noninterest income for the six months ended June 30, 2023 decreased $8.7 million, or 23.9%, from the comparable period of 2022 primarily related to lower bankcard revenues and declines in SBA loan sale gains.
•Noninterest expense increased $34.9 million, or 34.6%, for the six months ended June 30, 2023 as compared to the prior year period driven by higher personnel expense, intangible amortization, merger expenses, and increased general operating expenses resulting from the GrandSouth acquisition.

Total assets at June 30, 2023 amounted to $12.0 billion, a 13.3% increase from December 31, 2022, driven primarily by the acquisition of GrandSouth. The primary balance sheet changes are presented below.
•Total loans amounted to $7.9 billion at June 30, 2023, with acquired balances contributing $1.02 billion and organic growth of $212.4 million, for an annualized organic growth rate (exclusive of acquired loans) of 5.5% from December 31, 2022.
•Total deposits were $10.2 billion at June 30, 2023, an increase of $941.0 million from December 31, 2022. Acquired deposits contributed $1.05 billion while organic market growth (excluding wholesale funding) totaled $154.0 million since year end for an annualized growth rate of 3.1%. Wholesale brokered deposits decreased $249.5 million from year end.

Page 44
•Credit quality continued to be strong at June 30, 2023, with a NPA to total assets ratio of 0.30% as of June 30, 2023 down from 0.39% for the comparable period of 2022.
•Our liquidity ratio was 17.3% at June 30, 2023 and was in excess of 29.0% when including available off-balance sheet sources.
•We remain well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 12.75% and total risk-based capital ratio of 15.09%.
Critical Accounting Policies

and Estimates

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of AmericaGAAP 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, andWe have identified the fair value and discount accretion of acquired loans are threeaccounting policies we have identifieddiscussed below as being more sensitive in terms of judgments and estimates taking into account their overall potential impact to our consolidated financial statements.

The following should be read in conjunction with our significant accounting policies are presented in Note 1 of the 2022 Annual Report on Form 10-K filed with the SEC.
Allowance for LoanCredit Losses

Due on Loans and Unfunded Commitments

The ACL represents management’s current estimate of credit losses for the remaining estimated life of financial instruments. We perform periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectability of the portfolio. We believe the accounting estimate related to the ACL is a “critical accounting estimate” as: (1) changes in it can materially affect the provision for credit losses and net income; (2) it requires management to predict borrowers’ likelihood or capacity to repay, including evaluation of inherently uncertain future economic conditions; (3) the value of underlying collateral must be estimated on collateral-dependent loans; (4) prepayment activity must be projected to estimate the life of loans that often are shorter than contractual terms; and (5) it requires estimation of a reasonable and supportable forecast period for credit losses. Accordingly, this is a highly subjective process and requires significant judgment since it is difficult to evaluate current and future economic conditions in relation to an overall credit cycle and estimate the timing and extent of loss events that are expected to occur prior to the end of a loan’s estimated life.
Our ACL is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The ACL is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast, and assumptions of probability of default and loss given default. Loan balances considered uncollectible are charged-off against the ACL. There are many factors affecting the ACL, some of which are quantitative, while others require qualitative judgment. Although management believes its process for determining the ACL adequately considers all the potential materialityfactors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.
PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination as of the amounts involved,acquisition date. At acquisition, an allowance on PCD loans is booked directly to the ACL. Any subsequent changes in the ACL on PCD loans is recorded through the provision for credit losses.
We believe that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans as of the balance sheet date. Actual losses incurred may differ materially from our estimates. For example, inflationary pressures and recessionary concerns leading to macroeconomic deterioration of the economy, higher unemployment and declines in real estate and other asset valuations could affect our loss experience and assumptions utilized in our model.
We estimate expected credit losses on unfunded commitments to extend credit over the contractual period in which we have identifiedare exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable. The allowance for off-balance sheet credit exposures, which is included in "Other liabilities" on the Consolidated Balance Sheets, is adjusted for as an increase or decrease to the provision for unfunded commitments. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The methodology is based on a loss rate approach that starts with the probability of funding based on historical experience. Similar to methodology discussed above

Page 45
related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecasts.
Additional information on the loan portfolio and ACL can be found in the “Nonperforming Assets” and “Allowance for Credit Losses and Loan Loss Experience” sections below.
Business Combinations and Goodwill
We believe that the accounting for the allowance for loan lossesgoodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. Pursuant to applicable accounting guidance, we recognize assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values as of the acquisition date, with 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 inherenttransaction costs expensed in the portfolio.

Our determination of the adequacy of the allowance is based primarily on a mathematical modelperiod incurred. Specified items such as acquired operating lease assets and liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in accordance with accounting guidance 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 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, 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 flowsresults in measurements that we expect to receivemay differ from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan,fair value. Determining 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 typeassets acquired and risk grade and estimated loss percentages are assigned to each loan poolliabilities assumed often involves estimates based on historical losses.internal or third-party valuations which include appraisals, discounted cash flow analysis, or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, discount rates, credit risk, multiples of earnings, or other relevant factors. The historical loss percentages are then adjusted for any environmental factors used to reflect changes in the collectabilitydetermination of the portfolio not captured by historical data.

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 atmay require us to make point-in-time estimates about discount rates, future expected cash flows, market conditions, and other future events that can be volatile in nature and challenging to assess. While we use the acquisition date. Therefore, amounts deemed uncollectiblebest estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, represent a discountthe estimates are inherently uncertain and subject to the loan value and become a part of the fair value calculation and are excluded from the allowance for loan losses. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase 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.”

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 Loan Loss Experience” below.

Page 40

refinement.
Index

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,intangibles which represents the primary identifiable intangible asset is theestimated value of the long-term deposit relationships acquired customer list.in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, theThe core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. 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 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, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including 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.

In our 2016 goodwill impairment evaluation, we concluded that our goodwill was not impaired.

We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.

Fair Value

The ACL for PCD loans is recognized within business combination accounting with no initial impact to net income. Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise. The ACL for non-PCD loans is recognized as provision expense in the same reporting period as the business combination. Estimated loan losses for acquired loans are determined using methodologies and Discount Accretion of Acquired Loans

We considerapplying estimates and assumptions that were described previously in the determination of the initial"Allowance for Credit Losses on Loans" foregoing section.

Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of acquired loansdiscount rate, remaining life, prepayments, probability of default, 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 realizeloss given default. The actual cash flows on these assetsloans could differ materially from the carryingfair 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, theestimates. 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 purchasedDiscounts on acquired non-PCD loans we accrete the discountare accreted to interest income over thetheir estimated remaining lives, which may include prepayment estimates in certain circumstances.

Similarly, premiums or discounts on acquired debt are accreted or amortized to interest expense over their remaining lives. Actual accretion or amortization of the loans inpremiums and discounts from a manner consistent with the guidance for accounting for loan origination fees and costs.

Page 41

business acquisition may differ materially from our estimates impacting our operating results.
Index

For purchased credit-impaired (“PCI”) loans,Goodwill arising from business combinations represents the excess of the cash flows initially expected to be collectedpurchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the loans at the acquisition date (i.e., the accretable yield)liabilities assumed. Goodwill has an indefinite useful life and is accreted into interest income over the estimated remaining life of the loans using the effective yield method, providedevaluated for impairment annually or more frequently if events and circumstances indicate 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 toasset might 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,impaired. An impairment 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.

the


Page 46
extent that the carrying amount exceeds the asset’s fair value. At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment. During 2023, there were no triggers warranting interim impairment assessments and for the 2022 annual assessment, we concluded that it was more likely than not that the fair value exceeded its carrying value.
Current Accounting Matters

See Note 21 to the Consolidated Financial Statements above for information about recently announced or adopted accounting standards that we have recently adopted.

standards.

RESULTS OF OPERATIONS

Overview

Net income available to common shareholders was $13.1 million, or $0.53 per diluted common share, for the three months ended September 30, 2017, an increase of 130% in earnings per share from the $4.6 million, or $0.23 per diluted common share, recorded in the third quarter of 2016. For the nine months ended September 30, 2017, we recorded net income available to common shareholders of $31.8 million, or $1.33 per diluted common share, an increase of 43.0% in earnings per share from the $19.0 million, or $0.93 per diluted common share, for the nine months ended September 30, 2016.

The third quarter of 2016 results included two non-recurring items that impacted diluted 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 resulted in the Company recording 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.

Net Interest Income and Net Interest Margin

Net interest income foris our largest source of revenue and is the third quarter of 2017 was $41.6 million, a 37.2% increase fromdifference between the $30.4 million recordedinterest earned on interest-earning assets (generally loans and investment securities) and the interest expense incurred in the third quarter of 2016. Net interest income for the first nine months of 2017 amounted to $115.9 million, a 25.8% increase from the $92.1 million recordedconnection with interest-bearing liabilities (generally deposits and borrowed funds). Changes in the comparable period of 2016. The increase in net interest income was primarily due to higher amounts of loans outstanding as aare the result of internal growth, as well aschanges in volume and the acquisition of Carolina Bank.

Page 42

Index

Also contributingnet interest spread which affects NIM. Volume refers to the increase in netaverage dollar levels of interest-earning assets and interest-bearing liabilities. Net interest income was a higher net interest margin forspread refers to the period. Our net interest margin (tax-equivalentdifference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. NIM refers to net interest income divided by average earning assets) increased for the fourth consecutive quarterinterest-earning assets and amounted to 4.16% for the third quarter of 2017 compared to 3.93% for the third quarter of 2016. For the nine month period ended September 30, 2017, our net interest margin was 4.11% compared to 4.07% 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.

The net interest 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 in the acquisition of Carolina Bank.

Provision for Loan Losses and Asset Quality

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. We have experienced low levels of charge-offs and asset quality indicators have steadily improved.

Noninterest Income

Total noninterest income was $12.4 million and $5.2 million for the three months ended September 30, 2017 and September 30, 2016, respectively. For the nine months ended September 30, 2017, noninterest income amounted to $34.0 million compared to $16.1 million for the same period of 2016.

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) 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.

The primary reason for the increase in core noninterest income in 2017 was the acquisition of Carolina Bank, as well as income derived 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 and deposit growth during 2017. For the first nine months 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.

Page 43

Index

We remain well-capitalized by all regulatory standards, with an estimated Total Risk-Based Capital Ratio at September 30, 2017 of 12.44%, a decline from 13.49% 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 Components of Earnings

For the periods in 2016 presented, our results of operations were significantly affectedinfluenced by the accounting for two FDIC-assisted failed bank acquisitions. In the discussion abovelevel and in the accompanying tables, the term “covered” is used to describerelative mix of interest-earning 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

interest-bearing liabilities. Net interest income is the largest component of earnings, representing the difference between interestalso influenced by external factors such as local economic conditions, competition for loans and fees generated from earning assets and the interest costs of deposits, and other funds needed to support those assets. Netmarket 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 incomerates.

For internal purposes, we evaluate our NIM on a tax-equivalent basis forby adding the three month period ended September 30, 2017 amountedtax benefit realized from tax-exempt loans and securities 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.reported interest income then dividing by total average earning assets. We believe that analysis of net interest incomeNIM on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.

  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 nine month periodthree months ended SeptemberJune 30, 20172023 amounted to $115.9$87.0 million, an increase of $23.8$8.7 million, or 25.7%11.1%, from the $92.1$78.3 million recorded in the first nine monthssecond quarter of 2016. Net interest income2022. The increase was primarily driven by higher average earning assets from both the GrandSouth acquisition and organic growth. Average interest-earning assets for the second quarter of 2023 increased 14.8% from the comparable period of the prior year, with growth primarily in loans. Somewhat offsetting the impact of the higher earning assets was the reduction in our NIM which, on a tax-equivalent basis, decreased from 3.18% for the nine month periodsecond quarter of 2022 to 3.08% for the three months ended SeptemberJune 30, 2017 amounted2023.
The following is a reconciliation of reported net interest income to $117.8 million,tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis.
For the Three Months Ended June 30, 2023
($ in thousands)20232022
Net interest income, as reported$86,985 78,270 
Tax-equivalent adjustment699 669 
Net interest income, tax-equivalent$87,684 78,939 
Net interest margin, as reported3.05 %3.16 %
Net interest margin, tax-equivalent3.08 %3.18 %


Page 47
The following table presents an increase of $24.2 million, or 25.9%, from the $93.6 million recorded in the comparable period 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 

There are two primary factors that cause changes in the amountanalysis of net interest income for the three months ended June 30, 2023 and 2022:

Average Balances and Net Interest Income Analysis
 Three Months Ended June 30,
 20232022


($ in thousands)		Average
Volume		Average
Rate		Interest
Earned
or Paid		Average
Volume		Average
Rate		Interest
Earned
or Paid
Assets      
Loans (1) (2)$7,850,522 5.26 %$102,963 $6,149,174 4.24 %$65,077 
Taxable securities2,925,060 1.79 %13,063 3,137,383 1.71 %13,385 
Non-taxable securities296,747 1.51 %1,120 299,982 1.48 %1,104 
Short-term investments, primarily interest-bearing cash350,338 4.60 %4,015 363,119 0.97 %881 
Total interest-earning assets11,422,667 4.25 %121,161 9,949,658 3.24 %80,447 
Cash and due from banks93,421 125,545 
Premises and equipment152,534 135,553 
Other assets389,714 305,992 
Total assets$12,058,336 $10,516,748 
Liabilities
Interest-bearing checking$1,456,540 0.37 %$1,333 $1,541,768 0.05 %$210 
Money market deposits3,250,399 2.23 %18,053 2,567,138 0.11 %731 
Savings deposits676,427 0.16 %269 745,496 0.06 %106 
Other time deposits791,980 2.64 %5,216 522,239 0.19 %242 
Time deposits >$250,000343,054 2.87 %2,457 296,210 0.40 %296 
Total interest-bearing deposits6,518,400 1.68 %27,328 5,672,851 0.11 %1,585 
Borrowings483,439 5.68 %6,848 67,418 3.52 %592 
Total interest-bearing liabilities7,001,839 1.96 %34,176 5,740,269 0.15 %2,177 
Noninterest-bearing checking3,662,641 3,664,764 
Other liabilities79,236 20,638 
Shareholders’ equity1,314,620 1,091,077 
Total liabilities and
shareholders’ equity		$12,058,336 $10,516,748 
Net yield on interest-earning assets and net interest income3.05 %$86,985 3.16 %$78,270 
Net yield on interest-earning assets and net interest income – tax-equivalent (3)3.08 %$87,684 3.18 %$78,939 
Interest rate spread2.29 %3.09 %
Average prime rate8.16 %3.94 %
(1)   Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization in the amounts of $49,000, and $651,000 for three months ended June 30, 2023 and 2022, respectively.
(2)   Includes accretion of discount on acquired and SBA loans of $3.6 million and $2.3 million for three months ended June 30, 2023 and 2022, respectively.
(3)   Includes tax-equivalent adjustments of $699,000 and $669,000 for three months ended June 30, 2023 and 2022, respectively, to reflect the tax benefit that we record: 1) changesreceive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax-exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.



Page 48
Overall, as demonstrated in our loansthe table above, higher earning asset volumes, arising from both the GrandSouth acquisition and deposits balances, and 2) ourorganic growth, combined with an expansion in NIM, drove the increase in net interest margin (tax-equivalent netincome.
•Market interest rates increased 375 basis points between June 2022 and June 2023 to result in an average prime rate of 8.16% for three months ended June 30, 2023 compared to 3.94% for the prior year period.
•Average loan volumes for the three months ended June 30, 2023 were $1.7 billion higher than the same period in 2022. In addition to higher volumes arising from both the GrandSouth acquisition and organic growth, interest rates on loans increased 102 basis points to 5.26% for the second quarter of 2023, resulting in an increase in loan interest income divided byof $37.9 million.
•Primarily due to higher market rates and increased average interest-earning assets).

Forbalances related in large part to the GrandSouth acquisition, deposit interest expense for the three and nine months ended SeptemberJune 30, 2017, the higher net interest income2023 increased $25.7 million compared to the same period in 2022. Average interest-bearing deposit balances increased $845.5 million while rates on those deposits increased 157 basis points as compared to the same period in the prior year.

•The combination of 2016higher rates on borrowings, up 216 basis points in the second quarter of 2023 from the second quarter of 2022 due to increasing market rates, and the increase in volume of borrowings between periods drove the $6.3 million increase in interest expense. Average borrowings increased $416.0 million in the second quarter of 2023 due in large part to the higher levels of short-term borrowings utilized as needed to fund loan growth and manage fluctuations in deposit balances.
•The decrease in NIM was due primarilydirectly related to growthhigher cost of funds, partially offset by higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion.

Net interest income for the six months ended June 30, 2023 amounted to $179.5 million, an increase of $24.3 million, or 15.7%, from the $155.1 million recorded in loans outstanding.

the six months ended June 30, 2022. The increase was driven by higher average earning assets from both the GrandSouth acquisition and organic growth. Our tax-equivalent NIM remained unchanged at 3.19% for the six months ended June 30, 2023 as compared to the same period in 2022 as discussed further below.

The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis.

For the Six Months Ended June 30, 2023
($ in thousands)20232022
Net interest income, as reported$179,471 155,148 
Tax-equivalent adjustment1,399 1,366 
Net interest income, tax-equivalent$180,870 156,514 
Net interest margin, as reported3.17 %3.17 %
Net interest margin, tax-equivalent3.19 %3.19 %


Page 44

49

The following table presents an analysis of net interest income analysis on a 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% tax rate and is reduced by the related nondeductible portion of interest expense.

Page 45

for the six months ended June 30, 2023 and 2022.
Index
Average Balances and Net Interest Income Analysis
 Six Months Ended June 30,
 20232022
($ in thousands)Average
Volume		Average
Rate		Interest
Earned
or Paid		Average
Volume		Average
Rate		Interest
Earned
or Paid
Assets
Loans (1) (2)$7,789,800 5.24 %$202,343 $6,100,246 4.27 %$129,279 
Taxable securities2,973,460 1.80 %26,479 3,066,772 1.75 %26,595 
Non-taxable securities297,789 1.52 %2,250 294,257 1.47 %2,152 
Short-term investments, primarily interest-bearing cash364,651 4.02 %7,263 420,671 0.73 %1,530 
Total interest-earning assets11,425,700 4.21 %$238,335 9,881,946 3.26 %159,556 
Cash and due from banks94,239 120,691 
Premises and equipment151,877 135,768 
Other assets378,546 401,660 
Total assets$12,050,362 $10,540,065 
Liabilities
Interest bearing checking$1,491,401 0.30 %$2,199 $1,558,950 0.06 %$434 
Money market deposits3,113,201 1.87 %28,867 2,586,527 0.12 %1,584 
Savings deposits702,527 0.11 %397 733,769 0.06 %214 
Time deposits >$100,000838,287 2.59 %10,770 534,300 0.18 %487 
Other time deposits328,079 2.47 %4,013 315,027 0.41 %637 
Total interest-bearing deposits6,473,495 1.44 %46,246 5,728,573 0.12 %3,356 
Borrowings461,260 5.52 %12,618 67,400 3.15 %1,052 
Total interest-bearing liabilities6,934,755 1.71 %58,864 5,795,973 0.15 %4,408 
Noninterest bearing checking3,725,222 3,550,741 
Other liabilities96,228 43,098 
Shareholders’ equity1,294,157 1,150,253 
Total liabilities and
shareholders’ equity		$12,050,362 $10,540,065 
Net yield on interest-earning assets and net interest income3.17 %$179,471 3.17 %$155,148 
Net yield on interest-earning assets and net interest income – tax-equivalent (3)3.19 %$180,870 3.19 %$156,514 
Interest rate spread2.50 %3.11 %
Average prime rate7.92 %3.62 %

  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.

(1)   Average loans outstandinginclude nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $406,000, and $2.0 million for six months ended June 30, 2023 and 2022, respectively.
(2) Includes accretion of discount on acquired and SBA loans of $7.2 million and $4.6 million for six months ended June 30, 2023 and 2022, respectively.
(3)   Includes tax-equivalent adjustments of $1.4 million and $1.4 million for six months ended June 30, 2023 and 2022, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense



Page 50
Overall, as demonstrated in the table above, higher earning asset volumes, arising from both the GrandSouth acquisition and organic growth drove the increase in net interest income.
•Market interest rates increased 375 basis points between June 2022 and June 2023 to result in an average prime rate of 7.92% for six months ended June 30, 2023 compared to 3.62% for the third quarter of 2017prior year period.
•Average loan volumes for the six months ended June 30, 2023 were $3.405$1.7 billion which was $769 million, or 29.2%, higher than the average loans outstanding for the third quarter of 2016 ($2.636 billion). Average loans for the nine months ended September 30, 2017 were $3.212 billion, which was 24.7% higher than the average loans outstanding for the nine months ended September 30, 2016 ($2.577 billion). The higher amount of average loans outstandingsame period in 2017 was2022 due to a combination of acquired growthboth the GrandSouth acquisition and organic growth. In addition, interest rates on loans increased 97 basis points to 5.24% for the six months ended June 30, 2023, resulting in an increase in loan interest income of $73.1 million.
•Primarily due to higher market rates and increased average balances related in large part to the GrandSouth acquisition, deposit interest expense for the six months ended June 30, 2023 increased $42.9 million compared to the same period in 2022. Average interest-bearing deposit balances increased $744.9 million while rates on those deposits increased 132 basis points as compared to the same period in the prior year.
•The combination of higher rates on borrowings, up 237 basis points for the six months ended June 30, 2023 as compared to the same period in 2022 due to increasing market rates, and the increase in volume of borrowings between periods drove the $11.6 million increase in interest expense. Average borrowings increased $393.9 million for the six months ended June 30, 2023 as compared to the same period in 2022 due in large part to the higher levels of short-term borrowings utilized as needed to fund loan growth and manage fluctuations in deposit balances.
•NIM remained unchanged between the comparable periods as higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion was offset by the higher cost of funds, also driven by increases in market rates and competition for deposits.

Our NIM for all periods benefited from net accretion income, primarily associated with purchase accounting discounts on loans, and premiums/discounts on deposits and borrowings associated with acquisitions. Presented in the table below is the amount of purchase accounting adjustments which impacted net interest income in each time period presented.
For the Three Months Ended June 30,For the Six Months Ended June 30,
($ in thousands)2023202220232022
Accretion of loan discount on acquired loans$3,159 1,545 6,277 3,216 
Accretion of loan discount on retained SBA loans426 730 874 1,397 
Total interest income impact3,585 2,275 7,151 4,613 
(Discount accretion) premium amortization of acquired deposits(878)168 (1,897)402 
Discount accretion of acquired borrowings(212)(53)(420)(126)
Total net interest expense impact(1,090)115 (2,317)276 
Total impact on net interest income$2,495 2,390 4,834 4,889 
The increase in loan discount accretion on acquired loans for the three and six months ended June 30, 2023 as compared to the same period in the prior year was related to the GrandSouth acquisition of Carolina Bank on March 3, 2017which added $497$23.9 million in loansaccretable discount as of the acquisition date. Also,Generally, the level of loan discount accretion will decline each year due to the natural paydowns in acquired loan portfolios. At June 30, 2023 and 2022, unaccreted loan discounts on purchased loans amounted to $29.2 million and $14.0 million, respectively.
In addition to the loan discount accretion recorded on acquired loans, we recorded accretion on the discounts associated with the retained unguaranteed portions of SBA loans sold in the secondary market. The level of SBA loan discount accretion will vary relative to fluctuations in the SBA loan portfolio. At June 30, 2023 and 2022, the unaccreted loan discounts on SBA loans amounted to $3.8 million and $5.4 million, respectively.


Page 51
Provision for Credit Losses and Provision for Unfunded Commitments
The provisions for credit losses represents our current estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments. Our estimate of credit losses is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. The provision for unfunded commitments represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances. The allowance for unfunded commitments is included in "Other liabilities" in the Consolidated Balance Sheets.
The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined under CECL. For the three months ended June 30, 2023, we recorded a $3.7 million provision for loan losses while no provision was recognized for the comparable period of 2022. The provision for the current quarter was driven in part by the loan growth initiatives, including expansion into higher growth markets, and improved loan demandexperienced during the period, combined with updated economic forecasts projecting some deterioration in the key factors utilized in our CECL model calculation, primarily the commercial real estate index. The six months ended June 30, 2023 included a one-time loan loss provision of $12.2 million recorded to establish an initial ACL for non-PCD loans acquired from GrandSouth in accordance with our CECL model. This was the primary contributor to the provision for the year to date period which totaled $15.2 million.
In addition, a reversal of provision for unfunded commitments of $1.3 million was recorded for the three months ended June 30, 2023 related primarily to a reduction in the amount of available lines of credit outstanding. The six months ended June 30, 2023 included a one-time initial provision for unfunded commitments of $1.9 million required for the GrandSouth acquisition which substantially offset the reversal recognized in the second quarter of 2023. For the same period in 2022, there was a reversal of provision for unfunded commitments of $1.5 million, related primarily to fluctuations in commitment levels combined with updated loss rate factors.
Additional discussion of our asset quality and credit metrics, which impact our provision for credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses and Loan Loss Experience" sections following.
Noninterest Income
Our noninterest income amounted to $14.2 million and $17.3 million for the three months ended June 30, 2023 and 2022, respectively, and $27.8 million and $36.5 million for the six months ended June 30, 2023 and 2022, respectively. Included in noninterest income were nonrecurring amounts totaling $0.3 million and $1.6 million in other gains for the three months ended June 30, 2023 and 2022, respectively, and $0.5 million and $3.2 million for the six months ended June 30, 2023 and 2022, respectively.
The following table presents the primary components of noninterest income. The drivers of larger fluctuations between periods are discussed below the table.
 For the Three Months Ended June 30,For the Six Months Ended June 30,
($ in thousands)2023202220232022
Service charges on deposit accounts$4,114 3,700 8,008 7,241 
Other service charges and fees - bankcard interchange income, net2,368 4,812 4,950 9,523 
Other service charges and fees - other3,282 3,070 6,620 5,364 
Fees from presold mortgage loans557 454 963 1,575 
Commissions from sales of financial products1,413 1,151 2,719 2,096 
SBA consulting fees409 704 930 1,484 
SBA loan sale gains696 841 951 4,102 
Bank-owned life insurance ("BOLI") income1,066 942 2,112 1,918 
Core noninterest income13,905 15,674 27,253 33,303 
Other gains, net330 1,590 518 3,212 
Total noninterest income$14,235 $17,264 $27,771 $36,515 


Page 52
Service charges on deposit accounts increased $0.4 million, or 11.2%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, and increased $0.8 million, or 10.6% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, respectively. The increase was driven by the higher number of new customers and transaction accounts generating fees from both the GrandSouth acquisition and organic growth.
Other service charges and fees - bankcard interchange income, net represents interchange income from debit and credit card transactions, net of associated interchange expense, and decreased $2.4 million, or 50.8%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 and decreased $4.6 million, or 48.0%, for the six months ended June 30, 2023 compared to the same period in 2022. The decrease is a result of the Durbin Amendment limitation on debit card interchange fees becoming applicable to the Company beginning in July 2022.
Other service charges and fees - other includes items such as SBA guarantee servicing fees and related servicing rights amortization, ATM charges, wire transfer fees, safety deposit box rentals, fees from sales of personalized checks, and check cashing fees. The increases in this line item for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 of $0.2 million, or 6.9%, and for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 of $1.3 million, or 23.4%, were due primarily to the GrandSouth acquisition and the resulting growth in the number of accounts and related transaction activity, as well as increases in the Bank's organic deposit base.
Fees from presold mortgage loans amounted to $0.6 million for the three months ended June 30, 2023, an increase of $0.1 million, or 22.7%, from the same time period in 2022. Mortgage fees decreased $0.6 million, or 38.9% for the six months ended June 30, 2023 compared to the prior year period due to the general increase in market areas,interest rates starting in 2022 which have resulted in continued lower volumes of home mortgage refinancing and new originations into 2023.
SBA loan sale gains decreased $0.1 million, or 17.2%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 and $3.2 million, or 76.8%, for the six months ended June 30, 2023 compared to the same period in 2022. The decreases were related to slower loan originations combined with lower premiums available on SBA loan sales given the current market interest rates, resulting in lower volumes of loan sales in 2023.
Other gains, net for the three and six months ended June 30, 2022 consisted primarily of death benefits realized on BOLI policies. There were no large or unusual transactions in the three and six months ended June 30, 2023 giving rise to gains or losses.
Noninterest Expenses
Noninterest expenses totaled $61.6 million and $49.4 million for the three months ended June 30, 2023 and 2022, respectively, and $135.8 million and $100.9 million for the six months ended June 30, 2023 and 2022, respectively. Included in noninterest expenses were nonrecurring merger and acquisition costs totaling $1.3 million and $0.7 million for the three months ended June 30, 2023 and 2022, respectively, and $13.5 million and $4.2 million for the six months ended June 30, 2023 and 2022, respectively. The following table presents the primary components of noninterest expenses:

Page 53
For the Three Months Ended June 30,For the Six Months Ended June 30,
($ in thousands)2023202220232022
Salaries$28,676 23,799 57,997 47,253 
Employee benefits6,165 6,310 12,558 11,888 
Total personnel expense34,841 30,109 70,555 59,141 
Occupancy expense3,547 3,122 7,235 6,506 
Equipment related expenses1,425 1,514 2,804 2,818 
Credit card rewards and other bankcard expenses1,324 970 2,443 2,213 
Telephone and data lines982 855 1,978 1,790 
Software costs2,133 1,288 4,303 2,862 
Data processing expense1,860 1,920 4,272 4,022 
Professional fees1,416 1,307 2,865 2,178 
Advertising and marketing expense1,090 884 2,209 1,795 
Non-credit losses1,550 488 2,415 1,090 
Deposit related expenses720 257 1,434 667 
Other operating expenses7,322 5,286 15,580 9,962 
Core noninterest expense58,21048,000118,09395,044
Merger and acquisition expenses1,334 737 13,516 4,221 
Amortization of intangible assets2,049 953 4,194 1,970 
Foreclosed property losses (gains), net— (292)(35)(372)
Total noninterest expense$61,593 $49,398 $135,768 $100,863 
In general, the 24.7% and 34.6% increases for the quarter and year to date period, respectively, in noninterest expenses were driven by by increased salary and benefit expense (up $4.7 million and $11.4 million for the three and six months ended June 30, 2023 as compared to the same periods in the prior year) and other facilities-related costs associated with the acquisition of eight GrandSouth branch locations and related branch and support personnel.
In addition, merger and acquisition expenses of $1.3 million and $13.5 million for the three and six months ended June 30, 2023, respectively, and higher intangible amortization, which increased $1.1 million and $2.2 million for the three and six months ended June 30, 2023 as compared to the same periods in the prior year, respectively, contributed the in the higher noninterest expense in the current year periods.
Also contributing to higher noninterest expense were increases in the three and six months ended June 30, 2023 for data processing, professional fees, software expense, and advertising, as well as FDIC insurance, travel and training (all included in "other operating expenses") related to the GrandSouth acquisition, including the transition of new customers and overlapping pre-conversion costs associated with the core processing system prior to the full system integration late in the quarter. Non-credit losses increased $1.1 million and $1.3 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in the prior year driven by an increase in check fraud experienced in the current year.
Also included in "other operating expenses" is a one-time charge of $2.4 million for the estimated termination costs associated with the Company's pension plan which we have grown loan balances organically by $281anticipate exiting during the fourth quarter of 2023.
Income Taxes
We recorded income tax expense of $7.9 million overand $9.6 million for the pastthree months ended June 30, 2023 and 2022, respectively. Our effective tax rate increased to 21.1% from 20.7% for the three months ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023 and June 30, 2022, we recorded income tax expense of $12.0 million and $18.2 million, respectively. Our effective tax rate increased to 21.3% from 20.5% for the six months ended June 30, 2023 and 2022, respectively. The increase in effective tax rate between both periods was attributable primarily to the merger and acquisition expenses which were non-deductible for tax purposes, thus increasing our federal taxable income in the current period.



Page 54
FINANCIAL CONDITION
Total assets at June 30, 2023 amounted to $12.0 billion, a $1.4 billion, or 13.3%, increase from December 31, 2022 due in large part to the GrandSouth acquisition, combined with organic growth during the year.

Total loans at June 30, 2023 amounted to $7.9 billion, a $1.2 billion, or 18.5%, increase from December 31, 2022 related primarily to the GrandSouth acquisition which contributed $1.02 billion to the increase. Organic growth (exclusive of acquired loans) amounted to $212.4 million for the first six months of 2023 or an annualized growth rate of 5.5%. The mix of our loan portfolio remained substantially the same at SeptemberJune 30, 20172023 compared to December 31, 2016, with approximately 87% of our loans being real estate loans, 11% being commercial, financial, and agricultural loans, and the remaining 2% being consumer installment loans.2022. The majority of our real estate loans arewere personal and commercial loans where real estate provides additional security for the loan.

Average total deposits outstanding for the third quarter of 2017 were $3.632 billion, which was $809 million, or 28.7%, higher than the average deposits outstanding for the third quarter of 2016 ($2.823 billion). Average deposits outstanding for the nine months ended September 30, 2017 were $3.465 billion, which was 23.7% higher than the average deposits outstanding for 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 million in deposits on the acquisition date. Including the acquisition, average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $2.130 billion for the nine months ended September 30, 2016 to $2.743 billion for the nine months ended September 30, 2017, representing growth of $613 million, or 28.8%. Average time deposits also increased for the first nine months of 2017 in comparison to the first nine months of 2016, from $672 million to $722 million, an increase of $50 million, or 7.5%.

Page 46

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 net interest income divided by average earning assets) for the third quarter of 2017 was 4.16% compared to 3.93% for the third quarter of 2016. For the nine month period ended September 30, 2017, our net interest margin was 4.11% compared to 4.07% for the same period in 2016. The increases in 2017 were due to both increased asset yields and higher amounts of discount accretion. 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.

Our net interest margin benefits from the net accretion of purchase accounting premiums/discounts associated with acquired loans and deposits. We 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 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.

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

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.

Our provision for loan loss levels have been impacted by continued improvement in asset quality. Nonperforming assets amounted to $53.0 million at September 30, 2017, a decrease 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 provision for loan loss levels were impacted by lower net loan charge-offs in 2017. We experienced net loan recoveries of $0.1 million for the first nine months of 2017, compared to net loan charge-offs of $2.9 million 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.

Total noninterest income was $12.4 million and $5.2 million for the three months ended September 30, 2017 and September 30, 2016, respectively. For the nine months ended September 30, 2017, noninterest income amounted to $34.0 million compared to $16.1 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) 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.

Page 47

Index

The following table presents our core noninterest income 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 $2.7 million in the third quarter of 2016 to $2.9 million in the third quarter of 2017. For the nine months ended September 30, 2017, service charges on deposit accounts amounted to $8.5 million, which is a $0.5 million increase from the $8.0 million recorded in the comparable period of 2016. The increases for both periods are primarily due to the service charges from accounts assumed in the Carolina Bank acquisition.

Other service charges, commissions, and fees increased from $3.0 million in the third quarter of 2016 to $3.5 million in the third 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. For the first nine months of 2017, fees from presold mortgage loans increased to $4.1 million from the $1.5 million recorded in the comparable period of 2016. The increases were primarily due to the acquisition of Carolina Bank in March 2017, which had a significant mortgage loan operation.

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.

Oneconsolidated financial statements presents additional detailed information regarding our mix of loans. We have no notable concentrations in geographies or industries, including in office or hospitality categories. The Company's exposure to non-owner occupied commercial office loans represents approximately 5.7% of the primary reasons fortotal portfolio and 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 portionsaverage size of these loans duringis $1.3 million. Non-owner occupied office loans are generally in non-metro markets and the threetop 10 loans in this category represent less than 2% of the total loan portfolio.

The composition of our investment portfolio remained substantially the same as at December 31, 2022, and nine months ended September 30, 2017, respectively,continues to reflect our investment strategy of maintaining an appropriate level of liquidity while providing a stable source of income. The investment portfolio also provides a balance to interest rate risk and credit risk in comparison to $0.7 million for bothother categories of the three and nine months ended September 30, 2016.

Bank-owned life insurance income was relatively unchangedbalance sheet while providing a vehicle for the periods presented, amountinginvestment of available funds, furnishing liquidity, and supplying securities to $0.6pledge as required collateral for certain deposits. Total investment securities decreased $98.6 million from December 31, 2022 to $2.8 billion at June 30, 2023 due in the third quarter of 2017 compared to $0.5 million in the third quarter of 2016, and $1.7 million to $1.5 million for the first nine months of 2017 and 2016, respectively.

Page 48

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 million and $10.3 million for the three and nine months ended September 30, 2016, respectively.

During the nine months ended September 30, 2017, we 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.

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 our acquisition of Carolina Bank.

Salaries expense increased to $16.6 million in the third quarter of 2017 from the $13.4 million recorded in the third quarter of 2016. Salaries expense 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 salaries 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 $3.4 million in the third quarter of 2017 compared to $2.6 million in the third quarter of 2016. For the first nine months of 2017, employee benefits expense amounted to $10.7 million compared to $7.9 million in 2016. This increase in 2017 was primarily duelarge part to the acquisition and growth initiatives discussed above.

Occupancy and equipment expense increased in 2017 primarily dueutilization of cash flows from amortizing securities 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 million in the first nine 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 associated 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 that were recorded in connection with our acquisitions.

Other operating expenses amounted to $8.7 million and $7.8 million for the third quarters of 2017 and 2016, respectively, and $26.4 million in the first nine months of 2017 compared to $22.7 million in the first nine months of 2016.fund loan growth. The increases were primarily due to the Company’s growth, including the acquisitions of the SBA consulting firm and Carolina Bank.

For the third quarter of 2017, the provision for income taxes was $6.5 million, an effective tax rate of 33.3%, compared to $3.1 million for the same period of 2016, which is an effective tax rate of 40.0%. For the first nine months of 2017, the provision for income taxes was $15.8 million, an effective tax rate of 33.3%, compared to $10.4 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 Bank during the third quarter of 2016 contributed to the increase in effective tax rate for the periods in 2016.

Page 49

Index

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 million and $2.0 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. Ourloss on available for sale securities portfolio is predominantlytotaled $440.1 million, representing an improvement of $3.9 million during the six months ended June 30, 2023. The Company has the intent and ability to hold investments with unrealized losses until maturity or recovery of the amortized cost as market conditions change. Note 3 to the consolidated financial statements presents additional detailed information regarding our mix of investments and the unrealized losses for each category.

We invest primarily in securities issued by GSEs including FHLMC, FNMA, GNMA, and SBA, each of which guarantees the repayment of the securities. Nearly all of our mortgage-backed securities are issued by GSEs and are traded in liquid secondary markets. The state and local government investments are comprised almost entirely of fixed ratehighly-rated municipal bonds that generally increase in value when market yields for fixed rate bonds decreaseissued by state and decline in value when market yields for fixed rate bonds increase. Management haslocal governments throughout the nation. We have no significant concentration of bond holdings from one state or local government entity. We have evaluated anythe unrealized losses on individual securities at each period endJune 30, 2023 and determined that there is no other-than-temporarythem to be of a temporary nature due primarily to interest rate factors and not credit quality concerns. In arriving at this conclusion, we reviewed third-party credit ratings and considered the severity of the impairment.

FINANCIAL CONDITION

Total assets at September 30, 2017 amounted to $4.59 billion, a 29.8% increase from a year earlier. Total loans at September 30, 2017 amounted to $3.43 billion, a 29.4% increase from a year earlier, and total deposits amounted to $3.65$10.2 billion a 25.4%at June 30, 2023, an increase from a year earlier.

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 nine 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.

As derived from the table above, for the twelve months preceding September 30, 2017, our total loans increased $778$941.0 million, or 29.4%10.2%, from December 31, 2022. Deposits acquired from GrandSouth contributed $1.05 billion while organic market growth (excluding wholesale funding) totaled $154.0 million since year end for an annualized growth rate of 3.1%. The loan growthWholesale brokered deposits decreased $249.5 million from acquisitions is dueyear end. We continue to our acquisition of Carolina Bank in March 2017,have a diversified and granular deposit base 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. Internal loan growth was $280.8 million, or 10.6%, for the twelve months ended September 30, 2017 and 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 our recent expansion into high-growth markets and the hiring of experienced bankers in these areas. We expectremained stable with continued growth in our loan portfolio forcore deposits, primarily noninterest-bearing checking accounts and money market accounts. As of June 30, 2023, the remainderestimated insured deposits totaled $6.5 billion or 63.6% of 2017.

Page 50

Index

The mixtotal deposits. In addition, we had collateralized deposits at that date of $774.8 million such that approximately 71.2% of our loan portfolio remains substantiallytotal deposits were insured or collateralized at June 30, 2023.

Our deposit mix has remained consistent historically and has not significantly changed with the same at September 30, 2017 compared to December 31, 2016. The majorityaddition of our real estate loans are personal and commercial loans where real estate provides additional security forGrandSouth as presented in the loan.

For both the nine and twelve month periods ended September 30, 2017, we experienced net internal growth in total deposits. For these periods, increases in transaction deposit account balances (checking, money market, and savings) offset declines in time deposits. Due to the low interest rate environment, some 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 milliontable below. There has been no notable shift 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 ablenoninterest-bearing to capture loan market share fasterinterest-bearing during 2023 to date other than deposit market share. This imbalance has resulted in higher use of brokered 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 outstandingacquired deposits driving a year earlier. Borrowings have increased from $236.4 million to $397.5 million over that same period.

moderate change in mix.


Page 55
June 30, 2023December 31, 2022
($ in thousands)AmountPercentageAmountPercentage
Noninterest-bearing checking accounts$3,639,930 36 %3,566,003 39 %
Interest-bearing checking accounts1,454,489 14 %1,514,166 16 %
Money market accounts3,411,072 34 %2,416,146 26 %
Savings accounts658,473 6 %728,641 8 %
Other time deposits638,751 6 %464,343 5 %
Time deposits >$250,000353,473 4 %276,319 3 %
Total market deposits10,156,188 100 %8,965,618 97 %
Brokered deposits12,381 — %261,911 3 %
Total deposits$10,168,569 100 %9,227,529 100 %

Nonperforming Assets

Nonperforming assets include

NPAs are defined as nonaccrual loans, troubled debt restructurings,modifications to borrowers in financial distress, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assetsestate, and prior to the adoption of ASU 2022-02, accruing TDRs. NPAs 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% 

(1)In the March 3, 2017 acquisition of Carolina Bank Holdings, Inc., the Company acquired $19.3 million in purchased credit impaired loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from the nonperforming loan amounts.

($ in thousands)June 30, 2023December 31, 2022
Nonperforming assets
Nonaccrual loans$29,876 28,514 
Modifications to borrowers in financial distress4,862 — 
TDRs – accruing— 9,121 
Total nonperforming loans34,738 37,635 
Foreclosed real estate1,077 658 
Total nonperforming assets$35,815 38,293 
Asset Quality Ratios
Nonaccrual loans to total loans0.38 %0.43 %
Nonperforming loans to total loans0.44 %0.56 %
Nonperforming assets to total loans and foreclosed properties0.45 %0.57 %
Nonperforming assets to total assets0.30 %0.36 %
Allowance for credit losses to nonaccrual loans365.61 %319.03 %
Allowance for credit losses to nonperforming loans314.44 %241.71 %
As shown in the table above, NPAs decreased from December 31, 2022 to June 30, 2023. The decline was due in part to the Company's adoption of ASU 2022-02 which eliminated the accounting for TDRs and replaced it with disclosures of loan modifications for borrowers experiencing financial difficulty. At June 30, 2023, total nonaccrual loans amounted to $29.9 million, compared to $28.5 million at December 31, 2022.
"Commercial and industrial" is the largest category of nonaccrual loans, at $11.3 million, or 37.8% of total nonaccrual loans, followed by "Commercial real estate - owner occupied" at $11.3 million, or 37.7% of total nonaccrual loans. Included in those categories are nonaccrual SBA loans totaling $15.4 million at June 30, 2023, or 51.5%, of total nonaccrual loans which have $5.7 million in guarantees from the SBA.
As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans increased 14.6% to $55.4 million at June 30, 2023 compared to $48.3 million at December 31, 2022. Special mention loans increased 8.5% from $39.0 million at December 31, 2022 to $42.3 million at June 30, 2023. The majority of the increase was attributable to commercial real estate loans acquired from GrandSouth.

Page 56
Allowance for Credit Losses and Loan Loss Experience
Our ACL is based on the total amount of loan losses that are expected over the remaining life of the loan portfolio. Our estimate of credit losses on loans is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. The ACL is measured on a collective pool basis when similar risk characteristics exist based primarily on discounted cash flows computed for each loan in a pool based on its individual characteristics. When we determine that foreclosure is probable or when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. 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.

Page 51

ACL.
Index

As noted in the table above, at September 30, 2017, total nonaccrual loans amounted to $23.4 million, compared to $27.5 million at December 31, 2016 and $32.8 million at September 30, 2016. “Restructured loans – accruing”, or troubled debt restructurings (“TDRs”), are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At September 30, 2017, total accruing TDRs amounted to $20.3 million, compared to $22.1 million at December 31, 2016 and $27.3 million at September 30, 2016.

Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $9.4 million at September 30, 2017, $9.5 million at December 31, 2016, and $10.1 million at September 30, 2016. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and the improvement in our 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.

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.

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 

Page 52

Index

The following table presents geographical information regarding our nonperforming assets at September 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 
                 

(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

South Carolina Region - Chesterfield, Dillon, Florence

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 of Loan Loss Experience

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 recoveries 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 environment that began

Fluctuations in 2008 resultedthe ACL each period are based on loan mix and growth, changes in elevatedthe levels of classifiednonperforming loans, economic forecasts impacting loss drivers, other assumptions and nonperforming assets, which generally ledinputs to higher provisionsthe CECL model, and as occurred in 2023, adjustments for acquired loan lossesportfolios. Our ACL increased $18.3 million at June 30, 2023, as compared to historical averages. Overyear end, to a total of $109.2 million. The increase was driven by the past several years, we have seen ongoing signsacquisition 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 severity of the loss rate inherent in our current inventory of classified loans is less thanGrandSouth as discussed previously in the recession years.

We"Provision for Credit Losses" section above and in Note 4 to the accompanying consolidated financial statements. Purchase accounting adjustments included a "Day 1" ACL of $5.6 million recorded no provision for loan losses in the third quarters of 2017 or 2016. For the nine months ended September 30, 2017, we recorded totalPCD loans and an initial "Day 2" provision for loan losses of $0.7$12.2 million comparedrelated to a total negative provision for loan losses of $23,000non-PCD loans in the same periodGrandSouth portfolio. The balance of 2016. The negative provisionthe change in 2016the ACL was primarily due to significant recoveries on covered loans.

Page 53

a result of loan growth experienced during the period, combined with updated economic forecasts projecting some deterioration in the key factors utilized in our CECL model calculation, primarily the commercial real estate index.
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 fromACL, charge-offs and recoveries, and additionskey ratios:

($ in thousands)Six Months Ended June 30, 2023Twelve Months
Ended December 31,
2022		Six Months Ended June 30, 2022
Loans outstanding at end of period$7,897,629 6,665,145 6,243,170 
Average amount of loans outstanding7,789,800 6,293,280 6,100,246 
Allowance for credit losses, at period end109,230 90,967 82,181 
Total charge-offs(4,372)(4,465)(2,803)
Total recoveries1,874 4,043 2,695 
Net charge-offs$(2,498)(422)(108)
Ratios:
Net charge-offs as a percent of average loans (annualized)0.06 %0.01 %— %
Allowance for credit losses as a percent of loans at end of period1.38 %1.36 %1.32 %
Recoveries of loans previously charged-off as a percent of loans charged-off42.86 %90.55 %96.15 %
Allowance for Unfunded Commitments
In addition 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 provision for loan losses thatACL on loans, we record is driven bymaintain an allowance for lending-related commitments such as unfunded loan loss mathematical model. The primary factors impacting this modelcommitments. We estimate expected credit losses associated with these commitments over the contractual period in which we are loan growth, net charge-off history, and asset quality trends. In 2017, the impact 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.

exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable. The allowance for loan losses amounted to $24.6 million at September 30, 2017, compared to $23.8 million at December 31, 2016 and $24.6 million at September 30, 2016. The ratio of our allowance to total loans has declined from 0.93% at September 30, 2016 to 0.72% at September 30, 2017lending-related commitments on off-balance sheet credit exposures is adjusted as a resultprovision for unfunded commitments expense. The estimate includes consideration of the factors discussed above


Page 57
likelihood that impacted our relatively low levelsfunding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
For the six months ended June 30, 2023, we recorded a reversal of provision for loan losses, as well as applicable accounting guidance that does not allow us to recordunfunded commitments of $0.3 million, which includes an allowanceinitial provision of $1.9 million for loan losses upon the acquisition of loans. Thus, noGrandSouth and a provision reversal of $2.2 million related to fluctuations in the levels and mix of outstanding loan commitments. For the comparable period of 2022, we recognized a reversal of provision for unfunded commitments of $1.5 million related to lower levels of unfunded commitments for the period. The 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 fair value, which included the considerationunfunded commitments of any expected losses. See Critical Accounting Policies above for further discussion. Unaccreted discount, which is available to absorb loan losses on a loan-by-loan basis, amounted to $16.9 million, $12.7$13.0 million and $13.2$13.3 million at SeptemberJune 30, 2017,2023 and December 31, 2016, and September 30, 2016, 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.

2022, respectively, are classified on the balance sheet within "Other liabilities."

We believe our reserve levels arethe ACL is adequate to cover probable loan losses on the loans outstanding as ofat each reporting date.period end presented. It must be emphasized, however, that the determination of the reserveallowances 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 lossesACL or future charges to earnings. See “Critical Accounting Policies – Allowance for Loan Losses” above.

Page 54

Credit Losses on Loans and Unfunded Commitments” in Note 1 to the 2022 Annual Report on Form 10-K filed with the SEC for more information.
Index

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan lossesACL and the value of other real estate.our collateral-dependent loans. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estateACL 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 September 30, 2017, 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.

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 has a high percentage of amortizing mortgage-backed securities generating monthly cash flows. In addition, the portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings We also maintain available lines of credit from the followingFHLB and the Federal Reserve, as well as federal funds lines from several correspondent banks which are summarized below.

At June 30, 2023, the Company had three sources - 1) anof readily available borrowing capacity:
•An approximately $813$928.4 million line of credit with the Federal Home Loan BankFHLB (of which $344$381.8 million wasand $221.8 million were outstanding at SeptemberJune 30, 20172023 and $225 million was outstanding at December 31, 2016), 2) a $35 million federal funds line with a correspondent bank (of which none was outstanding at September 30, 2017 or December 31, 2016), and 3) an2022, respectively);
•An approximately $113$835.5 million line of credit through the Federal ReserveReserve's discount window and its Bank of Richmond’s discount windowTerm Funding Program (of which none was outstanding at SeptemberJune 30, 20172023 or December 31, 2016)2022); and,
•Federal funds lines with several correspondent banks totaling $265.0 million (of which none were outstanding at June 30, 2023 or December 31, 2022). In addition
Our overall on-balance sheet liquidity ratio was 17.3% at June 30, 2023. compared 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 September 30, 2017 and $193 million26.0% at December 31, 2016,2022. We define our liquidity ratio 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 at September 30, 2017 compared to $425 million at December 31, 2016.

Our overall liquidity has decreased slightly since September 30, 2016 but remains sufficient. Ournet liquid assets (cash, unpledged securities and securities)other marketable assets) as a percentage of our totalnet liabilities (unpledged deposits and borrowings decreased from 19.6%borrowings). The decrease in on-balance sheet liquidity is primarily related to the higher level of investment securities pledged during the year to date to increase our borrowing availability. Our total liquidity ratio, including the $1.6 billion in available lines of credit at Septemberquarter end was 29.0% as of June 30, 20162023. The increase in available lines during 2023 was a result of additional loan and security collateral being transferred to 18.1% at September 30, 2017.

the FHLB and the Federal Reserve to enhance the levels of off-balance sheet liquidity availability to meet demands, as necessary. 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 hashave not changed materially since December 31, 2016,2022, the detail of whichwhich is presented in Table 18 on page 90 the Contractual Obligations and Other Commercial Commitments table of our 20162022 Annual Report on Form 10-K.

We In addition, we are not involved in any 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.


Page 58
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, and have no current plans to do so.

2023.

Capital Resources

Page 55

Index

The Company is regulated by the Board of Governors of the Federal Reserve Board (“Federal Reserve”) and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission.SEC. Our banking subsidiary First Bank, is also regulated by the Federal Reserve and the North Carolina Office of the Commissioner of Banks.Banks ("NCCOB"). We must comply with regulatory capital requirements established by the Federal Reserve and the NCCOB. 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 with regulatory capital requirements established by the Federal Reserve. Failure to meet minimum capital requirements can initiate certain mandatory,

Under Basel III standards and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under 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 Federal Reserve's capital standards require us to maintain minimum ratios of “Common Equity Tier“common equity tier 1” capital to total risk-weighted assets, “Tier“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 Tierequity 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 Tiercommon equity tier 1 capital plus Additional Tier"additional tier 1 Capital,capital", which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total risk-based capital is comprised of Tiertier 1 capital plus qualifying subordinated debentures, and certain adjustments, the largest of which is our allowanceACL and reserve for loan losses.unfunded commitments. The Company has elected to exclude AOCI related primarily to available for sale securities from common equity tier 1 capital. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in Federal Reserve regulations.

The capital conservation buffer requirement began to be phased in on January 1, 2016, at 0.625% of risk weighted assets, and will increase each year until fully implemented at 2.5% in 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 Reserve has not advised us of any requirement specifically applicable to us.

At SeptemberJune 30, 2017,2023, our capital ratios exceeded the regulatory minimum ratios discussed above. The decrease in tier 1 capital ratios at June 30, 2023 as compared to year end is related primarily to the GrandSouth acquisition and organic asset growth. The following table presents ourthe capital ratios for the Company 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% 

Firstindicated:


Page 59
June 30, 2023December 31, 2022
Risk-based capital ratios:  
Common equity Tier 1 to Tier 1 risk weighted assets12.75 %13.02 %
Minimum required Common Equity Tier 1 capital7.00 %7.00 %
Tier I capital to Tier 1 risk weighted assets13.54 %13.83 %
Minimum required Tier 1 capital8.50 %8.50 %
Total risk-based capital to Tier II risk weighted assets15.09 %15.09 %
Minimum required total risk-based capital10.50 %10.50 %
Leverage capital ratio:
Tier 1 capital to quarterly average total assets10.47 %10.51 %
Minimum required Tier 1 leverage capital4.00 %4.00 %
The 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, First2023, the 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 due to the acquisition of Carolina Bank in March 2017 (see Note 4 to the Consolidated Financial Statements for more information on this transaction).

Page 56

Index

In addition to the regulatory capital ratios,requirements, we also closely monitor ourthe Company's tangible common equity ratio which is a non-GAAP measurement calculated as total capital less intangible assets, as a percent of total assets net of intangible assets. AOCI is included in the Company’s tangible common equity to tangible assets (“TCE Ratio”). Our TCE ratio which was 7.95%6.79% at SeptemberJune 30, 2017 compared to 8.16% at2023, an increase of 40 basis points from December 31, 20162022 due to higher earnings and 8.03% at Septemberimprovement the level of AOCI.

Stock Repurchase Plans
During the quarter ended June 30, 2016.

BUSINESS DEVELOPMENT MATTERS

The following is a list of business development and other miscellaneous matters affecting2023, 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.”

SHARE REPURCHASES

We did not maintain, adopt, modify or terminate a stock repurchase any sharesplan operated under the provisions of our common stock duringRules 10b-18 or Rule 10b5-1(c) of the first nine months of 2017. At September 30, 2017, we had approximately 214,000 shares available for repurchase under existing authority from our Board of Directors. We may repurchase these shares 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.”

SEC or otherwise.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)

Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Company’s market risk is composed primarily of interest rate risk inherent in the normal course of lending and deposit-taking activities. We are also exposed to market risk in our investing activities. We do not have any trading assets or activities.
Interest Rate Risk
Net interest income is our most significant component of earnings. Notwithstanding changes in volumes of loansearnings and deposits,we consider interest rate risk to be our level ofmost significant market risk. Our goal is to structure our asset/liability composition to maximize 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 towhile managing interest rate risk is analyzedso as to minimize the adverse impact of changes in interest rates on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels ofnet 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 relatively consistent yield on average earning assets (net interest margin). Over the past five calendar years, our net interest margin has ranged from a low of 4.03% (realizedcapital in 2016) to a high of 4.92% (realized in 2013). Until the end 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. The consistency of our net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At September 30, 2017, approximately 77% 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.

Page 57

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 30, 2017, we had $1.0 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 aor declining interest rate environment. However, this methodProfitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates of analyzingthe underlying assets and liabilities do not change at the same speed, to the same extent or on the same basis.

Interest rate risk is monitored through the use of three complementary modeling tools: static gap analysis, earnings simulation modeling, and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest sensitivityrate scenarios. While each of the interest rate risk models has limitations, taken together they represent a reasonably comprehensive view of the magnitude of our interest rate risk, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which measures aggregate repricing values, is less utilized because it only measures the magnitude of the timing differences and does not address earnings,repricing lags, market value,influences, or management actions. Also,Earnings simulation and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are discussed further below. From the various model results and our

Page 60
expectations regarding future interest rate movements, the national, regional and local economies, and other financial and business risk factors, we quantify the overall magnitude of interest sensitivity risk and then determine appropriate strategies and practices governing asset growth and pricing, funding sources and pricing, and off-balance sheet commitments.
Earnings Simulation Analysis
We use net interest income simulations which measure the short-term earnings exposure from changes in market rates of interest. The model calculates an earnings estimate based on current and projected balances and rates, incorporating our current financial position with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis.
Assumptions used in the model are derived from historical trends and management’s outlook. The model assumes a static balance sheet with cash flows reinvested in similar instruments to maintain the balance sheet levels and current composition. Actual cash flows and repricing characteristics for our balance sheet instruments are input to the model. The model incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain types of assets and liabilitiesliabilities. Because these assumptions are inherently uncertain, actual results may fluctuate in advancediffer from simulated results.
Different interest rate scenarios and yield curves are used to measure the sensitivity of changes in marketearnings to changing interest rates while interestin both a "shocked" instantaneous move and a "ramped" move of rates. Interest rates on other types may lag behind changes in market rates. In addition todifferent asset and liability accounts move differently when the effects of “when” various rate-sensitive products reprice, marketprime rate changes and such assumptions are reflected in the different rate scenarios. The model does not take into account any future actions that management may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities subjecttake to mitigate the impact of interest rate changes, within one year at September 30, 2017 are deposits totaling $1.87 billion comprisedand it is our strategy to proactively change the volume and mix of checking, savings, and certain types of money market deposits withour balance sheet in order to mitigate our interest rates set by management. These types of deposits historically have not repriced with, orrate risk.
There has been no significant change in the same proportion, as general market indicators.

Overall, we believeCompany's estimated net interest income sensitivity position from December 31, 2022. From a net interest income perspective, the Company has been fairly neutral historically with no significant change in the short-term (within a 12-month period) and within the lower ranges (+ - 100-200 basis points) of interest rate changes. Starting in 2022, the Company's sensitivity position shifted somewhat such that, in the near term (twelve months),short-term it is projected that net interest income will not likely experience significant downward pressure frombe essentially flat or fall in both a rising interest rates. Similarly, we would not expect a significant increaseand falling rate environment. This position is due 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 lagpart to the rate changechanging market characteristics of certain loan and typically notdeposit products as well as to the full extent of the rate change. In the short-term (less than six months), this 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. However,shift in the twelve-month horizon, the impact of having a higher level of interest-sensitive liabilities lessens the short-term effects of changesyield curve. The rapid rate increases 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, the Federal Reserve took steps to suppress long-term interest rates in an effort to boost the housing market, increase employment, and stimulate the economy, which2022 resulted in a flat interest rate curve.steepening of the yield curve on the short end (within one year), while the longer end of the curve has inverted between one and 10 years, meaning that the yield on short-term instruments (less than one year) are higher than longer-term instruments (10 years). A flat or inverted interest rate curve is an unfavorable interest rate environment for many banks,financial institutions, 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 or invert, 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 periodsNIM.

With regard to rising rates, with an immediate increase or shock in the last few years that the yield curve has steepened somewhat, it currently remains relatively flat. This flat yield curve and the intense competition for high-quality loans in our market areas have limited our ability to charge higher rates on loans, and thus we continue to experience challenges in increasing our loan yields and net interest margin.

As noted earlier, the Federal Reserve made no changes to the short term interest rates it sets directly from 2008 until December 2015, and during that time we were able to reprice many of our maturing time deposits at lower interest rates. We were also able to generally decrease the rates we paid on other categories of deposits as a result of declining short-term interest rates in the marketplace and an increase 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 four interest rate increases initiated by the Federal Reserve over the past 18 months have not resultedshort-term (12-month horizon), we would expect to realize a decline in significant competitive pressure to increase deposit rates, but we expect the competitive pressures to increase.

Page 58

Index

As previously discussed in the section “Net Interest Income,” our net interest income, has been impacted by certain purchase accounting adjustments related to acquired banks. The purchase accounting adjustments relatedalthough not to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable. The accretionextent projected in a declining rate environment. This is due in part to the composition of theour loan discount on acquiredportfolio which is comprised of 20% variable rate loans which amounted to $5.1 million and $3.6 million for the nine months ended September 30, 2017 and 2016, respectively, is less predictable and could be materially different among periods. This is because ofimmediately reprice, thus limiting the magnitude of the discounts that were initially recorded and the factimpact of rate increases given that the accretion being recordedmajority of our portfolio is dependent on bothat fixed rates. In addition, the credit qualitymodel includes an assumption of a quick repricing up of the acquired loansfunding base in a rising rate environment, and our recent shift to higher-cost brokered deposits and short-term borrowings in our funding mix has lead to a narrowing of the interest rate spread in the projection. As previously noted, these assumptions are inherently uncertain, and actual results may differ from simulated results. While we believe rates may increase again moderately in 2023, the consensus is that the market rates may begin to stabilize and there is a possibility that the Federal Reserve may start to reduce rates in 2024. We would expect net interest income to decline somewhat in a decreasing interest rate environment, as interest-earning assets reprice to lower rates and interest-bearing deposits repricing may lag given continued market competition for deposits.

Economic Value Simulation
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic

Page 61
value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are generally used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.
As of December 31, 2022, the Company’s economic value of equity ("EVE") was generally liability sensitive in a rising interest rate environment and there has been no significant change in our EVE position from year end. The increase in EVE exposure to rising rates which occurred starting in 2022 was primarily due to the composition of the consolidated balance sheets combined with the pricing characteristics and assumptions of certain deposits. Specifically, starting in 2022, non-maturity deposits, generally with lower betas, have decreased and were replaced with short-term FHLB advances and short-term brokered deposits.
Additional discussion concerning our exposure to interest rate risk is presented in Item 7A of the 2022 Annual Report on Form 10-K filed with the SEC.
Inflation
Our financial statements have been prepared in accordance with GAAP, which requires the financial position and operating results to be measured principally in terms of historic dollars without considering the change in the relative purchasing power of money over time due to inflation.
Nearly all of the Company’s assets and liabilities are monetary in nature, and as such, changes in interest rates (as discussed above) generally affect the financial condition of the Company to a greater degree than changes in the rate of inflation. Although interest rates are influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Inflation affects the Company’s results of operations mainly through increased operating costs, and the impact of any accelerated loan repayments, including payoffs. If the credit qualityinflation on banks in general is normally not as significant as its influence on those businesses that have large investments in plant and inventories. We review pricing 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 predictour products and susceptible to volatility. The remaining loan discount on acquired loans amounted to $16.9 million at September 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 yields 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.

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,services, as well as discussionour controllable operating and labor costs in light of current and expected costs due to inflation, to mitigate the inflationary impact on financial performance to the extent possible.

Awards Made To Named Executive Officers
During the fiscal year ended December 31, 2022, the Company did not award an option or other right to purchase or acquire its common shares during any period beginning four business days before the filing of a periodic report on Form 10-Q or the filing or furnishing of a report on Form 8-K that disclosed material nonpublic information and ending one business day after the filing or furnishing of such a report to any the Company’s “named executive officers” (as such persons are specified in the Company’s Proxy Statements for its 2022 or 2023 Annual Meeting of Shareholders).
Trading Arrangements of Section 16 Reporting Persons.
During the quarter ended June 30, 2023, no person who is required to file reports pursuant to Section 16(a) of the changesSecurities and Exchange Act of 1934, as amended, with respect to holdings of, and transactions in, the annual net interest marginCompany’s common shares (i.e. directors and certain officers of the Company) maintained, adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1(c) arrangement”, as those terms are defined in Section 229.408 of the section entitled “Net Interest Income” above.

regulations of the SEC.

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

Page 62
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 is a party to routineand its subsidiaries. Neither the Company nor any of its subsidiaries are involved 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.

Page 59

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, 2016,2022, 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.

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

Footnotes to There are no material changes from the Above Table

(1)All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. On July 30, 2004, the Company announced that its Board of Directors had approved the repurchase of 375,000 shares of the Company’s common stock. The repurchase authorization does not have 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.

(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 exercises during the three months ended September 30, 2017.

During the three months ended September 30, 2017, the Company issued 13,374 shares of unregistered common stockrisk factors set forth 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 duringAnnual Report on Form 10-K for the three monthsyear ended September 30, 2017.

December 31, 2022.


Page 63
Index

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.aPurchase 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.bPurchase 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
2.a

2.dMerger 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, 2017,21, 2022, and is incorporated herein by reference.

Page 60

Index

3.a3.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’s Current Report on Form 8-K filed on December 26, 2012, and are incorporated herein by referencereference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed June 14, 2022., and are incorporated herein by reference.

3.b3.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.a4.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.

31.131.1
Chief Executive Officer 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
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.131.2Certification 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.

32.232.2
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

101101
The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2023, 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,Chief Financial Officer, 300 SW Broad Street, Southern Pines, North Carolina, 28387


Page 61 

64

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
FIRST BANCORP
August 8, 2023November 9, 2017BY:/s/  Richard H. Moore
Richard H. Moore

Chief Executive Officer

(Principal Executive Officer),
and Director
and Director
August 8, 2023BY:/s/  Elizabeth B. Bostian
November 9, 2017BY:/s/ Eric P. Credle
Eric P. Credle
Elizabeth B. Bostian
Executive Vice President

and Chief Financial Officer
August 8, 2023BY:/s/  Blaise B. Buczkowski
Blaise B, Buczkowski
Executive Vice President
and Chief Accounting Officer


Page 62 

65