Index

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, 2018

2019

Commission File Number 0-15572

FIRST BANCORP

(Exact Name of Registrant as Specified in its Charter)

North Carolina 56-1421916
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization) (I.R.S. Employer Identification Number)
   
300 SW Broad St.,Southern Pines,North Carolina 28387
(Address of Principal Executive Offices) (Zip Code)
   
(Registrant's telephone number, including area code) (910)246-2500

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.xYES     oNO

☒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).xYES     oNO

☒Yes☐ No

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

xLarge Accelerated Filer      oAccelerated Filer      oNon-Accelerated Filer     oSmaller Reporting Company     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).oYES     xNO

☐ Yes ☒ No

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
The number of shares of the registrant's Common Stock outstanding on OctoberJuly 31, 20182019 was 29,729,285.

29,717,223.


Index

INDEX

FIRST BANCORP AND SUBSIDIARIES

 Page
  
Part I.  Financial Information
 
  
Item 1 - Financial Statements
 
Consolidated Balance Sheets - SeptemberJune 30, 20182019 and SeptemberJune 30, 20172018 (With Comparative Amounts at December 31, 2017)2018)
4
Consolidated Statements of Income - For the Periods Ended SeptemberJune 30, 20182019 and 20172018
5
Consolidated Statements of Comprehensive Income - For the Periods Ended SeptemberJune 30, 20182019 and 20172018
6
Consolidated Statements of Shareholders’ Equity - For the Periods Ended SeptemberJune 30, 20182019 and 20172018
7
Consolidated Statements of Cash Flows - For the Periods Ended SeptemberJune 30, 20182019 and 20172018
8
9
Notes to Consolidated Financial Statements
9
10
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition
40
39
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
56
Item 4 – Controls and Procedures
58
  
Item 4 – Controls and Procedures
58
Part II.  Other Information 
  
Item 1 – Legal Proceedings
58
Item 1A – Risk Factors
58
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
59
Item 6 – Exhibits
59
60
Signatures
Signatures61
61



Page 2

Index


FORWARD-LOOKING STATEMENTS

Part I of this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Further, forward-looking statements are intended to speak only as of the date made. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning our opinions or judgment about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 20172018 Annual Report on Form 10-K.



Page 3

Index


Part I. Financial Information

Item 1 - Financial Statements


First Bancorp and Subsidiaries

Consolidated Balance Sheets

($ in thousands-unaudited) September 30,
2018		  December 31,
2017 (audited)		  September 30,
2017		 
ASSETS            
Cash and due from banks, noninterest-bearing $50,209   114,301   82,758 
Due from banks, interest-bearing  460,520   375,189   326,089 
     Total cash and cash equivalents  510,729   489,490   408,847 
             
Securities available for sale  353,068   343,270   198,924 
Securities held to maturity (fair values of $103,360, $118,998, and $124,878)  104,819   118,503   123,156 
             
Presold mortgages in process of settlement  6,111   12,459   17,426 
             
Loans  4,190,628   4,042,369   3,429,755 
Allowance for loan losses  (20,546)  (23,298)  (24,593)
   Net loans  4,170,082   4,019,071   3,405,162 
             
Premises and equipment  116,618   116,233   95,762 
Accrued interest receivable  14,982   14,094   11,445 
Goodwill  232,458   233,070   144,667 
Other intangible assets  22,279   24,437   15,634 
Foreclosed real estate  6,140   12,571   9,356 
Bank-owned life insurance  101,055   99,162   88,081 
Other assets  73,289   64,677   72,687 
        Total assets $5,711,630   5,547,037   4,591,147 
             
LIABILITIES            
Deposits:   Noninterest bearing checking accounts $1,280,408   1,196,161   1,016,947 
Interest bearing checking accounts  870,487   884,254   683,113 
Money market accounts  1,007,177   984,945   795,572 
Savings accounts  432,335   454,860   396,192 
Time deposits of $100,000 or more  669,081   593,123   517,770 
Other time deposits  268,885   293,612   241,647 
     Total deposits  4,528,373   4,406,955   3,651,241 
Borrowings  406,593   407,543   397,525 
Accrued interest payable  1,916   1,235   1,143 
Other liabilities  31,672   38,325   28,737 
     Total liabilities  4,968,554   4,854,058   4,078,646 
             
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 none  ̶   ̶   — 
Common stock, no par value per share.  Authorized: 40,000,000 shares            
     Issued & outstanding:  29,729,285, 29,639,374, and 24,723,929 shares  434,227   432,794   263,493 
Retained earnings  320,822   264,331   251,790 
Stock in rabbi trust assumed in acquisition  (3,224)  (3,581)  (3,571)
Rabbi trust obligation  3,224   3,581   3,571 
Accumulated other comprehensive income (loss)  (11,973)  (4,146)  (2,782)
     Total shareholders’ equity  743,076   692,979   512,501 
          Total liabilities and shareholders’ equity $5,711,630   5,547,037   4,591,147 

($ in thousands)June 30,
2019 (unaudited)		 December 31,
2018		 June 30,
2018 (unaudited)
ASSETS 
  
  
Cash and due from banks, noninterest-bearing$52,679
 56,050
 97,163
Due from banks, interest-bearing286,781
 406,848
 462,972
Total cash and cash equivalents339,460
 462,898
 560,135
      
Securities available for sale691,971
 501,351
 334,068
Securities held to maturity (fair values of $79,044, $99,906, and $107,068)79,050
 101,237
 108,265
      
Presold mortgages in process of settlement6,222
 4,279
 9,311
      
Loans4,339,497
 4,249,064
 4,149,390
Allowance for loan losses(20,789) (21,039) (23,298)
Net loans4,318,708
 4,228,025
 4,126,092
      
Premises and equipment136,901
 119,000
 113,774
Accrued interest receivable16,909
 16,004
 13,930
Goodwill234,368
 234,368
 232,458
Other intangible assets19,401
 21,112
 23,152
Foreclosed properties5,107
 7,440
 8,296
Bank-owned life insurance103,154
 101,878
 100,413
Other assets60,788
 66,524
 87,706
Total assets$6,012,039
 5,864,116
 5,717,600
      
LIABILITIES     
Deposits:      Noninterest bearing checking accounts$1,441,064
 1,320,131
 1,252,214
Interest bearing checking accounts931,945
 916,374
 915,666
Money market accounts1,104,052
 1,035,523
 1,021,659
Savings accounts413,065
 432,389
 440,475
Time deposits of $100,000 or more690,734
 690,922
 647,206
Other time deposits262,194
 264,000
 276,401
Total deposits4,843,054
 4,659,339
 4,553,621
Borrowings301,140
 406,609
 407,076
Accrued interest payable2,258
 1,976
 1,651
Other liabilities50,418
 31,962
 30,530
Total liabilities5,196,870
 5,099,886
 4,992,878
      
Commitments and contingencies


 


 


      
SHAREHOLDERS’ EQUITY     
Preferred stock, no par value per share.  Authorized: 5,000,000 shares     
Issued & outstanding:  none, none, and none—
 —
 —
Common stock, no par value per share.  Authorized: 40,000,000 shares     
Issued & outstanding:  29,717,223, 29,724,874, and 29,702,912 shares432,533
 434,453
 434,117
Retained earnings380,748
 341,738
 301,800
Stock in rabbi trust assumed in acquisition(2,866) (3,235) (3,214)
Rabbi trust obligation2,866
 3,235
 3,214
Accumulated other comprehensive income (loss)1,888
 (11,961) (11,195)
Total shareholders’ equity815,169
 764,230
 724,722
Total liabilities and shareholders’ equity$6,012,039
 5,864,116
 5,717,600
See accompanying notes to unaudited consolidated financial statements.


Page 4
Index

First Bancorp and Subsidiaries
Consolidated Statements of Income
($ in thousands, except share data-unaudited)Three Months Ended
June 30,		 Six Months Ended
June 30,
 2019 2018 2019 2018
INTEREST INCOME       
Interest and fees on loans$55,652
 51,451
 109,612
 101,621
Interest on investment securities:    

 

Taxable interest income4,993
 2,465
 9,730
 5,051
Tax-exempt interest income271
 368
 608
 748
Other, principally overnight investments2,106
 2,451
 4,807
 4,376
Total interest income63,022
 56,735
 124,757
 111,796
        
INTEREST EXPENSE       
Savings, checking and money market accounts2,335
 1,132
 4,344
 2,111
Time deposits of $100,000 or more3,522
 1,850
 6,700
 3,325
Other time deposits467
 251
 857
 470
Borrowings2,289
 2,270
 5,086
 4,151
Total interest expense8,613
 5,503
 16,987
 10,057
        
Net interest income54,409
 51,232
 107,770
 101,739
Provision (reversal) for loan losses(308) (710) 192
 (4,369)
Net interest income after provision for loan losses54,717
 51,942
 107,578
 106,108
        
NONINTEREST INCOME       
Service charges on deposit accounts3,210
 3,122
 6,155
 6,385
Other service charges, commissions and fees5,786
 4,674
 11,034
 9,159
Fees from presold mortgage loans857
 796
 1,402
 1,655
Commissions from sales of insurance and financial products2,204
 2,119
 4,233
 4,059
SBA consulting fees921
 1,126
 2,184
 2,267
SBA loan sale gains3,069
 2,598
 5,131
 6,400
Bank-owned life insurance income631
 628
 1,277
 1,251
Foreclosed property gains (losses), net(381) (99) (626) (387)
Other gains (losses), net(308) 908
 (226) 912
Total noninterest income15,989
 15,872
 30,564
 31,701
        
NONINTEREST EXPENSES       
Salaries expense19,732
 18,446
 38,697
 37,844
Employee benefits expense4,418
 4,084
 9,006
 8,691
Total personnel expense24,150
 22,530
 47,703
 46,535
Occupancy expense2,729
 2,543
 5,483
 5,345
Equipment related expenses1,183
 1,241
 2,552
 2,493
Merger and acquisition expenses103
 640
 213
 3,401
Intangibles amortization expense1,242
 1,506
 2,574
 3,066
Other operating expenses11,032
 10,174
 21,185
 21,280
Total noninterest expenses40,439
 38,634
 79,710
 82,120
        
Income before income taxes30,267
 29,180
 58,432
 55,689
Income tax expense6,408
 6,450
 12,288
 12,286
        
Net income$23,859
 22,730
 46,144
 43,403
        
Earnings per common share:       
Basic$0.80
 0.77
 1.55
 1.47
Diluted0.80
 0.77
 1.55
 1.46
        
Dividends declared per common share$0.12
 0.10
 0.24
 0.20
        
Weighted average common shares outstanding:       
Basic29,626,931
 29,544,747
 29,607,074
 29,539,308
Diluted29,796,941
 29,632,738
 29,808,859
 29,630,822
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)2019 2018 2019 2018
Net income$23,859
 22,730
 46,144
 43,403
Other comprehensive income (loss):       
Unrealized gains (losses) on securities available for sale:       
Unrealized holding gains (losses) arising during the period, pretax11,701
 (2,012) 17,604
 (9,302)
Tax (expense) benefit(2,714) 471
 (4,094) 2,174
Postretirement Plans:       
Amortization of unrecognized net actuarial loss228
 51
 456
 103
Tax benefit(63) (12) (117) (24)
Other comprehensive income (loss)9,152
 (1,502) 13,849
 (7,049)
Comprehensive income$33,011
 21,228
 59,993
 36,354
See accompanying notes to unaudited consolidated financial statements.


Page 6
Index

First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity

($ in thousands, except per share - unaudited)Common Stock Retained
Earnings		 Stock in
Rabbi
Trust
Assumed
in
Acquisition		 Rabbi
Trust
Obligation		 Accumulated
Other
Comprehensive
Income
(Loss)		 Total
Shareholders’
Equity
Shares Amount     
Three Months Ended June 30, 2018            
Balances, April 1, 201829,661
 $433,305
 282,038
 (3,588) 3,588
 (9,693) 705,650
              
Net income    22,730
       22,730
Cash dividends declared ($0.10 per common share)    (2,968)       (2,968)
Change in Rabbi Trust Obligation      374
 (374)   —
Stock option exercises17
 216
         216
Stock withheld for payment of taxes(4) —
         —
Stock-based compensation29
 596
         596
Other comprehensive income (loss)          (1,502) (1,502)
              
Balances, June 30, 201829,703
 $434,117
 301,800
 (3,214) 3,214
 (11,195) 724,722
              
              
Three Months Ended June 30, 2019            
Balances, April 1, 201929,746
 434,948
 360,455
 (3,245) 3,245
 (7,264) 788,139
              
Net income  

 23,859
 

 

 

 23,859
Cash dividends declared ($0.12 per common share)  

 (3,566) 

 

 

 (3,566)
Change in Rabbi Trust Obligation  

 

 379
 (379) 

 —
Equity issued related to acquisition earn-out78
 3,070
         3,070
Stock repurchases(182) (6,524)         (6,524)
Stock option exercises9
 129
         129
Stock-based compensation65
 910
         910
Other comprehensive income (loss)          9,152
 9,152
              
Balances, June 30, 201929,717
 $432,533
 380,748
 (2,866) 2,866
 1,888
 815,169

See accompanying notes to unaudited consolidated financial statements.

















Page 7
Index

First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity (continued)
($ in thousands, except per share - unaudited)Common Stock Retained
Earnings		 Stock in
Rabbi
Trust
Assumed
in
Acquisition		 Rabbi
Trust
Obligation		 Accumulated
Other
Comprehensive
Income
(Loss)		 Total
Shareholders’
Equity
Shares Amount     
Six Months Ended June 30, 2018            
Balances, January 1, 201829,639
 $432,794
 264,331
 (3,581) 3,581
 (4,146) 692,979
              
Net income    43,403
       43,403
Cash dividends declared ($0.20 per common share)    (5,934)       (5,934)
Change in Rabbi Trust Obligation      367
 (367)   —
Stock option exercises25
 324
         324
Stock withheld for payment of taxes(4) —
         —
Stock-based compensation43
 999
         999
Other comprehensive income (loss)          (7,049) (7,049)
              
June 30, 201829,703
 $434,117
 301,800
 (3,214) 3,214
 (11,195) 724,722
              
              
Six Months Ended June 30, 2019            
Balances, January 1, 201929,725
 434,453
 341,738
 (3,235) 3,235
 (11,961) 764,230
              
Net income  

 46,144
 

 

 

 46,144
Cash dividends declared ($0.24 per common share)  

 (7,134) 

 

 

 (7,134)
Change in Rabbi Trust Obligation  

 

 369
 (369) 

 —
Equity issued related to acquisition earnout78
 3,070
         3,070
Stock repurchases(182) (6,524)         (6,524)
Stock option exercises9
 129
         129
Stock withheld for payment of taxes(2) (91)         (91)
Stock-based compensation89
 1,496
         1,496
Other comprehensive income (loss)          13,849
 13,849
              
Balances, June 30, 201929,717
 $432,533
 380,748
 (2,866) 2,866
 1,888
 815,169
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)2019 2018
Cash Flows From Operating Activities   
Net income$46,144
 43,403
Reconciliation of net income  to net cash provided by operating activities:   
Provision (reversal) for loan losses192
 (4,369)
Net security premium amortization1,104
 1,476
Loan discount accretion(3,149) (4,407)
Other purchase accounting accretion and amortization, net(18) (125)
Foreclosed property (gains) losses and write-downs, net626
 387
Other losses (gains)226
 (912)
Increase in net deferred loan costs(485) (955)
Depreciation of premises and equipment2,886
 2,859
Amortization of operating lease right-of-use assets911
 —
Repayments of lease obligations(1,198) —
Stock-based compensation expense1,202
 827
Amortization of intangible assets2,574
 3,066
Amortization of SBA servicing assets621
 351
Fees/gains from sale of presold mortgages and SBA loans(6,533) (8,055)
Origination of presold mortgage loans in process of settlement(53,390) (70,056)
Proceeds from sales of presold mortgage loans in process of settlement52,878
 74,729
Origination of SBA loans for sale(91,323) (110,116)
Proceeds from sales of SBA loans73,313
 88,811
(Increase) decrease in accrued interest receivable(905) 164
Decrease (increase) in other assets80
 (14,988)
Increase in accrued interest payable282
 416
Decrease in other liabilities(1,382) (7,504)
Net cash provided (used) by operating activities24,656
 (4,998)
    
Cash Flows From Investing Activities   
Purchases of securities available for sale(256,609) (18,850)
Proceeds from maturities/issuer calls of securities available for sale82,952
 17,835
Proceeds from maturities/issuer calls of securities held to maturity21,725
 9,679
Redemptions (purchases) of FRB and FHLB stock, net4,207
 (6,099)
Net increase in loans(67,139) (73,471)
Proceeds from sales of foreclosed properties3,262
 4,619
Purchases of premises and equipment(1,968) (1,959)
Proceeds from sales of premises and equipment240
 2,579
Net cash used by investing activities(213,330) (65,667)
    
Cash Flows From Financing Activities   
Net increase in deposits183,823
 146,882
Net decrease in borrowings(105,559) (558)
Cash dividends paid – common stock(6,542) (5,338)
Repurchases of common stock(6,524) —
Proceeds from stock option exercises129
 324
Stock withheld for payment of taxes(91) —
Net cash provided by financing activities65,236
 141,310
    
(Decrease) increase in cash and cash equivalents(123,438) 70,645
Cash and cash equivalents, beginning of period462,898
 489,490
    
Cash and cash equivalents, end of period$339,460
 560,135
    
Supplemental Disclosures of Cash Flow Information:   
Cash paid (received) during the period for:   
Interest$16,705
 9,641
Income taxes13,196
 10,190
Non-cash transactions:   
Unrealized gain (loss) on securities available for sale, net of taxes13,510
 (7,128)
Foreclosed loans transferred to other real estate1,555
 1,913
Initial recognition of operating lease right-of-use assets19,459
 —
Initial recognition of operating lease liabilities19,459
 —
See accompanying notes to consolidated financial statements.



Page 4 

9

Index


First Bancorp and Subsidiaries

Consolidated Statements of Income

($ in thousands, except share data-unaudited) Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2018  2017  2018  2017 
INTEREST INCOME                
Interest and fees on loans $52,407   41,549   154,028   114,908 
Interest on investment securities:                
     Taxable interest income  2,501   1,649   7,552   4,914 
     Tax-exempt interest income  367   399   1,115   1,269 
Other, principally overnight investments  2,944   1,414   7,320   3,215 
     Total interest income  58,219   45,011   170,015   124,306 
                 
INTEREST EXPENSE                
Savings, checking and money market accounts  1,334   685   3,445   1,892 
Time deposits of $100,000 or more  2,302   1,053   5,627   2,641 
Other time deposits  270   172   740   511 
Borrowings  2,468   1,462   6,619   3,411 
     Total interest expense  6,374   3,372   16,431   8,455 
                 
Net interest income  51,845   41,639   153,584   115,851 
Provision (reversal) for loan losses  87   —   (4,282)  723 
Net interest income after provision for loan losses  51,758   41,639   157,866   115,128 
                 
NONINTEREST INCOME                
Service charges on deposit accounts  3,221   2,945   9,606   8,525 
Other service charges, commissions and fees  5,146   3,468   14,656   10,195 
Fees from presold mortgage loans  576   1,842   2,231   4,121 
Commissions from sales of insurance and financial products  2,425   1,426   6,484   3,304 
SBA consulting fees  1,287   864   3,554   3,174 
SBA loan sale gains  2,373   1,692   8,773   3,241 
Bank-owned life insurance income  641   579   1,892   1,667 
Foreclosed property gains (losses), net  (192)  (216)  (579)  (439)
Securities gains (losses), net  —   —   —   (235)
Other gains (losses), net  (101)  (238)  811   493 
     Total noninterest income  15,376   12,362   47,428   34,046 
                 
NONINTEREST EXPENSES                
Salaries expense  18,771   16,550   56,615   46,799 
Employee benefits expense  4,061   3,606   12,752   11,402 
   Total personnel expense  22,832   20,156   69,367   58,201 
Occupancy expense  2,742   2,439   8,087   6,981 
Equipment related expenses  1,438   1,070   3,931   3,277 
Merger and acquisition expenses  167   1,329   3,568   4,824 
Intangibles amortization expense  1,656   902   5,073   2,509 
Other operating expenses  10,403   8,488   31,683   25,748 
     Total noninterest expenses  39,238   34,384   121,709   101,540 
                 
Income before income taxes  27,896   19,617   83,585   47,634 
Income tax expense  5,905   6,531   18,191   15,839 
                 
Net income available to common shareholders $21,991   13,086   65,394   31,795 
                 
Earnings per common share:                
     Basic $0.74   0.53   2.21   1.34 
     Diluted  0.74   0.53   2.21   1.33 
                 
Dividends declared per common share $0.10   0.08   0.30   0.24 
                 
Weighted average common shares outstanding:                
     Basic  29,530,203   24,607,516   29,536,273   23,728,262 
     Diluted  29,621,130   24,695,295   29,639,126   23,827,011 

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
($ in thousands-unaudited) 2018  2017  2018  2017 
             
Net income $21,991   13,086   65,394   31,795 
Other comprehensive income (loss):                
   Unrealized gains (losses) on securities available for sale:                
Unrealized holding gains (losses) arising during the period, pretax  (927)  186   (10,229)  3,288 
      Tax (expense) benefit  216   (69)  2,390   (1,213)
Reclassification to realized (gains) losses  —   —   —   235 
      Tax expense (benefit)  —   —   —   (87)
Postretirement Plans:                
Amortization of unrecognized net actuarial (gain) loss  (87)  53   16   158 
       Tax expense (benefit)  20   (20)  (4)  (56)
Other comprehensive income (loss)  (778)  150   (7,827)  2,325 
 Comprehensive income $21,213   13,236   57,567   34,120 
                 

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In thousands, except per share -
unaudited)		 Common Stock  Retained  Stock in 
 Rabbi
Trust
Assumed
in
Acquisi-		  Rabbi
Trust		  Accumulated
Other
Compre-
hensive
Income		  Total
Share-
holders’		 
  Shares  Amount  Earnings  tion  Obligation  (Loss)  Equity 
                      
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 acquisition  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 
                             
                             
Balances, January 1, 2018  29,639  $432,794   264,331   (3,581)  3,581   (4,146)  692,979 
                             
Net income          65,394               65,394 
Cash dividends declared ($0.30 per common share)          (8,903)              (8,903)
Payment of deferred fees              357   (357)      — 
Stock option exercises  25   324                   324 
Stock withheld for payment of taxes  (7)  (264)                  (264)
Stock-based compensation  72   1,373                   1,373 
Other comprehensive income (loss)                      (7,827)  (7,827)
                             
Balances, September 30, 2018  29,729  $434,227   320,822   (3,224)  3,224   (11,973)  743,076 

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

  Nine Months Ended
September 30,		 
($ in thousands-unaudited) 2018  2017 
Cash Flows From Operating Activities        
Net income $65,394   31,795 
Reconciliation of net income to net cash (used) provided by operating activities:        
     Provision (reversal) for loan losses  (4,282)  723 
     Net security premium amortization  2,184   2,165 
     Loan discount accretion  (5,982)  (5,073)
     Purchase accounting accretion and amortization, net  (165)  (142)
     Foreclosed property (gains) losses and write-downs, net  579   439 
     Loss (gain) on securities available for sale  —   235 
     Other losses (gains)  (811)  (493)
     Decrease (increase) in net deferred loan fees  (1,475)  388 
     Depreciation of premises and equipment  4,420   4,023 
     Stock-based compensation expense  1,201   860 
     Amortization of intangible assets  5,073   2,509 
     Fees/gains from sale of presold mortgages and SBA loans  (11,004)  (7,362)
     Origination of presold mortgages in process of settlement  (97,081)  (169,021)
     Proceeds from sales of presold mortgages in process of settlement  105,506   165,341 
     Origination of SBA loans for sale  (162,782)  (54,714)
     Proceeds from sales of SBA loans  130,460   44,259 
     Increase in accrued interest receivable  (888)  (642)
     Increase in other assets  (893)  (13,112)
     Increase in accrued interest payable  681   340 
     Decrease in other liabilities  (6,448)  (12,377)
          Net cash provided (used) by operating activities  23,687   (9,859)
         
Cash Flows From Investing Activities        
     Purchases of securities available for sale  (48,975)  (35,034)
     Purchases of securities held to maturity  —   (291)
     Proceeds from maturities/issuer calls of securities available for sale  27,609   29,156 
     Proceeds from maturities/issuer calls of securities held to maturity  12,841   18,021 
     Proceeds from sales of securities available for sale  —   45,601 
     Purchases of Federal Reserve and Federal Home Loan Bank stock, net  (6,129)  (10,372)
     Net increase in loans  (103,091)  (206,948)
     Proceeds from sales of foreclosed real estate  6,829   6,468 
     Purchases of premises and equipment  (6,656)  (3,040)
     Proceeds from sales of premises and equipment  2,739   114 
     Net cash received in acquisition  —   48,636 
          Net cash used by investing activities  (114,833)  (107,689)
         
Cash Flows From Financing Activities        
     Net increase in deposits  121,719   118,752 
     Net increase (decrease) in borrowings  (1,086)  106,980 
     Cash dividends paid – common stock  (8,308)  (5,617)
     Proceeds from stock option exercises  324   287 
     Stock withheld for payment of taxes  (264)  — 
          Net cash provided by financing activities  112,385   220,402 
         
Increase in cash and cash equivalents  21,239   102,854 
Cash and cash equivalents, beginning of period  489,490   305,993 
         
Cash and cash equivalents, end of period $510,729   408,847 
         
Supplemental Disclosures of Cash Flow Information:        
Cash paid during the period for:        
     Interest $15,750   8,115 
     Income taxes  17,333   15,275 
Non-cash transactions:        
     Unrealized gain (loss) on securities available for sale, net of taxes  (7,839)  2,223 
     Foreclosed loans transferred to other real estate  2,159   3,897 

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)
(unaudited)For the Periods Ended SeptemberJune 30, 20182019 and 20172018 

Note 1 - Basis of Presentation

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of SeptemberJune 30, 20182019 and 20172018 and the consolidated results of operations and consolidated cash flows for the periods ended SeptemberJune 30, 20182019 and 2017.2018. All such adjustments were of a normal, recurring nature. Reference is made to the 20172018 Annual Report on Form 10-K filed with the SECSecurities and Exchange Commission (“SEC”) for a discussion of accounting policies and other relevant information with respect to the financial statements. The results of operations for the periods ended SeptemberJune 30, 20182019 and 20172018 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.

Note 2 – Accounting Policies

Note 1 to the 20172018 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and a discussion of recent accounting pronouncements. The following paragraphs update that information as necessary.

Accounting Standards Adopted in 2018

2019

In May 2014,February 2016, 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. The Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues were not affected. The guidance was effective for the Company on January 1, 2018 and the Company adopted the guidance using the modified retrospective method. The adoption did not have a material effect on the Company’s financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This update is intended to improve the recognition and measurement of financial instruments and it requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. The guidance also provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes and requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The amendments were effective for the Company on January 1, 2018 and the adoption of the guidance did not have a material effect on its financial statements.

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 were effective for the Company on January 1, 2018 and did not 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 were effective for the Company on January 1, 2018 and did not have a material effect on its financial statements.

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In February 2018, the FASB issued guidance related to the Income Statement – Reporting Comprehensive Income topic of the Accounting Standards Codification, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017. The guidance will be effective for all annual and interim periods beginning January 1, 2019, with early adoption permitted. The Company chose to early adopt the new standard for the year ending December 31, 2017, as allowed under the new standard, and reclassified $0.7 million between Accumulated Other Comprehensive Income and Retained Earnings.

Accounting Standards Pending Adoption

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 provisionsnew standard was adopted by the Company on January 1, 2019. The guidance provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption.  The Company elected to apply the guidance as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. Adoption of the guidance resulted in the recognition of lease liabilities and the recognition of right-of-use assets totaling $19.4 million as of the date of adoption. Lease liabilities and right-of-use assets are reflected in other liabilities and premises and equipment, respectively. The initial balance sheet gross-up upon adoption was related to operating leases of certain real estate properties. The Company has no finance leases or material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. Adoption of this guidance aredid not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 13 – Leases for additional disclosures related to leases.

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 were effective for reporting periods beginning after December 15, 2018; earlythe Company on January 1, 2019 and adoption is permitted. The Company doesdid not expect these amendments to have a material effect on its financial statements.

In June 2018, the FASB amended the Compensation—Stock Compensation Topic of the Accounting Standards Codification. The amendments expand the scope of this Topic to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments were effective for the Company on January 1, 2019 and the adoption did not have a material effect on its financial statements.
Accounting Standards Pending Adoption
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


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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 guidance 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 doesdid not expect to elect that option. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. Also, in May 2019, the FASB issued additional guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of the CECL model, but the Company does not expect to elect this option. The Company is continuingcontinues its implementation efforts throughongoing analysis on the impact of this guidance on its consolidated financial statements. In that regard, a cross-functional team,working group has been formed, under the direction of the Company's Chief Financial Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. Implementation efforts continue with model development, ongoing system requirements evaluation and the identification of data and resource needs, among other things. The Company has also engaged a third-party vendor solution to assist in the application of thisthe new guidance. The Company’s preliminary evaluation indicatesCompany has provided core data to the provisionsvendor and continues to validate and enhance the data. The Company is currently running models under both the current methodology and the CECL methodology. While the Company is currently unable to reasonably estimate the impact of adopting the guidance, the Company expects the adoption of this new guidance are expected to impact the Company’s Consolidated Financial Statements, in particular the level of thesignificantly increase its allowance for loan losses. The Companyimpact of adoption is continuingexpected to evaluatebe significantly influenced by the extentcomposition, characteristics and quality of the potential impact.

Company's loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

In January 2017, the FASB 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 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 June 2018, the FASB amended the Compensation—Stock Compensation Topic of the Accounting Standards Codification. The amendments expand the scope of this Topic to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of the Revenue from Contracts with Customers Topic. The Company does not expect these amendments to have a material effect on its financial statements.

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In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement,Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this guidance and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2018, the FASB amended the Compensation - Retirement Benefits – Defined Benefit Plans Topic of the Accounting Standards Codification to improve disclosure requirements for employers that sponsor defined benefit pension and other postretirement plans. The guidance removes disclosures that are no longer considered cost-beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2018,March 2019, the FASB amendedissued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the Intangibles - Goodwillfair value of underlying assets under the leases standard and Other Topic ofclarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the Accounting Standards Codification to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.new standard. The amendments will be effective for the Company for fiscal yearsreporting periods beginning after December 15, 2019. 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.





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Note 3 – Reclassifications

Certain amounts reported in the period ended SeptemberJune 30, 20172018 have been reclassified to conform to the presentation for SeptemberJune 30, 2018.2019. 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 4 – Acquisitions

Since January 1, 2017, the Company completed the acquisitions described below. The results of each acquired company are included in the Company’s results beginning on its respective acquisition date.

(1)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-charted 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 complemented the Company’s expansion into several of these high-growth markets and increased 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 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 $114.5 million 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 was able to 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 $65.1 million in goodwill that resulted from this transaction is non-deductible for tax purposes.

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($ 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)  (444) (p)  12,636 
   Total  619,660   (2,199)  (706)  616,755 
                 
Net identifiable assets acquired              74,685 
                 
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       $65,072 
                 

Explanation of Fair Value Adjustments

(a)This adjustment was recorded to a short-term investment to its estimated fair value.
(b)This fair value adjustment was recorded to adjust the securities portfolio to its estimated fair value.
(c)This fair value adjustment represents the amount necessary to reduce performing loans to their fair value due to interest rate factors and credit factors. Assuming the loans continue to perform, this amount will be amortized to increase interest income over the remaining lives of the related loans.
(d)This fair value adjustment was recorded to write-down purchased credit impaired loans assumed in the acquisition to their estimated fair market value.
(e)This fair value adjustment reduced the allowance for loan losses to zero as required by relevant accounting guidance.
(f)This adjustment represents the amount necessary to increase premises and equipment from its book value on the date of acquisition to its estimated fair market value.
(g)This fair value adjustment represents the value of the core deposit base assumed in the acquisition based on a study performed by an independent consulting firm. This amount was recorded by the Company as an identifiable intangible asset and will be amortized as expense on an accelerated basis over seven years.
(h)This fair value adjustment primarily represents the net deferred tax liability associated with the other fair value adjustments made to record the transaction.
(i)This fair value adjustment was recorded because the weighted average interest rate of Carolina Bank’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition. This amount is being amortized to reduce interest expense on an accelerated basis over the deposits’ remaining five year life.
(j)This fair value adjustment was primarily recorded because the interest rate of Carolina Bank’s trust preferred securities was less than the current interest rate on similar instruments. This amount is being 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.

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(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 adjustments to decrease the initial fair value of the foreclosed real estate acquired in the transaction based on newly obtained valuations.
(o)This fair value adjustment relates to miscellaneous adjustments to decrease the initial fair value of borrowings.
(p)This fair value adjustment relates to a change in the estimate of a contingent liability.

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

($ in thousands, except share data) Pro Forma Combined
Nine Months Ended
September 30, 2017		 
Net interest income $119,899 
Noninterest income  35,236 
Total revenue  155,135 
     
Net income available to common shareholders  35,176 
     
Earnings per common share    
     Basic $1.43 
     Diluted  1.43 

The above pro forma results for the nine months ended September 30, 2017 include merger-related expenses and charges recorded by Carolina Bank prior to the acquisition that are nonrecurring in nature and amounted to $4.6 million pretax, or $3.1 million after-tax ($0.12 per basic and diluted share).

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

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 Company’s 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, 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 acquisition, 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.

(3)On October 1, 2017, the Company completed the acquisition of ASB Bancorp, Inc. (“Asheville Savings Bank”), headquartered in Asheville, North Carolina, pursuant to an Agreement and Plan of Merger and Reorganization dated May 1, 2017. The results of Asheville Savings Bank are included in First Bancorp’s results beginning on the October 1, 2017 acquisition date.

ASB Bancorp, Inc. was the parent company of Asheville Savings Bank, a North Carolina state-chartered savings bank with eight bank branches located in Buncombe County, North Carolina and five bank branches located in the counties of Henderson, Madison, McDowell and Transylvania, all in North Carolina. The acquisition complemented the Company’s existing presence in the Asheville and surrounding markets, which are high-growth and highly desired markets. The Company was willing to record goodwill primarily due to the reasons just noted, as well as the positive earnings of Asheville Savings Bank. The total merger consideration consisted of $17.9 million in cash and 4,920,061 shares of the Company’s common stock, with each share of Asheville Savings Bank common stock being exchanged for either $41.90 in cash or 1.44 shares of the Company’s stock, subject to the total consideration being 90% stock / 10% cash. The issuance of common stock was valued at $169.3 million and was based on the Company’s closing stock price on September 30, 2017 of $34.41 per share.

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This acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Asheville Savings Bank were recorded based on estimates of fair values as of October 1, 2017. The Company may change its valuations of acquired Asheville Savings 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 Asheville Savings Bank on October 1, 2017, and the related fair value adjustments recorded by the Company to reflect the acquisition. The $88.2 million in goodwill that resulted from this acquisition is non-deductible for tax purposes.

 

($ in thousands)

 

 As Recorded by
Asheville Savings
Bank		  Initial Fair
Value
Adjustments		  Measurement
Period
Adjustments		  As
Recorded by
First Bancorp		 
Assets                
Cash and cash equivalents $41,824   —   —   41,824 
Securities  95,020   —   —   95,020 
Loans, gross  617,159   (9,631) (a)  —   606,180 
       (1,348) (b)  —     
Allowance for loan losses  (6,685)  6,685  (c)  —   — 
Presold mortgages  3,785   —   —   3,785 
Premises and equipment  10,697   9,857  (d)  —   20,554 
Core deposit intangible  —   9,760  (e)  120  (i)  9,880 
Other  35,944   (5,851) (f)  (777) (j)  29,316 
   Total  797,744   9,472   (657)  806,559 
                 
Liabilities                
Deposits $678,707   430  (g)  —   679,137 
Borrowings  20,000   —   —   20,000 
Other  8,943   298  (h)  (822) (k)  8,419 
   Total  707,650   728   (822)  707,556 
                 
Net identifiable assets acquired              99,003 
                 
Total cost of acquisition                
   Value of stock issued     $169,299         
   Cash paid in the acquisition      17,939         
       Total cost of acquisition              187,238 
                 
Goodwill recorded related to acquisition of Asheville Savings Bank     $88,235 

Explanation of Fair Value Adjustments

(a)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.
(b)This fair value adjustment was recorded to write-down purchased credit impaired loans assumed in the acquisition to their estimated fair market value.
(c)This fair value adjustment reduced the allowance for loan losses to zero as required by relevant accounting guidance.
(d)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.
(e)This fair value adjustment represents the value of the core deposit base assumed in the acquisition based on a study performed by an independent consulting firm. This amount was recorded by the Company as an identifiable intangible asset and is being amortized as expense on an accelerated basis over seven years.
(f)This fair value adjustment primarily represents the net deferred tax liability associated with the other fair value adjustments made to record the transaction.

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(g)This fair value adjustment was recorded because the weighted average interest rate of Asheville Savings Bank’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition. This amount is being amortized to reduce interest expense on an accelerated basis over their remaining five year life.
(h)This fair value adjustment represents miscellaneous adjustments needed to record assets and liabilities at their fair value.
(i)This fair value adjustment relates to a change in the final amount of the core deposit intangible asset from the amount originally estimated.
(j)This fair value adjustment relates to the write-down of a foreclosed property based on an updated appraisal and the related deferred tax asset adjustment.
(k)This fair value adjustment was recorded to adjust the tax liability assumed on the acquisition date based on updated information.

Note 54 – Stock-Based Compensation Plans

The Company recorded total stock-based compensation expense of $374,000$801,000 and $204,000$596,000 for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and $1,201,000$1,202,000 and $860,000$827,000 for the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. OfStock-based compensation expense for the $1,201,000 in expense that was recorded in 2018, approximately $352,000 related to the June 1, 2018 director equity grants, which are classified as “other operating expenses” in the Consolidated Statements of Income. The remaining $849,000 in expenseCompany relates to the employee equity grants discussed belowawards granted to employees and is recorded as “salaries expense.” Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company’s consolidated statement of cash flows. The Company recognized $281,000 and $318,000 of income tax benefits related to stock based compensation expense in its consolidated income statement for the nine months ended Septemberdirectors.
At June 30, 2018 and 2017, respectively.

At September 30, 2018,2019, the Company had twothe following stock-based compensation plans – 1)plans: the First Bancorp 2014 Equity Plan and 2) the First Bancorp 2007 Equity Plan. The Company’s shareholders approved each plan. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of SeptemberJune 30, 2018,2019, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants, and there were 745,104662,551 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 Plan’s participants with those of the Company and its shareholders. The First Bancorp 2014 Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.

Recent equity grantsawards to employees have hadbeen made in the form of shares of restricted stock with service vesting conditions.conditions only. Compensation expense for these grantsawards is recorded over the requisite service periods. No compensation cost is recognized for grants that do not vest andUpon forfeiture, any previously recognized compensation cost is reversed at forfeiture. The Company issues new shares of common stock when optionsreversed. Upon a change in control (as defined in the plans), unless the awards remain outstanding or substitute equivalent awards are exercised.

provided, the awards become immediately vested.

Certain of the Company’s equity grantsawards 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 minimal amounts of forfeitures, and therefore the Company assumes that all awards granted with service conditions only will vest.

As it relates The Company issues new shares of common stock when options are exercised.

In addition to directoremployee equity grants,awards, the Company grantsCompany's practice is to grant common shares, valued at approximately $32,000 to each non-employee director (currently 11 in total) in June of each year. Compensation expense associated with these director grantsawards is recognized on the date of grantaward since there are no vesting conditions. On June 1, 2019, the Company granted 9,030 shares of common stock to non-employee directors (903 shares per director), at a fair market value of $35.41 per share, which was the closing price of the Company's common stock on that date, and resulted in $320,000 in expense. On June 1, 2018, the Company granted 8,393 shares of common stock to non-employee directors (763 shares per director), at a fair market value of $41.93$41.93 per share, which was the closing price of the Company’sCompany's common stock on that date, and which resulted in $352,000 in expense. 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 and which resulted in $320,000 in expense.

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The Company’s senior officers receive their annual bonuses 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 54,529 shares of restricted stock have been granted related to performance in the preceding fiscal years (net of an immaterial amount of forfeitures). Total compensation expense associated with thosedirector grants was $1.4 million and is being recognized over the respective vesting periods. For the three months ended September 30, 2018 and 2017, total compensation expense related to these grants was $73,000 and $66,000, respectively, and for the nine months ended September 30, 2018 and 2017, total compensation expense was $220,000 and $216,000, respectively. The Company expects to record $73,000 in compensation expense during the remaining quarter of 2018.

In the last three years, the Compensation Committee also granted 135,189 shares of stock to various employees of the Company to promote retention (net of an immaterial amount of forfeitures). The total value associated with these grants amounted to $3.9 million, which is being recordedclassified as an expense over their three year vesting periods. For the three months ended September 30, 2018 and 2017, total compensation expense related to these grants was $301,000 and $138,000, respectively, and for the nine months ended September 30, 2018 and 2017, total compensation expense was $629,000 and $324,000, respectively. The Company expects to record $305,000 in compensation expense during the remaining quarter of 2018. 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 the first nine months of 2018 related to the Company’s outstanding restricted stock grants:

  Long-Term Restricted Stock 
  Number of Units  Weighted-Average
Grant-Date Fair Value		 
       
Nonvested at January 1, 2018  103,063  $24.08 
         
Granted during the period  66,060   40.04 
Vested during the period  (16,533)  17.31 
Forfeited or expired during the period  (2,977)  25.21 
         
Nonvested at September 30, 2018  149,613  $31.85 

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. Upon a change in control (as defined"other operating expense" in the plans), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.

At September 30, 2018, there were 9,000 stock options outstanding related to the Company’s two equity-based plans, all with an exercise priceConsolidated Statements of $14.35.

Income.

The following table presents information regarding the activity for the first ninesix months of 2018 under2019 related to the Company’s outstanding restricted stock:


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  Long-Term Restricted Stock
 Number of Units 
Weighted-Average
Grant-Date Fair Value
Nonvested at January 1, 2019 129,251
 $32.39
Granted during the period 82,411
 36.37
Vested during the period (8,844) 26.97
Forfeited or expired during the period (954) 41.93
     
Nonvested at June 30, 2019 201,864
 $34.21

Total unrecognized compensation expense as of June 30, 2019 amounted to $4,154,000 with a weighted-average remaining term of 2.4 years. The Company expects to record $2,006,000 in compensation expense in the next twelve months, $1,062,000 of which will be recorded in the remaining quarters of 2019.
Prior to 2010, stock options outstanding:

  Options Outstanding 
  Number of
Shares		  Weighted-
Average
Exercise
Price		  Weighted-
Average
Contractual
Term (years)		  Aggregate
Intrinsic
Value		 
             
Balance at January 1, 2018  38,689  $16.09         
                 
   Granted  —   —         
   Exercised  (29,689)  16.61      $659,743 
   Forfeited  —   —         
   Expired  —   —         
                 
Outstanding at September 30, 2018  9,000  $14.35   0.7  $235,440 
                 
Exercisable at September 30, 2018  9,000  $14.35   0.7  $235,440 

were the primary form of stock-based compensation utilized by the Company. At June 30, 2019, there were no stock options outstanding. The following table presents information regarding the activity for the first six months of 2019 related to the Company’s outstanding stock options:

  Options Outstanding
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic
Value
Balance at January 1, 2019 9,000
 $14.35
    
         
Granted —
 —
    
Exercised (9,000) 14.35
    
Forfeited —
 —
    
Expired —
 —
    
         
Outstanding at June 30, 2019 —
 $—
 0 $—
         
Exercisable at June 30, 2019 —
 $—
 0 $—

During the three and nine months ended SeptemberJune 30, 2019 and 2018, the Company received $0$129,000 and $216,000, respectively, as a result of stock option exercises. During the six months ended June 30, 2019 and 2018, the Company received $129,000 and $324,000, respectively, as a result of stock option exercises. 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.

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Note 65 – Earnings Per Common Share

Basic Earnings Per Common Share is calculated by dividing net income, availableless income allocated to common shareholdersparticipating securities, by the weighted average number of common shares outstanding during the period, excluding unvested shares of restricted stock. For the Company, participating securities include unvested shares of restricted stock. Diluted Earnings Per Common Share is computed by assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period. For the periods presented, the Company’s potentially dilutive common stock issuances related to unvested shares of restricted stock and stock option grants under the Company’s equity-based plans.

plans, as well as contingently issuable shares.

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

As it relates to contingently issuable shares, the number of shares that are included in the calculation of



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

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, 
  2018  2017 

 

($ 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 $21,991   29,530,203  $0.74  $13,086   24,607,516  $0.53 
                         
Effect of Dilutive Securities  —   90,927       —   87,779     
                         
Diluted EPS per common share $21,991   29,621,130  $0.74  $13,086   24,695,295  $0.53 


  For the Nine Months Ended September 30, 
  2018  2017 

 

($ 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 $65,394   29,536,273  $2.21  $31,795   23,728,262  $1.34 
                         
Effect of Dilutive Securities  —   102,853       —   98,749     
                         
Diluted EPS per common share $65,394   29,639,126  $2.21  $31,795   23,827,011  $1.33 

  For the Three Months Ended June 30,
  2019 2018
($ in thousands except per
share amounts)
 Per Share
Amount		 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
Basic EPS:            
Net income $23,859
     $22,730
    
Less: income allocated to participating securities (114)     —
    
Basic EPS per common share $23,745
 29,626,931
 $0.80
 $22,730
 29,544,747
 $0.77
             
Diluted EPS:            
Net income $23,859
 29,626,931
   $22,730
 29,544,747
  
Effect of Dilutive Securities —
 170,010
   —
 87,991
  
Diluted EPS per common share $23,859
 29,796,941
 $0.80
 $22,730
 29,632,738
 $0.77

  For the Six Months Ended June 30,
  2019 2018
($ in thousands except per
share amounts)
 Per Share
Amount		 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
Basic EPS:            
Net income $46,144
     $43,403
    
Less: income allocated to participating securities (227)     —
    
Basic EPS per common share $45,917
 29,607,074
 $1.55
 $43,403
 29,539,308
 $1.47
             
Diluted EPS:            
Net income $46,144
 29,607,074
   $43,403
 29,539,308
  
Effect of Dilutive Securities —
 201,785
   —
 91,514
  
Diluted EPS per common share $46,144
 29,808,859
 $1.55
 $43,403
 29,630,822
 $1.46

For both the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, there were no options that were antidilutive.

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Note 76 – Securities

The book values and approximate fair values of investment securities at SeptemberJune 30, 20182019 and December 31, 20172018 are summarized as follows:

  September 30, 2018  December 31, 2017 
  Amortized  Fair  Unrealized  Amortized  Fair  Unrealized 
($ in thousands) Cost  Value  Gains  (Losses)  Cost  Value  Gains  (Losses) 
                         
Securities available for sale:                                
  Government-sponsored enterprise securities $44,000   43,422   —   (578)  14,000   13,867   —   (133)
  Mortgage-backed securities  287,746   276,474   42   (11,314)  297,690   295,213   246   (2,722)
  Corporate bonds  33,761   33,172   1   (591)  33,792   34,190   512   (114)
Total available for sale $365,507   353,068   43   (12,483)  345,482   343,270   758   (2,969)
                                 
Securities held to maturity:                                
  Mortgage-backed securities $54,512   52,560   —   (1,952)  63,829   63,092   —   (737)
  State and local governments  50,307   50,800   584   (91)  54,674   55,906   1,280   (48)
Total held to maturity $104,819   103,360   584   (2,043)  118,503   118,998   1,280   (785)



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($ in thousands)June 30, 2019 December 31, 2018
Amortized
Cost
 
Fair
Value
 Unrealized 
Amortized
Cost
 
Fair
Value
 Unrealized
  Gains (Losses)   Gains (Losses)
Securities available for sale:               
Government-sponsored enterprise securities$59,202
 59,477
 313
 (38) 82,995
 82,662
 63
 (396)
Mortgage-backed securities593,824
 598,024
 7,088
 (2,888) 396,995
 385,551
 39
 (11,483)
Corporate bonds33,731
 34,470
 869
 (130) 33,751
 33,138
 76
 (689)
Total available for sale$686,757
 691,971
 8,270
 (3,056) 513,741
 501,351
 178
 (12,568)
                
Securities held to maturity:               
Mortgage-backed securities$46,447
 45,998
 —
 (449) 52,048
 50,241
 —
 (1,807)
State and local governments32,603
 33,046
 444
 (1) 49,189
 49,665
 525
 (49)
Total held to maturity$79,050
 79,044
 444
 (450) 101,237
 99,906
 525
 (1,856)

All of the Company’s mortgage-backed securities including commercial mortgage-backed obligations, were issued by government-sponsored corporations, except for two private mortgage-backed securities with a fair value of $1.0 million as of SeptemberJune 30, 2019 and December 31, 2018.

The following table presents information regarding securities with unrealized losses at SeptemberJune 30, 2018:

($ 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 $9,687   313   8,735   265   18,422   578 
  Mortgage-backed securities  211,002   8,222   115,439   5,044   326,441   13,266 
  Corporate bonds  31,235   521   930   70   32,165   591 
  State and local governments  10,357   91   —   —   10,357   91 
      Total temporarily impaired securities $262,281   9,147   125,104   5,379   387,385   14,526 

2019:

($ in thousands)
Securities in an Unrealized
Loss Position for
Less than 12 Months
 
Securities in an Unrealized
Loss Position for
More than 12 Months
 Total
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
Government-sponsored enterprise securities$—
 —
 13,962
 38
 13,962
 38
Mortgage-backed securities—
 —
 276,614
 3,337
 276,614
 3,337
Corporate bonds—
 —
 870
 130
 870
 130
State and local governments—
 —
 946
 1
 946
 1
Total temporarily impaired securities$—
 —
 292,392
 3,506
 292,392
 3,506
The following table presents information regarding securities with unrealized losses at December 31, 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 $10,897   103   2,970   30   13,867   133 
  Mortgage-backed securities  192,702   1,582   125,060   1,877   317,762   3,459 
  Corporate bonds  2,500   49   935   65   3,435   114 
  State and local governments  7,928   48   —   —   7,928   48 
      Total temporarily impaired securities $214,027   1,782   128,965   1,972   342,992   3,754 
                         

2018:

($ in thousands)
Securities in an Unrealized
Loss Position for
Less than 12 Months
 
Securities in an Unrealized
Loss Position for
More than 12 Months
 Total
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
Government-sponsored enterprise securities$4,921
 78
 13,682
 318
 18,603
 396
Mortgage-backed securities82,525
 351
 294,305
 12,939
 376,830
 13,290
Corporate bonds20,704
 433
 5,817
 256
 26,521
 689
State and local governments595
 1
 6,641
 48
 7,236
 49
Total temporarily impaired securities$108,745
 863
 320,445
 13,561
 429,190
 14,424

In the above tables, all of the securities that were in an unrealized loss position at SeptemberJune 30, 20182019 and December 31, 20172018 were bonds that the Company has determined wereare in a loss position due primarily to interest rate factors and not credit quality concerns. The Company evaluated the collectability of each of these bonds and concluded that there was no other-than-temporary impairment. The Company does not intend to sell these securities, and it is


Page 15
Index

more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.

Page 18 

Index

The book values and approximate fair values of investment securities at SeptemberJune 30, 2018,2019, 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 
             
Securities                
Due within one year $—   —   3,240   3,254 
Due after one year but within five years  70,218   69,160   28,532   28,838 
Due after five years but within ten years  2,543   2,523   16,790   16,978 
Due after ten years  5,000   4,911   1,745   1,730 
Mortgage-backed securities  287,746   276,474   54,512   52,560 
Total securities $365,507   353,068   104,819   103,360 

 Securities Available for Sale Securities Held to Maturity
($ in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Securities       
Due within one year$—
 —
 1,165
 1,169
Due after one year but within five years77,691
 78,421
 22,463
 22,813
Due after five years but within ten years10,242
 10,473
 8,110
 8,165
Due after ten years5,000
 5,053
 865
 899
Mortgage-backed securities593,824
 598,024
 46,447
 45,998
Total securities$686,757
 691,971
 79,050
 79,044

At SeptemberJune 30, 20182019 and December 31, 2017,2018 investment securities with carrying values of $225,467,000$303,878,000 and $176,813,000,$234,382,000, respectively, were pledged as collateral for public deposits.

In the first nine months of 2017, the Company received proceeds from sales of securities of $45,601,000 and recorded losses of $235,000 from the sales. There were no securities sales in the first nine months of 2018.

Included in “other assets” in the consolidated balance sheetsConsolidated Balance Sheets are cost methodcost-method investments in Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank of Richmond (“FRB”) stock totaling $33,260,000 and $37,468,000 and $31,338,000 at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. The FHLB stock had a cost of $15,789,000 and fair value of $20,036,000 and $19,647,000 at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, and serves as part of the collateral for the Company’s line of credit with the FHLB and is also a requirement for membership in the FHLB system. The FRB stock had a cost of $17,471,000 and fair value of $17,432,000 and $11,691,000 at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, and is a requirement for FRB member bank qualification. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end.

The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain litigation against Visa. 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, 2019 was approximately 1.63, which means the Company would receive approximately 20,140 Class A shares if the stock had converted on that date. This stock does not have a readily determinable fair value and is therefore carried at its cost basis of zero. If a readily determinable fair value becomes available for the Class B shares, or upon the conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a credit to earnings.













Page 19 

16
Index

Index


Note 87 – Loans and Asset Quality Information

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 being recognized as an adjustment to yield over the remaining life of each loan.

The following table relates to Carolina Bank 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 

On October 1, 2017, the Company acquired Asheville Savings Bank (see Note 4 for more information). As a result of this acquisition, the Company recorded loans with a fair value of $606.2 million. Of those loans, $9.9 million were considered to be PCI loans. The remaining loans were considered to be purchased non-impaired loans and their related fair value discount or premium is being recognized as an adjustment to yield over the remaining life of each loan.

The following table relates to acquired Asheville Savings Bank 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) Asheville Savings Bank
Acquisition on
October 1, 2017		 
Contractually required payments $13,424 
Nonaccretable difference  (1,734)
Cash flows expected to be collected at acquisition  11,690 
Accretable yield  (1,804)
Fair value of PCI loans at acquisition date $9,886 

The following table relates to acquired Asheville Savings 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)

 

 Asheville Savings Bank
Acquisition on
October 1, 2017		 
Contractually required payments $727,706 
Fair value of acquired loans at acquisition date  595,167 
Contractual cash flows not expected to be collected  7,000 

Page 20 

Index

The following is a summary of the major categories of total loans outstanding:

($ in thousands) September 30, 2018  December 31, 2017  September 30, 2017 
  Amount  Percentage  Amount  Percentage  Amount  Percentage 
All  loans:                        
                         
Commercial, financial, and agricultural $435,730   10%  $381,130   10%  $376,940   11% 
Real estate – construction, land development & other land loans  559,450   13%   539,020   13%   450,746   13% 
Real estate – mortgage – residential (1-4 family) first mortgages  1,038,436   25%   972,772   24%   796,222   23% 
Real estate – mortgage – home equity loans / lines of credit  362,829   9%   379,978   9%   315,322   10% 
Real estate – mortgage – commercial and other  1,723,598   41%   1,696,107   42%   1,431,934   41% 
Installment loans to individuals  70,096   2%   74,348   2%   59,028   2% 
    Subtotal  4,190,139   100%   4,043,355   100%   3,430,192   100% 
Unamortized net deferred loan costs (fees)  489       (986)      (437)    
    Total loans $4,190,628      $4,042,369      $3,429,755     

($ in thousands)June 30, 2019 December 31, 2018 June 30, 2018
 Amount Percentage Amount Percentage Amount Percentage
All  loans:           
            
Commercial, financial, and agricultural$471,188
 11% $457,037
 11% $417,366
 10%
Real estate – construction, land development & other land loans456,781
 10% 518,976
 12% 600,031
 14%
Real estate – mortgage – residential (1-4 family) first mortgages1,090,601
 25% 1,054,176
 25% 1,000,189
 24%
Real estate – mortgage – home equity loans / lines of credit349,355
 8% 359,162
 8% 369,875
 9%
Real estate – mortgage – commercial and other1,900,188
 44% 1,787,022
 42% 1,690,175
 41%
Installment loans to individuals69,600
 2% 71,392
 2% 71,823
 2%
Subtotal4,337,713
 100% 4,247,765
 100% 4,149,459
 100%
Unamortized net deferred loan costs (fees)1,784
   1,299
   (69)  
Total loans$4,339,497
   $4,249,064
   $4,149,390
  

Included in the table above are the following amounts of SBA loans:
($ in thousands)June 30,
2019		 December 31,
2018		 June 30,
2018
Guaranteed portions of SBA Loans included in table above$43,157

53,205

20,466
Unguaranteed portions of SBA Loans included in table above106,154

97,572

98,013
Total SBA loans included in the table above$149,311

150,777

118,479
 







Sold portions of SBA loans with servicing retained - not included in table above$288,914

230,424

171,462

At June 30, 2019 and December 31, 2018, there was a remaining unaccreted discount on the retained portion of sold SBA loans amounting to $6.9 million and $5.7 million, respectively. As of June 30, 2019 and December 31, 2018, there was a remaining accretable discount of $13.0 million and $15.0 million, respectively, related to purchased non-impaired loans. Both types of discounts are amortized as yield adjustments over the respective lives of the loans, so long as the loans perform.
The following table presents changes in the carrying valuerecorded investment of PCIpurchased credit impaired (“PCI”) loans.

($ in thousands)

 

 

 

Purchased Credit Impaired Loans

 For the Nine
Months Ended
September 30,
2018		  For the Year
Ended
December 31,
2017		 
Balance at beginning of period $23,165   514 
Additions due to acquisition of Carolina Bank  —   19,254 
Additions due to acquisition of Asheville Savings Bank  —   9,886 
Change due to payments received and accretion  (2,994)  (6,016)
Change due to loan charge-offs  (10)  (12)
Transfers to foreclosed real estate  —   (69)
Other  28   (392)
Balance at end of period $20,189   23,165 

PCI loansFor the Six Months Ended June 30,
2019		 For the Year Ended December 31,
2018
Balance at beginning of period$17,393
 23,165
Change due to payments received and accretion(3,273) (5,799)
Change due to loan charge-offs(11) (10)
Transfers to foreclosed real estate—
 (4)
Other66
 41
Balance at end of period$14,175
 17,393
The following table presents changes in the accretable yield for PCI loans.

($ in thousands)

 

 

 

Accretable Yield for PCI loans

 For the Nine
Months Ended
September 30,
2018		  For the Year
Ended
December 31,
2017		 
Balance at beginning of period $4,688   — 
Additions due to acquisition of Carolina Bank  —   3,617 
Additions due to acquisition of Asheville Savings Bank  —   1,804 
Accretion  (1,169)  (1,846)
Reclassification from (to) nonaccretable difference  712   423 
Other, net  831   690 
Balance at end of period $5,062   4,688 



Page 17
Index

Accretable Yield for PCI loansFor the Six Months Ended June 30,
2019		 For the Year Ended December 31,
2018
Balance at beginning of period$4,750
 4,688
Accretion(811) (2,050)
Reclassification from (to) nonaccretable difference502
 849
Other, net(89) 1,263
Balance at end of period$4,352
 4,750


During the first ninesix months of 2018,2019, the Company received $225,000$290,000 in payments that exceeded the carrying amount of the related PCI loans, of which $184,000$263,000 was recognized as loan discount accretion income and $27,000 was recorded as additional loan interest income. During the first six months of 2018, the Company received $190,000 in payments that exceeded the carrying amount of the related PCI loans, of which $149,000 was recognized as loan discount accretion income and $41,000 was recorded as additional loan interest income. 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.

Page 21 

Index

Nonperforming assets are defined as nonaccrual loans, troubled debt restructured (“TDR”) loans, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows.

($ in thousands) September 30,
2018		  December 31,
2017		  September 30,
2017		 
          
Nonperforming assets            
Nonaccrual loans $18,267   20,968   23,350 
Restructured loans - accruing  16,657   19,834   20,330 
Accruing loans > 90 days past due  —   —   — 
     Total nonperforming loans  34,924   40,802   43,680 
Foreclosed real estate  6,140   12,571   9,356 
Total nonperforming assets $41,064   53,373   53,036 
             
       Purchased credit impaired loans not included above (1) $20,189   23,165   15,034 

($ in thousands)June 30,
2019
December 31,
2018
June 30,
2018
Nonperforming assets 

 

 
Nonaccrual loans$17,375

22,575

25,494
TDRs- accruing11,890

13,418

17,386
Accruing loans > 90 days past due—

—

—
Total nonperforming loans29,265

35,993

42,880
Foreclosed real estate5,107

7,440

8,296
Total nonperforming assets$34,372

43,433

51,176









Purchased credit impaired loans not included above (1)$14,175

17,393

20,832









(1) In the March 3, 2017 acquisition of Carolina Bank, and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.6 million, $0.6 million, and $0.4$0.5 million in PCI loans at SeptemberJune 30, 2018,2019, December 31, 2017,2018, and SeptemberJune 30, 2017,2018, respectively, that were contractually past due 90 days or more.

At SeptemberJune 30, 20182019 and December 31, 2017,2018, the Company had $1.4$1.3 million and $0.8$0.7 million in residential mortgage loans in process of foreclosure, respectively.

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

($ in thousands) September 30,
2018		  December 31,
2017		 
Commercial, financial, and agricultural $2,092   1,001 
Real estate – construction, land development & other land loans  651   1,822 
Real estate – mortgage – residential (1-4 family) first mortgages  8,807   12,201 
Real estate – mortgage – home equity loans / lines of credit  1,419   2,524 
Real estate – mortgage – commercial and other  5,178   3,345 
Installment loans to individuals  120   75 
  Total $18,267   20,968 
         

($ in thousands)June 30,
2019		 December 31,
2018
Commercial, financial, and agricultural$1,490
 919
Real estate – construction, land development & other land loans1,420
 2,265
Real estate – mortgage – residential (1-4 family) first mortgages8,697
 10,115
Real estate – mortgage – home equity loans / lines of credit1,404
 1,685
Real estate – mortgage – commercial and other4,260
 7,452
Installment loans to individuals104
 139
Total$17,375
 22,575



Page 18
Index

The following table presents an analysis of the payment status of the Company’s loans as of SeptemberJune 30, 2018.

($ 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 $2,302   278   —   2,092   430,794   435,466 
Real estate – construction, land development & other land loans  1,948   738   —   651   555,588   558,925 
Real estate – mortgage – residential (1-4 family) first mortgages  6,160   398   —   8,807   1,016,896   1,032,261 
Real estate – mortgage – home equity loans / lines of credit  1,056   270   —   1,419   359,739   362,484 
Real estate – mortgage – commercial and other  3,196   573   —   5,178   1,702,063   1,711,010 
Installment loans to individuals  360   139   —   120   69,185   69,804 
Purchased credit impaired  132   304   627   —   19,126   20,189 
  Total $15,154   2,700   627   18,267   4,153,391   4,190,139 
Unamortized net deferred loan costs                      489 
           Total loans                     $4,190,628 

Page 22 

2019.

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, financial, and agricultural$3,716
 606
 —
 1,490
 465,112
 470,924
Real estate – construction, land development & other land loans299
 —
 —
 1,420
 454,890
 456,609
Real estate – mortgage – residential (1-4 family) first mortgages4,821
 101
 —
 8,697
 1,071,040
 1,084,659
Real estate – mortgage – home equity loans / lines of credit856
 620
 —
 1,404
 346,265
 349,145
Real estate – mortgage – commercial and other1,007
 2,514
 —
 4,260
 1,884,964
 1,892,745
Installment loans to individuals354
 77
 —
 104
 68,921
 69,456
Purchased credit impaired167
 174
 622
 —
 13,212
 14,175
Total$11,220
 4,092
 622
 17,375
 4,304,404
 4,337,713
Unamortized net deferred loan costs          1,784
Total loans          $4,339,497
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 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 $89   151   —   1,001   379,241   380,482 
Real estate – construction, land development & other land loans  1,154   214   —   1,822   535,423   538,613 
Real estate – mortgage – residential (1-4 family) first mortgages  6,777   1,370   —   12,201   943,565   963,913 
Real estate – mortgage – home equity loans / lines of credit  1,347   10   —   2,524   375,814   379,695 
Real estate – mortgage – commercial and other  1,270   451   —   3,345   1,678,529   1,683,595 
Installment loans to individuals  445   95   —   75   73,277   73,892 
Purchased credit impaired  821   77   601   —   21,666   23,165 
  Total $11,903   2,368   601   20,968   4,007,515   4,043,355 
Unamortized net deferred loan fees                      (986)
           Total loans                     $4,042,369 

2018.

($ 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$191
 5
 —
 919
 455,691
 456,806
Real estate – construction, land development & other land loans849
 212
 —
 2,265
 515,472
 518,798
Real estate – mortgage – residential (1-4 family) first mortgages14,178
 1,369
 —
 10,115
 1,022,262
 1,047,924
Real estate – mortgage – home equity loans / lines of credit1,048
 254
 —
 1,685
 355,831
 358,818
Real estate – mortgage – commercial and other709
 520
 —
 7,452
 1,768,205
 1,776,886
Installment loans to individuals359
 220
 —
 139
 70,422
 71,140
Purchased credit impaired990
 138
 583
 —
 15,682
 17,393
Total$18,324
 2,718
 583
 22,575
 4,203,565
 4,247,765
Unamortized net deferred loan costs          1,299
Total loans          $4,249,064



Page 23 

19
Index

Index


The following table presents the activity in the allowance for loan losses for all loans for the three and ninesix months ended SeptemberJune 30, 2018.

 

($ 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, 2018
Beginning balance $2,268   2,692   7,059   2,250   7,295   897   837   23,298 
Charge-offs  (933)  (126)  (1,183)  (192)  (1,086)  (232)  —   (3,752)
Recoveries  159   181   155   51   209   158   —   913 
Provisions  1,221   (366)  (664)  (330)  753   79   (606)  87 
Ending balance $2,715   2,381   5,367   1,779   7,171   902   231   20,546 
                                 
As of and for the nine months ended September 30, 2018
                                 
Beginning balance $3,111   2,816   6,147   1,827   6,475   950   1,972   23,298 
Charge-offs  (1,542)  (158)  (1,598)  (378)  (1,398)  (494)  —   (5,568)
Recoveries  971   3,568   671   294   1,333   261   —   7,098 
Provisions  175   (3,845)  147   36   761   185   (1,741)  (4,282)
Ending balance $2,715   2,381   5,367   1,779   7,171   902   231   20,546 
                                 
Ending balances as of September 30, 2018: Allowance for loan losses
Individually evaluated for impairment $126   —   1,004   —   502   —   —   1,632 
Collectively evaluated for impairment $2,585   2,335   4,306   1,765   6,662   887   231   18,771 
Purchased credit impaired $4   46   57   14   7   15   —   143 
                                 
Loans receivable as of September 30, 2018:
Ending balance – total $435,730   559,450   1,038,436   362,829   1,723,598   70,096   —   4,190,139 
Unamortized net deferred loan costs                              489 
Total loans                             $4,190,628 
                                 
Ending balances as of September 30, 2018: Loans
Individually evaluated for impairment $1,981   2,642   12,617   22   10,490   —   —   27,752 
Collectively evaluated for impairment $433,485   556,283   1,019,645   362,462   1,700,519   69,804   —   4,142,198 
Purchased credit impaired $264   525   6,174   345   12,589   292   —   20,189 

2019.

($ in thousands)Commercial,
Financial,
and
Agricultural		 Real Estate
–
Construction,
Land
Development
& Other Land
Loans		 Real Estate
–
Residential
(1-4 Family)
First
Mortgages		 Real Estate
– Mortgage
– Home
Equity
Lines of
Credit		 Real Estate
– Mortgage
–
Commercial
and Other		 Installment
Loans to
Individuals		 Unallocated Total
As of and for the three months ended June 30, 2019
                
Beginning balance$3,709
 2,284
 4,510
 1,374
 8,120
 1,006
 92
 21,095
Charge-offs(690) (29) (155) (66) (2) (155) —
 (1,097)
Recoveries191
 202
 222
 327
 103
 54
 —
 1,099
Provisions8
 (642) (454) (364) 631
 306
 207
 (308)
Ending balance$3,218
 1,815
 4,123
 1,271
 8,852
 1,211
 299
 20,789
                
As of and for the six months ended June 30, 2019
                
Beginning balance$2,889
 2,243
 5,197
 1,665
 7,983
 952
 110
 21,039
Charge-offs(936) (293) (185) (146) (838) (436) —
 (2,834)
Recoveries605
 489
 382
 455
 374
 87
 —
 2,392
Provisions660
 (624) (1,271) (703) 1,333
 608
 189
 192
Ending balance$3,218
 1,815
 4,123
 1,271
 8,852
 1,211
 299
 20,789
                
Ending balance as of June 30, 2019: Allowance for loan losses
Individually evaluated for impairment$435
 44
 770
 —
 783
 —
 —
 2,032
Collectively evaluated for impairment$2,776
 1,771
 3,289
 1,271
 8,013
 1,195
 299
 18,614
Purchased credit impaired$7
 —
 64
 —
 56
 16
 —
 143
                
Loans receivable as of June 30, 2019
Ending balance – total$471,188
 456,781
 1,090,601
 349,355
 1,900,188
 69,600
 —
 4,337,713
Unamortized net deferred loan costs              1,784
Total loans              $4,339,497
                
Ending balances as of June 30, 2019: Loans
Individually evaluated for impairment$992
 1,020
 10,334
 21
 7,451
 —
 —
 19,818
Collectively evaluated for impairment$469,932
 455,589
 1,074,325
 349,124
 1,885,294
 69,456
 —
 4,303,720
Purchased credit impaired$264
 172
 5,942
 210
 7,443
 144
 —
 14,175


Page 24 

20
Index
Index

The following table presents the activity in the allowance for loan losses for the year ended December 31, 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 year ended December 31, 2017
Beginning balance $3,829   2,691   7,704   2,420   5,098   1,145   894   23,781 
Charge-offs  (1,622)  (589)  (2,641)  (978)  (1,182)  (799)  —   (7,811)
Recoveries  1,311   2,579   1,076   333   1,027   279   —   6,605 
Provisions  (407)  (1,865)  8   52   1,532   325   1,078   723 
Ending balance $3,111   2,816   6,147   1,827   6,475   950   1,972   23,298 
                                 
Ending balances as of December 31, 2017:  Allowance for loan losses
Individually evaluated for impairment $215   18   1,099   —   232   —   —   1,564 
Collectively evaluated for impairment $2,896   2,798   4,831   1,788   6,226   950   1,972   21,461 
Purchased credit impaired $—   —   217   39   17   —   —   273 
                                 
Loans receivable as of December 31, 2017:
Ending balance – total $381,130   539,020   972,772   379,978   1,696,107   74,348   —   4,043,355 
Unamortized net deferred loan fees                              (986)
Total loans                             $4,042,369 
                                 
Ending balances as of December 31, 2017: Loans
Individually evaluated for impairment $579   2,975   14,800   368   8,493   —   —   27,215 
Collectively evaluated for impairment $379,903   535,638   949,113   379,327   1,675,102   73,892   —   3,992,975 
Purchased credit impaired $648   407   8,859   283   12,512   456   —   23,165 

2018.

($ 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
 Unallocated Total
As of and for the year ended December 31, 2018
                
Beginning balance$3,111
 2,816
 6,147
 1,827
 6,475
 950
 1,972
 23,298
Charge-offs(2,128) (158) (1,734) (711) (1,459) (781) —
 (6,971)
Recoveries1,195
 4,097
 833
 364
 1,503
 309
 —
 8,301
Provisions711
 (4,512) (49) 185
 1,464
 474
 (1,862) (3,589)
Ending balance$2,889
 2,243
 5,197
 1,665
 7,983
 952
 110
 21,039
                
Ending balances as of December 31, 2018: Allowance for loan losses
Individually evaluated for impairment$226
 134
 955
 48
 906
 —
 —
 2,269
Collectively evaluated for impairment$2,661
 2,109
 4,143
 1,608
 7,070
 941
 110
 18,642
Purchased credit impaired$2
 —
 99
 9
 7
 11
 —
 128
                
Loans receivable as of December 31, 2018:
Ending balance – total$457,037
 518,976
 1,054,176
 359,162
 1,787,022
 71,392
 —
 4,247,765
Unamortized net deferred loan costs              1,299
Total loans              $4,249,064
                
Ending balances as of December 31, 2018: Loans
Individually evaluated for impairment$696
 1,345
 12,391
 296
 9,525
 —
 —
 24,253
Collectively evaluated for impairment$456,111
 517,453
 1,035,532
 358,522
 1,767,361
 71,140
 —
 4,206,119
Purchased credit impaired$230
 178
 6,253
 344
 10,136
 252
 —
 17,393


Page 25 

21
Index
Index

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

 

($ in thousands)

 Commercial,
Financial,
and
Agricultural		  Real Estate
–
Construction,
Land
Development
& Other Land
Loans		  Real Estate
–
Residential
(1-4 Family)
First
Mortgages		  Real Estate
– Mortgage
– Home
Equity
Lines of
Credit		  Real Estate
– Mortgage
–
Commercial
and Other		  Installment
Loans to
Individuals		  Unallo
-cated		  Total 
                
As of and for the three months ended September 30, 2017
Beginning balance $3,430   2,676   7,085   2,057   6,153   1,074   1,550   24,025 
Charge-offs  (131)  (43)  (499)  (213)  (159)  (162)  —   (1,207)
Recoveries  330   809   170   120   275   71   —   1,775 
Provisions  (314)  (973)  (281)  (49)  (271)  45   1,843   — 
Ending balance $3,315   2,469   6,475   1,915   5,998   1,028   3,393   24,593 
                                 
As of and for the nine months ended September 30, 2017
                                 
Beginning balance $3,829   2,691   7,704   2,420   5,098   1,145   894   23,781 
Charge-offs  (1,335)  (312)  (1,746)  (791)  (573)  (521)  —   (5,278)
Recoveries  848   2,280   806   250   973   210   —   5,367 
Provisions  (27)  (2,190)  (289)  36   500   194   2,499   723 
Ending balance $3,315   2,469   6,475   1,915   5,998   1,028   3,393   24,593 
                                 
Ending balances as of September 30, 2017:  Allowance for loan losses
Individually evaluated for impairment $144   23   929   —   487   —   —   1,583 
Collectively evaluated for impairment $3,171   2,446   5,546   1,915   5,511   1,028   3,393   23,010 
Purchased credit impaired $—   —   —   —   —   —   —   — 
                                 
Loans receivable as of September 30, 2017:
Ending balance – total $376,940   450,746   796,222   315,322   1,431,934   59,028   —   3,430,192 
Unamortized net deferred loan fees                              (437)
Total loans                             $3,429,755 
                                 
Ending balances as of September 30, 2017: Loans
Individually evaluated for impairment $490   3,072   14,987   52   9,443   —   —   28,044 
Collectively evaluated for impairment $376,195   446,798   777,925   314,559   1,412,666   58,971   —   3,387,114 
Purchased credit impaired $255   876   3,310   711   9,825   57   —   15,034 

2018.

($ 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		 Unallocated Total
As of and for the three months ended June 30, 2018
                
Beginning balance$2,536
 2,317
 5,892
 2,266
 5,991
 844
 3,452
 23,298
Charge-offs(370) (30) (172) (10) (271) (144) —
 (997)
Recoveries313
 341
 371
 90
 542
 50
 —
 1,707
Provisions(211) 64
 968
 (96) 1,033
 147
 (2,615) (710)
Ending balance$2,268
 2,692
 7,059
 2,250
 7,295
 897
 837
 23,298
                
As of and for the six months ended June 30, 2018
                
Beginning balance$3,111
 2,816
 6,147
 1,827
 6,475
 950
 1,972
 23,298
Charge-offs(609) (32) (415) (186) (312) (262) —
 (1,816)
Recoveries812
 3,387
 516
 243
 1,124
 103
 —
 6,185
Provisions(1,046) (3,479) 811
 366
 8
 106
 (1,135) (4,369)
Ending balance$2,268
 2,692
 7,059
 2,250
 7,295
 897
 837
 23,298
                
Ending balances as of June 30, 2018: Allowance for loan losses
Individually evaluated for impairment$277
 302
 2,756
 415
 1,231
 6
 —
 4,987
Collectively evaluated for impairment$1,991
 2,390
 4,133
 1,794
 6,052
 891
 837
 18,088
Purchased credit impaired$—
 —
 170
 41
 12
 —
 —
 223
                
Loans receivable as of June 30, 2018
Ending balance – total$417,366
 600,031
 1,000,189
 369,875
 1,690,175
 71,823
 —
 4,149,459
Unamortized net deferred loan fees              (69)
Total loans              4,149,390
                
Ending balances as of June 30, 2018: Loans
Individually evaluated for impairment$3,208
 3,549
 15,247
 671
 10,333
 10
 —
 33,018
Collectively evaluated for impairment$413,889
 596,157
 977,549
 368,831
 1,667,700
 71,483
 —
 4,095,609
Purchased credit impaired$269
 325
 7,393
 373
 12,142
 330
 —
 20,832



Page 26 

22
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Index

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of SeptemberJune 30, 2018.

 

($ in thousands)

 Recorded
Investment		  Unpaid
Principal
Balance		  Related
Allowance		  Average
Recorded
Investment		 
Impaired loans with no related allowance recorded:                
                 
Commercial, financial, and agricultural $1,693   2,117   —   1,119 
Real estate – mortgage – construction, land development & other land loans  2,642   2,956   —   2,836 
Real estate – mortgage – residential (1-4 family) first mortgages  4,740   5,072   —   4,849 
Real estate – mortgage –home equity loans / lines of credit  22   32   —   109 
Real estate – mortgage –commercial and other  4,550   5,016   —   3,718 
Installment loans to individuals  —   —   —   — 
Total impaired loans with no allowance $13,647   15,193   —   12,631 
                 
                 
Impaired loans with an allowance recorded:                
                 
Commercial, financial, and agricultural $288   289   126   431 
Real estate – mortgage – construction, land development & other land loans  —   —   —   266 
Real estate – mortgage – residential (1-4 family) first mortgages  7,877   8,017   1,004   9,263 
Real estate – mortgage –home equity loans / lines of credit  —   —   —   162 
Real estate – mortgage –commercial and other  5,940   6,233   502   5,877 
Installment loans to individuals  —   —   —   2 
Total impaired loans with allowance $14,105   14,539   1,632   16,001 
                 

2019.

($ in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
Impaired loans with no related allowance recorded:       
        
Commercial, financial, and agricultural$—
 —
 —
 113
Real estate – mortgage – construction, land development & other land loans439
 766
 —
 461
Real estate – mortgage – residential (1-4 family) first mortgages4,645
 4,972
 —
 4,687
Real estate – mortgage –home equity loans / lines of credit21
 30
 —
 21
Real estate – mortgage –commercial and other3,287
 4,276
 —
 3,593
Installment loans to individuals—
 —
 —
 —
Total impaired loans with no allowance$8,392
 10,044
 —
 8,875
        
Impaired loans with an allowance recorded:       
        
Commercial, financial, and agricultural$992
 1,323
 435
 798
Real estate – mortgage – construction, land development & other land loans581
 581
 44
 593
Real estate – mortgage – residential (1-4 family) first mortgages5,689
 5,881
 770
 6,519
Real estate – mortgage –home equity loans / lines of credit—
 —
 —
 91
Real estate – mortgage –commercial and other4,164
 4,763
 783
 4,865
Installment loans to individuals—
 —
 —
 —
Total impaired loans with allowance$11,426
 12,548
 2,032
 12,866
Interest income recorded on impaired loans during the ninesix months ended SeptemberJune 30, 20182019 was insignificant.



Page 23
Index

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, 2017.

 

($ in thousands)

 Recorded
Investment		  Unpaid
Principal
Balance		  Related
Allowance		  Average
Recorded
Investment		 
Impaired loans with no related allowance recorded:                
                 
Commercial, financial, and agricultural $183   425   —   276 
Real estate – mortgage – construction, land development & other land loans  2,743   3,941   —   2,846 
Real estate – mortgage – residential (1-4 family) first mortgages  5,205   5,728   —   7,067 
Real estate – mortgage –home equity loans / lines of credit  368   387   —   129 
Real estate – mortgage –commercial and other  3,066   3,321   —   3,143 
Installment loans to individuals  —   —   —   — 
Total impaired loans with no allowance $11,565   13,802   —   13,461 
                 
                 
Impaired loans with an allowance recorded:                
                 
Commercial, financial, and agricultural $396   396   215   214 
Real estate – mortgage – construction, land development & other land loans  232   241   18   503 
Real estate – mortgage – residential (1-4 family) first mortgages  9,595   9,829   1,099   10,077 
Real estate – mortgage –home equity loans / lines of credit  —   —   —   66 
Real estate – mortgage –commercial and other  5,427   5,427   232   5,369 
Installment loans to individuals  —   —   —   — 
Total impaired loans with allowance $15,650   15,893   1,564   16,229 

2018.

($ in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
Impaired loans with no related allowance recorded:       
        
Commercial, financial, and agricultural$310
 310
 —
 957
Real estate – mortgage – construction, land development & other land loans485
 803
 —
 2,366
Real estate – mortgage – residential (1-4 family) first mortgages4,626
 4,948
 —
 4,804
Real estate – mortgage –home equity loans / lines of credit22
 31
 —
 91
Real estate – mortgage –commercial and other3,475
 4,237
 —
 3,670
Installment loans to individuals—
 —
 —
 —
Total impaired loans with no allowance$8,918
 10,329
 —
 11,888
        
Impaired loans with an allowance recorded:       
        
Commercial, financial, and agricultural$386
 387
 226
 422
Real estate – mortgage – construction, land development & other land loans860
 864
 134
 385
Real estate – mortgage – residential (1-4 family) first mortgages7,765
 7,904
 955
 8,963
Real estate – mortgage –home equity loans / lines of credit274
 275
 48
 184
Real estate – mortgage –commercial and other6,050
 6,054
 906
 5,911
Installment loans to individuals—
 —
 —
 2
Total impaired loans with allowance$15,335
 15,484
 2,269
 15,867

Interest income recorded on impaired loans during the year ended December 31, 20172018 was insignificant.

Page 27 

Index

The Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.



Page 24
Index

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

 Risk GradeDescription
Pass: 
 1Loans with virtually no risk, including cash secured loans.
 2Loans with documented significant overall financial strength.  These loans have minimum chance of loss due to the presence of multiple sources of repayment – each clearly sufficient to satisfy the obligation.
 3Loans with documented satisfactory overall financial strength.  These loans have a low loss potential due to presence of at least two clearly identified sources of repayment – each of which is sufficient to satisfy the obligation under the present circumstances.
 4Loans to borrowers with acceptable financial condition.  These loans could have signs of minor operational weaknesses, lack of adequate financial information, or loans supported by collateral with questionable value or marketability.  
 5Loans that represent above average risk due to minor weaknesses and warrant closer scrutiny by management.  Collateral is generally required and felt to provide reasonable coverage with realizable liquidation values in normal circumstances.  Repayment performance is satisfactory.
 

P

(Pass)

Consumer loans (<$500,000) that are of satisfactory credit quality with borrowers who exhibit good personal credit history, average personal financial strength and moderate debt levels.  These loans generally conform to Bank policy, but may include approved mitigated exceptions to the guidelines.  
Special Mention: 
 6Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank.
Classified: 
 7An existing loan inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged, if any.  These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
 8Loans that have a well-defined weakness that make the collection or liquidation in full highly questionable and improbable.  Loss appears imminent, but the exact amount and timing is uncertain.
 9Loans that are considered uncollectible and are in the process of being charged-off.  This grade is a temporary grade assigned for administrative purposes until the charge-off is completed.
 

F

(Fail)

Consumer loans (<$500,000) with a well-defined weakness, such as exceptions of any kind with no mitigating factors, history of paying outside the terms of the note, insufficient income to support the current level of debt, etc.

Page 28 

Index

The following table presents the Company’s recorded investment in loans by credit quality indicators as of SeptemberJune 30, 2018.

($ in thousands)   
  Pass  Special
Mention Loans		  Classified
Accruing Loans		  Classified
Nonaccrual
Loans		  Total 
                
Commercial, financial, and agricultural $429,721   2,797   856   2,092   435,466 
Real estate – construction, land development & other land loans  547,323   6,331   4,620   651   558,925 
Real estate – mortgage – residential (1-4 family) first mortgages  984,851   13,052   25,551   8,807   1,032,261 
Real estate – mortgage – home equity loans / lines of credit  351,575   1,697   7,793   1,419   362,484 
Real estate – mortgage – commercial and other  1,684,024   15,075   6,733   5,178   1,711,010 
Installment loans to individuals  69,072   212   400   120   69,804 
Purchased credit impaired  9,269   5,306   5,614   —   20,189 
  Total $4,075,835   44,470   51,567   18,267   4,190,139 
Unamortized net deferred loan costs                  489 
            Total loans                  4,190,628 

2019.

($ in thousands)Pass 
Special
Mention Loans
 
Classified
Accruing Loans
 
Classified
Nonaccrual
Loans
 Total
Commercial, financial, and agricultural$460,804
 7,643
 987
 1,490
 470,924
Real estate – construction, land development & other land loans447,686
 4,680
 2,823
 1,420
 456,609
Real estate – mortgage – residential (1-4 family) first mortgages1,040,778
 16,274
 18,910
 8,697
 1,084,659
Real estate – mortgage – home equity loans / lines of credit340,085
 1,361
 6,295
 1,404
 349,145
Real estate – mortgage – commercial and other1,857,389
 20,539
 10,557
 4,260
 1,892,745
Installment loans to individuals68,190
 223
 939
 104
 69,456
Purchased credit impaired8,060
 2,884
 3,231
 —
 14,175
Total$4,222,992
 53,604
 43,742
 17,375
 4,337,713
Unamortized net deferred loan costs        1,784
Total loans        4,339,497


Page 25
Index

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2017.

($ in thousands)   
  Pass  Special
Mention Loans		  Classified
Accruing Loans		  Classified
Nonaccrual
Loans		  Total 
                
Commercial, financial, and agricultural $368,658   9,901   922   1,001   380,482 
Real estate – construction, land development & other land loans  523,642   7,129   6,020   1,822   538,613 
Real estate – mortgage – residential (1-4 family) first mortgages  905,111   16,235   30,366   12,201   963,913 
Real estate – mortgage – home equity loans / lines of credit  365,982   3,784   7,405   2,524   379,695 
Real estate – mortgage – commercial and other  1,647,725   23,335   9,190   3,345   1,683,595 
Installment loans to individuals  73,379   222   216   75   73,892 
Purchased credit impaired  6,541   12,309   4,315   —   23,165 
  Total $3,891,038   72,915   58,434   20,968   4,043,355 
Unamortized net deferred loan fees                  (986)
            Total loans                  4,042,369 

2018.

($ in thousands)Pass 
Special
Mention Loans
 
Classified
Accruing Loans
 
Classified
Nonaccrual
Loans
 Total
Commercial, financial, and agricultural$452,372
 3,056
 459
 919
 456,806
Real estate – construction, land development & other land loans509,251
 5,668
 1,614
 2,265
 518,798
Real estate – mortgage – residential (1-4 family) first mortgages1,004,458
 12,238
 21,113
 10,115
 1,047,924
Real estate – mortgage – home equity loans / lines of credit348,792
 1,688
 6,653
 1,685
 358,818
Real estate – mortgage – commercial and other1,750,810
 14,484
 4,140
 7,452
 1,776,886
Installment loans to individuals70,357
 231
 413
 139
 71,140
Purchased credit impaired8,355
 5,214
 3,824
 —
 17,393
Total$4,144,395
 42,579
 38,216
 22,575
 4,247,765
Unamortized net deferred loan costs        1,299
Total loans        4,249,064

Troubled Debt Restructurings

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

The vast majority of the Company’s troubled debt restructurings modified relatedare due to interest rate reductions combined with restructured amortization schedules. The Company does not generally grant principal forgiveness.

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

Page 29 

Index

The following table presents information related to loans modified in a troubled debt restructuring during the three months ended SeptemberJune 30, 20182019 and 2017.

($ in thousands) For three months ended
September 30, 2018		  For the three months ended
September 30, 2017		 
  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  —  $—  $—   —  $—  $— 
Real estate – construction, land development & other land loans  —   —   —   —   —   — 
Real estate – mortgage – residential (1-4 family) first mortgages  —   —   —   —   —   — 
Real estate – mortgage – home equity loans / lines of credit  —   —   —   —   —   — 
Real estate – mortgage – commercial and other  —   —   —   1   570   570 
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  —   —   —   1   47   47 
Real estate – mortgage – home equity loans / lines of credit  —   —   —   —   —   — 
Real estate – mortgage – commercial and other  —   —   —   —   —   — 
Installment loans to individuals  —   —   —   —   —   — 
Total TDRs arising during period  —  $—  $—   2  $617  $617 

2018.



Page 26
Index

($ in thousands)For the three months ended
June 30, 2019		 For the three months ended
June 30, 2018
 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 agricultural1
 $143
 $143
 —
 $—
 $—
Real estate – construction, land development & other land loans—
 —
 —
 —
 —
 —
Real estate – mortgage – residential (1-4 family) first mortgages—
 —
 —
 1
 18
 18
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 period1
 $143
 $143
 1
 $18
 $18



Page 27
Index

The following table presents information related to loans modified in a troubled debt restructuring during the ninesix months ended SeptemberJune 30, 20182019 and 2017.

($ in thousands) For nine months ended
September 30, 2018		  For the nine months ended
September 30, 2017		 
  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  —  $—  $—   —  $—  $— 
Real estate – construction, land development & other land loans  —   —   —   —   —   — 
Real estate – mortgage – residential (1-4 family) first mortgages  1   18   18   —   —   — 
Real estate – mortgage – home equity loans / lines of credit  —   —   —   —   —   — 
Real estate – mortgage – commercial and other  —   —   —   6   4,120   4,095 
Installment loans to individuals  —   —   —   —   —   — 
                         
TDRs – Nonaccrual                        
Commercial, financial, and agricultural  —   —   —   1   38   25 
Real estate – construction, land development & other land loans  1   61   61   1   32   32 
Real estate – mortgage – residential (1-4 family) first mortgages  2   254   264   2   262   262 
Real estate – mortgage – home equity loans / lines of credit  —   —   —   —   —   — 
Real estate – mortgage – commercial and other  —   —   —   —   —   — 
Installment loans to individuals  —   —   —   —   —   — 
                         
Total TDRs arising during period  4  $333  $343   10  $4,452  $4,414 
                         

2018.

($ in thousands)For the six months ended
June 30, 2019		 For the six months ended
June 30, 2018
 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 agricultural1
 $143
 $143
 —
 $—
 $—
Real estate – construction, land development & other land loans—
 —
 —
 —
 —
 —
Real estate – mortgage – residential (1-4 family) first mortgages1
 55
 55
 1
 18
 18
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—
 —
 —
 1
 61
 61
Real estate – mortgage – residential (1-4 family) first mortgages—
 —
 —
 2
 254
 264
Real estate – mortgage – home equity loans / lines of credit—
 —
 —
 —
 —
 —
Real estate – mortgage – commercial and other—
 —
 —
 —
 —
 —
Installment loans to individuals—
 —
 —
 —
 —
 —
Total TDRs arising during period2
 $198
 $198
 4
 $333
 $343


Page 30 

28
Index
Index

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the ninethree months ended SeptemberJune 30, 20182019 and 20172018 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate.

($ in thousands) For the nine months ended
September 30, 2018		  For the nine months ended
September 30, 2017		 
  Number of
Contracts		  Recorded
Investment		  Number of
Contracts		  Recorded
Investment		 
             
Accruing TDRs that subsequently defaulted                
Real estate – mortgage – residential (1-4 family first mortgages)  1  $60   2   880 
Real estate – mortgage – commercial and other  3   1,333   —   — 
Total accruing TDRs that subsequently defaulted  4  $1,393   2  $880 

There were no accruing

($ in thousands)For the Three Months Ended June 30, 2019 For the Three Months Ended June 30, 2018
 Number of
Contracts		 Recorded
Investment		 Number of
Contracts		 Recorded
Investment
Accruing TDRs that subsequently defaulted       
Real estate – mortgage – residential (1-4 family first mortgages)—
 $—
 1
 $60
Real estate – mortgage – commercial and other—
 —
 2
 763
Total accruing TDRs that subsequently defaulted—
 $—
 3
 $823

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the threesix months ended SeptemberJune 30, 2019 and 2018 or 2017.

are presented in the table below.

Page 31 

($ in thousands)For the Six Months Ended June 30, 2019 For the Six Months Ended June 30, 2018
 Number of
Contracts		 Recorded
Investment		 Number of
Contracts		 Recorded
Investment
Accruing TDRs that subsequently defaulted       
Real estate – mortgage – residential (1-4 family first mortgages)—
 $—
 1
 $60
Real estate – mortgage – commercial and other—
 —
 2
 763
Total accruing TDRs that subsequently defaulted—
 $—
 3
 $823


Index

Note 9 – Deferred Loan (Fees) Costs

The amount of loans shown on the consolidated balance sheets includes net deferred loan (fees) costs of approximately $489,000, ($986,000), and ($437,000) at September 30, 2018, December 31, 2017, and September 30, 2017, respectively.

Note 108 – 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, 2018,2019, December 31, 2017,2018, and SeptemberJune 30, 20172018 and the carrying amount of unamortized intangible assets as of those same dates.

  September 30, 2018  December 31, 2017  September 30, 2017 
($ in thousands) Gross Carrying
Amount		  Accumulated
Amortization		  Gross Carrying
Amount		  Accumulated
Amortization		  Gross Carrying
Amount		  Accumulated
Amortization		 
Amortizable intangible assets:                        
   Customer lists $6,013   1,459   6,013   1,090   6,013   953 
   Core deposit intangibles  28,440   15,300   28,280   11,475   18,520   10,084 
   SBA servicing asset  4,949   761   2,194   207   1,418   112 
   Other  1,303   906   1,303   581   1,303   471 
        Total $40,705   18,426   37,790   13,353   27,254   11,620 
                         
Unamortizable intangible                        
    assets:                        
   Goodwill $232,458       233,070       144,667     

Activity related to transactions during the periods includes the following:

(1)In connection with the Carolina Bank acquisition on March 3, 2017, the Company recorded a net increase of $65,072,000 in goodwill and $8,790,000 in a core deposit intangible.
(2)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.
(3)In connection with the Asheville Savings Bank acquisition on October 1, 2017, the Company recorded a net increase of $88,235,000 in goodwill and $9,880,000 in a core deposit intangible.

In addition to the above acquisition related activity, the

  June 30, 2019 December 31, 2018 June 30, 2018
($ in thousands) 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Amortizable intangible assets:            
Customer lists $6,013
 1,911
 6,013
 1,637
 6,013
 1,185
Core deposit intangibles 28,440
 18,648
 28,440
 16,469
 28,440
 12,803
SBA servicing asset 6,956
 1,674
 5,472
 1,053
 3,348
 319
Other 1,303
 1,078
 1,303
 957
 1,303
 718
Total $42,712
 23,311
 41,228
 20,116
 39,104
 15,025
             
Unamortizable intangible assets:            
Goodwill $234,368
   234,368
   232,458
  

The Company recorded $2,755,000$1,484,000 and $1,003,000$1,972,000 in servicing assets associated with the guaranteed portion of SBA loans originated and sold during the first ninesix months of 20182019 and 2017,2018, respectively. During the first ninesix months of 20182019 and 2017,2018, the Company recorded $555,000$621,000 and $112,000,$351,000, respectively, in related amortization expense. Servicing assets are recorded for loans, or portions thereof, that the Company has sold but continue to service for a fee. Servicing assets are recorded at fair value and amortized over the expected lifelives of the related loans.

loans and are tested for impairment on a quarterly basis. SBA servicing asset amortization expense is recorded within noninterest income to offset SBA servicing fees.



Page 29
Index

Amortization expense of all other intangible assets totaled $1,656,000$1,242,000 and $902,000$1,506,000 for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and $5,073,000$2,574,000 and $2,509,000$3,066,000 for the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively.

The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets forassets. These amounts will be recorded as "Intangibles amortization expense" within the last quarter of calendar year 2018 and for eachnoninterest expense section of the four calendar years ending December 31, 2022 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, 2018 $1,589 
2019  5,570 
2020  4,481 
2021  3,492 
2022  2,411 
Thereafter  4,736 
         Total $22,279 

Additionally, as noted in the table above, the Company has a SBA servicing asset at June 30, 2019 with a remaining book value of $5,282,000. This servicing asset will be amortized over the lives of the related loans, with such amortization expense recorded as a reduction of servicing income within the line item "Other service charges, commissions and fees" of the Consolidated Statements of Income.

Page 32 

($ in thousands) 
Estimated Amortization
Expense
July 1 to December 31, 2019 $2,284
2020 3,841
2021 2,927
2022 2,022
2023 1,041
Thereafter 2,004
Total $14,119

Index

Note 119 – Pension Plans

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

The Company recorded periodic pension cost (income) totaling $136,000$244,000 and ($202,000)$(93,000) for the three months ended SeptemberJune 30, 2019 and 2018, respectively, and 2017,$488,000 and $272,000 for the six months ended June 30, 2019 and 2018, respectively. The following table contains the components of the pension cost (income).

  For the Three Months Ended September 30, 
  2018  2017  2018  2017  2018 Total  2017 Total 
($ in thousands) Pension Plan  Pension Plan  SERP  SERP  Both Plans  Both Plans 
Service cost $—   —   32   29   32   29 
Interest cost  328   361   40   57   368   418 
Expected return on plan assets  (177)  (702)  —   —   (177)  (702)
Amortization of net (gain)/loss  (93)  61   6   (8)  (87)  53 
   Net periodic pension cost (income) $58   (280)  78   78   136   (202)

The Company recorded periodic pension cost (income) totaling $408,000 and ($605,000) for the nine months ended Septembercost.

 For the Three Months Ended June 30,
($ in thousands)2019
Pension Plan
2018
Pension Plan
2019
SERP
2018
SERP
2019 Total
Both Plans
Both Plans		2018 Total
Both Plans
Service cost$—

—

—

33

—

33
Interest cost372

326

41

53

413

379
Expected return on plan assets(397)
(556)
—

—

(397)
(556)
Amortization of net (gain)/loss223

59

5

(8)
228

51
Net periodic pension cost (income)$198

(171)
46

78

244

(93)

 For the Six Months Ended June 30,
($ in thousands)2019
Pension Plan		 2018
Pension Plan		 2019
SERP		 2018
SERP		 2019 Total
Both Plans		 2018 Total
Both Plans
Service cost$—
 —
 —
 62
 —
 62
Interest cost744
 656
 82
 110
 826
 766
Expected return on plan assets(794) (659) —
 —
 (794) (659)
Amortization of net (gain)/loss446
 119
 10
 (16) 456
 103
Net periodic pension cost$396
 116
 92
 156
 488
 272



Page 30 2018 and 2017, respectively. The following table contains the components of the pension cost (income).

  For the Nine Months Ended September 30, 
  2018  2017  2018  2017  2018 Total  2017 Total 
($ in thousands) Pension Plan  Pension Plan  SERP  SERP  Both Plans  Both Plans 
Service cost $—   —   94   88   94   88 
Interest cost  984   1,086   150   170   1,134   1,256 
Expected return on plan assets  (836)  (2,107)  —   —   (836)  (2,107)
Amortization of net (gain)/loss  26   183   (10)  (25)  16   158 
   Net periodic pension cost (income) $174   (838)  234   233   408   (605)

Index

The service cost component of net periodic pension cost (income) is included in salaries and benefits expense and all other components of net periodic pension cost (income) are included in other noninterest expense.

The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants and are intended to be deductible for income tax purposes. The Company did not contribute to the Pension Plan in the first six months of 2019 and does not expect to contribute to the Pension Plan in 2018.

the remainder of 2019.

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 33 

Note 1210 – Comprehensive Income (Loss)

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

($ in thousands)

 

 September 30,
2018		  December 31,
2017		  September 30,
2017		 
Unrealized gain (loss) on securities available for sale $(12,440)  (2,211)  438 
     Deferred tax asset (liability)  2,907   517   (162)
Net unrealized gain (loss) on securities available for sale  (9,533)  (1,694)  276 
             
Additional pension asset (liability)  (3,184)  (3,200)  (4,854)
     Deferred tax asset (liability)  744   748   1,796 
Net additional pension asset (liability)  (2,440)  (2,452)  (3,058)
             
Total accumulated other comprehensive income (loss) $(11,973)  (4,146)  (2,782)

($ in thousands)June 30, 2019 December 31, 2018 June 30, 2018
Unrealized gain (loss) on securities available for sale$5,214
 (12,390) (11,513)
Deferred tax asset (liability)(1,198) 2,896
 2,691
Net unrealized gain (loss) on securities available for sale4,016
 (9,494) (8,822)
      
Additional pension asset (liability)(2,764) (3,220) (3,097)
Deferred tax asset (liability)636
 753
 724
Net additional pension asset (liability)(2,128) (2,467) (2,373)
      
Total accumulated other comprehensive income (loss)$1,888
 (11,961) (11,195)

The following table discloses the changes in accumulated other comprehensive income (loss) for the ninesix months ended SeptemberJune 30, 20182019 (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, 2018 $(1,694)  (2,452)  (4,146)
     Other comprehensive income (loss) before reclassifications  (7,839)  —   (7,839)
     Amounts reclassified from accumulated other comprehensive income  —   12   12 
Net current-period other comprehensive income (loss)  (7,839)  12   (7,827)
             
Ending balance at September 30, 2018 $(9,533)  (2,440)  (11,973)

($ in thousands)
Unrealized Gain
(Loss) on
Securities
Available for Sale
 
Additional
Pension Asset
(Liability)
 Total
Beginning balance at January 1, 2019$(9,494) (2,467) (11,961)
Other comprehensive income (loss) before reclassifications13,510
 —
 13,510
Amounts reclassified from accumulated other comprehensive income—
 339
 339
Net current-period other comprehensive income (loss)13,510
 339
 13,849
      
Ending balance at June 30, 2019$4,016
 (2,128) 1,888
The following table discloses the changes in accumulated other comprehensive income (loss) for the ninesix months ended SeptemberJune 30, 20172018 (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)



Page 31

($ in thousands)
Unrealized Gain
(Loss) on
Securities
Available for Sale
 
Additional
Pension Asset
(Liability)
 Total
Beginning balance at January 1, 2018$(1,694) (2,452) (4,146)
Other comprehensive income (loss) before reclassifications(7,128) —
 (7,128)
Amounts reclassified from accumulated other comprehensive income—
 79
 79
Net current-period other comprehensive income (loss)(7,128) 79
 (7,049)
      
Ending balance at June 30, 2018$(8,822) (2,373) (11,195)

Note 1311 – 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.

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Index

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at SeptemberJune 30, 2018.

($ in thousands)      
Description of Financial Instruments Fair Value at
September
30, 2018		  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 $43,422   —   43,422   — 
        Mortgage-backed securities  276,474   —   276,474   — 
        Corporate bonds  33,172   —   33,172   — 
          Total available for sale securities $353,068   —   353,068   — 
                 
Nonrecurring                
     Impaired loans $13,820   —   —   13,820 
     Foreclosed real estate  6,140   —   —   6,140 

2019.

($ in thousands)
Description of Financial Instruments Fair Value at
June 30, 2019		 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Recurring        
Securities available for sale:        
Government-sponsored enterprise securities $59,477
 —
 59,477
 —
Mortgage-backed securities 598,024
 —
 598,024
 —
Corporate bonds 34,470
 —
 34,470
 —
Total available for sale securities $691,971
 —
 691,971
 —
         
Nonrecurring        
Impaired loans $11,351
 —
 —
 11,351
Foreclosed real estate 2,539
 —
 —
 2,539
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2017.

($ in thousands)      
Description of Financial Instruments Fair Value at
December 31,
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 $13,867   —   13,867   — 
Mortgage-backed securities  295,213   —   295,213   — 
Corporate bonds  34,190   —   34,190   — 
Total available for sale securities $343,270   —   343,270   — 
                 
Nonrecurring                
     Impaired loans $14,086   —   —   14,086 
     Foreclosed real estate  12,571   —   —   12,571 

2018.



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($ in thousands)    
Description of Financial Instruments Fair Value at
December 31, 2018		 
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 $82,662
 —
 82,662
 —
Mortgage-backed securities 385,551
 —
 385,551
 —
Corporate bonds 33,138
 —
 33,138
 —
Total available for sale securities $501,351
 —
 501,351
 —
         
Nonrecurring        
Impaired loans $13,071
 —
 —
 13,071
Foreclosed real estate 7,440
 —
 —
 7,440

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

Securities Available for Sale — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by our third-party bond accounting provider using matrix pricing. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities, collateralized mortgage obligations, government-sponsored enterprise securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. Further, the Company validates the fair values for a sample of securities in the portfolio by comparing the fair values provided by the bond accounting provider to prices from other independent sources for the same or similar securities. The Company analyzes unusual or significant variances and conducts additional research with the portfolio manager, if necessary, and takes appropriate action based on its findings.

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Index

Impaired loans — Fair values for impaired loans in the above table are measured on a non-recurring basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined 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). Any fair value adjustments are recorded in the period incurred as provision for loan 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). At the time of foreclosure, any excess of the loan balance


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over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the Consolidated Statements of Income.

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 2018,2019, the significant unobservable inputs used in the fair value measurements were as follows:

($ in thousands)     
Description Fair Value at
September
30, 2018		  Valuation
Technique		 Significant Unobservable
Inputs		 General Range
of Significant
Unobservable
Input Values
Impaired loans $13,820  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  6,140  Appraised value; List or contract price Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell 0-10%

($ in thousands)      
Description Fair Value at
June 30, 2019		 
Valuation
Technique
 
Significant Unobservable
Inputs
 
Range of Significant
Unobservable
Input Values
Impaired loans $11,351
 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 2,539
 Appraised value; List or contract price Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell 0-10%
         
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2017,2018, the significant unobservable inputs used in the fair value measurements were as follows:

($ in thousands)     
Description Fair Value at
December 31,
2017		  Valuation
Technique		 Significant Unobservable
Inputs		 General Range
of Significant
Unobservable
Input Values
Impaired loans $14,086  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  12,571  Appraised value; List or contract price Discounts to reflect current market conditions and estimated costs to sell 0-10%

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Index
($ in thousands)      
Description Fair Value at
December 31, 2018		 
Valuation
Technique
 
Significant Unobservable
Inputs
 
Range
of Significant
Unobservable
Input Values
Impaired loans $13,071
 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 7,440
 Appraised value; List or contract price Discounts to reflect current market conditions 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 ninesix months ended SeptemberJune 30, 20182019 or 2017.

2018.

For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, the increase (decrease) in the fair value of securities available for sale was ($10,229,000)$17,604,000 and $3,288,000,($9,302,000), respectively, which is included in other comprehensive income (net of tax benefit (expense) of $2,390,000($4,094,000) and ($1,213,000),$2,174,000, respectively). Fair value measurement methods at SeptemberJune 30, 20182019 and 20172018 are consistent with those used in prior reporting periods.

The carrying amounts and estimated fair values of financial instruments at SeptemberJune 30, 20182019 and December 31, 20172018 are as follows:

    September 30, 2018  December 31, 2017 

 

($ 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 $50,209   50,209   114,301   114,301 
Due from banks, interest-bearing Level 1  460,520   460,520   375,189   375,189 
Securities available for sale Level 2  353,068   353,068   343,270   343,270 
Securities held to maturity Level 2  104,819   103,360   118,503   118,998 
Presold mortgages in process of settlement Level 1  6,111   6,111   12,459   12,459 
Total loans, net of allowance Level 3  4,170,082   4,126,000   4,019,071   4,010,551 
Accrued interest receivable Level 1  14,982   14,982   14,094   14,094 
Bank-owned life insurance Level 1  101,055   101,055   99,162   99,162 
                   
Deposits Level 2  4,528,373   4,522,134   4,406,955   4,401,757 
Borrowings Level 2  406,593   398,109   407,543   397,903 
Accrued interest payable Level 2  1,916   1,916   1,235   1,235 

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 determined assuming the sale of the notes to a third-party financial investor. 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 with a liquidity discount offered on loans with similar risk characteristics, and includes the Company’s estimate of future credit losses expected to be incurred over the life of the loan. 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.



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   June 30, 2019 December 31, 2018
($ 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 $52,679
 52,679
 56,050
 56,050
Due from banks, interest-bearingLevel 1 286,781
 286,781
 406,848
 406,848
Securities available for saleLevel 2 691,971
 691,791
 501,351
 501,351
Securities held to maturityLevel 2 79,050
 79,044
 101,237
 99,906
Presold mortgages in process of settlementLevel 1 6,222
 6,222
 4,279
 4,279
Total loans, net of allowanceLevel 3 4,318,708
 4,264,663
 4,228,025
 4,181,139
Accrued interest receivableLevel 1 16,909
 16,909
 16,004
 16,004
Bank-owned life insuranceLevel 1 103,154
 103,154
 101,878
 101,878
SBA Servicing AssetLevel 3 5,284
 5,807
 4,419
 4,617
          
DepositsLevel 2 4,843,054
 4,839,229
 4,659,339
 4,653,522
BorrowingsLevel 2 301,140
 295,309
 406,609
 402,556
Accrued interest payableLevel 2 2,258
 2,258
 1,976
 1,972

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.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Note 1412 – Revenue from Contracts with Customers

All of the Company’s revenues that are withinin the scope of the “Revenue from Contracts with Customers” accounting standard (“ASCTopic 606”) are recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the ninethree and six months ended SeptemberJune 30, 20182019 and 2017.2018. Items outside the scope of ASCTopic 606 are noted as such.

  For the Nine Months Ended 
$ in thousands September 30,
2018		  September 30,
2017		 
       
Service charges on deposit accounts $9,606   8,525 
Other service charges, commissions, and fees:        
    Interchange income  9,917   7,175 
    Other fees  4,739   3,020 
Fees from presold mortgage loans (1)  2,231   4,121 
Commissions from sales of insurance and financial products:        
     Insurance income  4,530   1,663 
     Wealth management income  1,954   1,641 
SBA consulting fees  3,554   3,174 
SBA loan sale gains (1)  8,773   3,241 
Bank-owned life insurance income (1)  1,892   1,667 
Foreclosed property gains (losses), net  (579)  (439)
Securities gains (losses), net (1)  —   (235)
Other gains (losses), net (1)  811   493 
     Total noninterest income $47,428   34,046 
         
(1) Not within the scope of ASC 606.        



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 For the Three Months Ended For the Six Months Ended
$ in thousandsJune 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Noninterest Income       
In-scope of Topic 606:       
Service charges on deposit accounts:$3,210
 3,122
 6,155
 6,385
Other service charges, commissions, and fees:       
Interchange income4,228
 3,482
 7,779
 6,543
Other service charges and fees1,558
 1,192
 3,255
 2,616
Commissions from sales of insurance and financial products:       
Insurance income1,304
 1,489
 2,672
 2,903
Wealth management income900
 630
 1,561
 1,156
SBA consulting fees921
 1,126
 2,184
 2,267
Foreclosed property gains (losses), net(381) (99) (626) (387)
Noninterest income (in-scope of Topic 606)11,740
 10,942
 22,980
 21,483
Noninterest income (out-of-scope of Topic 606)4,249
 4,930
 7,584
 10,218
Total noninterest income$15,989
 15,872
 30,564
 31,701

A description of the Company’s revenue streams accounted for under ASCTopic 606 is detailed below.

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Overdraft fees are recognized at the point in time that the overdraft occurs. Maintenance and activity fees include account maintenance fees and transaction-based fees. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Service charges on deposits are withdrawn from the customer’s account balance.

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Index

Other service charges, commissions, and fees: The Company earns interchange income on its customers’ debit and credit card usage and earns fees from other services utilized by its customers. Interchange income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard.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. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, ATM surcharge fees, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Commissions from the sale of insurance and financial products: The Company earns commissions from the sale of insurance policies and wealth management products.

Insurance income generally consists of commissions from the sale of insurance policies and performance-based commissions from insurance companies. The Company recognizes commission income from the sale of insurance policies when it acts as an agent between the insurance company and the policyholder. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Performance-based commissions from insurance companies are recognized at a point in time as policies are sold.

Wealth Management Income primarily consists of commissions received on financial product sales, such as annuities. The Company’s performance obligation is generally satisfied upon the issuance of the financial product. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company also earns some fees from asset management, which is billed quarterly for services rendered in the most recent period, for which the performance obligation has been satisfied.

period.



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SBA Consulting fees: The Company earns fees for its consulting services related to the origination of SBA loans. Fees are based on a percentage of the dollar amount of the originated loans and are recorded when the performance obligation has been satisfied.

satisfied, upon closing the loan.

Foreclosed property gains (losses), net: The Company records a gain or loss from the sale of foreclosed property when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of foreclosed property to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed property asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.

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Note 13 – Leases
Effective January 1, 2019, the Company adopted new accounting guidance regarding Leases (Topic 842). As of June 30, 2019, the Company leased eight branch offices for which the land and buildings are leased and nine branch offices for which the land is leased but the building is owned. The Company also leases one loan production office and office space for several operational departments. All of the Company’s leases have historically qualified as operating leases under prior accounting guidance, and therefore, were not previously recognized on the Company’s Consolidated Balance Sheets. The lease agreements have maturity dates ranging from January 2021 through May 2076, some of which include options for multiple five- and ten-year extensions. The weighted average remaining life of the lease term for these leases was 20.83 years as of June 30, 2019.
The discount rate that was determined for each lease was based on the Company’s incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The weighted average discount rate for leases was 3.42% as of June 30, 2019.
Total operating lease expense was $1.2 million for the six months ended June 30, 2019. The right-of-use assets, included in premises and equipment, and lease liabilities, included in other liabilities, were $19.1 million and $19.2 million as of June 30, 2019, respectively.
Estimated lease payments for the Company’s operating leases with initial terms of one year or more as of June 30, 2019 were as follows.
($ in thousands)
Estimated Amortization
Expense
July 1 to December 31, 2019$1,164
20202,332
20212,135
20221,741
20231,643
Thereafter19,776
Total estimated lease payments28,791
Less effect of discounting(9,558)
Present value of estimated lease payments (lease liability)$19,233



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Future obligations for minimum rentals under noncancealable operating leases at December 31, 2018 were as follows:
($ in thousands)Future obligations for minimum rentals under noncancelable operating leases
2019$2,268
20201,973
20211,344
2022869
2023768
Thereafter4,082
Total estimated lease payments$11,304

Note 14 - Equity Issuance

On May 5, 2016, the Company acquired SBA Complete, Inc. (“SBA Complete”), a firm that provides services to financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. Per the terms of the acquisition agreement, the former owners of SBA Complete were eligible for a contingent earn-out payment to be paid in shares of Company stock based on achieving predetermined profitability goals over a cumulative three year period. The Company initially valued the earn-out at $3.0 million and adjusted the value quarterly thereafter based on updated estimates. On May 5, 2019, the three year earn-out period concluded, and based on the terms of the earn-out, the Company issued 78,353 shares of common stock with a value of $3.1 million, which increased shareholders' equity.


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

Critical Accounting Policies

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for loan losses, intangible assets, and the fair value and discount accretion of acquired loans are three policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements.

Allowance for Loan Losses

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

Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on individually evaluated “impaired loans.” A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the original loan agreement. A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, troubled debt restructured status, purchased credit impaired status, and type of collateral) and the loan is determined to be impaired. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.

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

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

Purchased loans are recorded at fair value at the acquisition date. Therefore, amounts deemed uncollectible at the acquisition date represent a discount to the loan value and become a part of the fair value calculation. 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.”

Within the purchased loan portfolio, loans are deemed purchased credit impaired at acquisition if the bank believes it will not be able to collect all contractual cash flows. Performing loans with an unamortized discount or premium that are not deemed purchased credit impaired are considered to be purchased performing loans. Purchased credit impaired loans are individually evaluated as impaired loans, as described above, while purchased performing loans are evaluated as general reserve loans. For purchased performing loan pools, any computed allowance that is in excess of remaining net discounts is a component of the allocated allowance.



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39

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.

Intangible Assets

Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements.

When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency or a consulting firm, as we did in 2016 and 2017, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis. For SBA Complete, the SBA consulting firm we acquired in 2016, the identifiable intangible asset related to the customer list was determined to have a life of approximately seven years, with amortization occurring on a straight-line basis.

Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill. We have three reporting units – 1) First Bank with $220.8$222.7 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA lending division,Lending Division, with $4.3 million in goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.

In our 2017October 31, 2018 goodwill impairment evaluation, we concluded that the goodwill for each of our reporting units 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.

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Index

Fair Value and Discount Accretion of Acquired Loans

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



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

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

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

Current Accounting Matters

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

adopted and accounting standards that are pending adoption.

FINANCIAL OVERVIEW


Net income available to common shareholders amounted to $22.0$23.9 million, or $0.74$0.80 per diluted common share, for the three months ended SeptemberJune 30, 2018,2019, an increase of 39.6%3.9% in earnings per share from the $13.1$22.7 million, or $0.53$0.77 per diluted common share, recorded in the thirdsecond quarter of 2017.

2018.


For the ninesix months ended SeptemberJune 30, 2018,2019, we recorded net income available to common shareholders of $65.4$46.1 million, or $2.21$1.55 per diluted common share, an increase of 66.2%6.2% in earnings per share from the $31.8$43.4 million, or $1.33$1.46 per diluted common share, for the ninesix months ended SeptemberJune 30, 2017.

Comparisons for the financial periods presented were significantly impacted by our acquisitions of Carolina Bank in March 2017 with total assets of $682 million and Asheville Savings Bank in October 2017 with $798 million in total assets. The assets, liabilities and earnings for the acquisitions were recorded beginning on their respective acquisition dates.

2018.


Net Interest Income and Net Interest Margin


Net interest income for the thirdsecond quarter of 20182019 was $51.8$54.4 million, a 24.5%6.2% increase from the $41.6$51.2 million recorded in the thirdsecond quarter of 2017.2018. Net interest income for the first ninesix months of 20182019 amounted to $153.6$107.8 million, a 32.6%5.9% increase from the $115.9$101.7 million recorded in the comparable period of 2017.2018. The increase in net interest income was primarily due to the acquisitions of Carolina Bank and Asheville Savings Bank, as well as higher amounts of loans outstanding as a result of organic growth.

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growth in interest-earning assets.
Index

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the thirdsecond quarter of 20182019 was 4.06% compared to 4.16% for, which was one basis point lower than the third4.07% realized in the second quarter of 2017.2018. For the ninesix month period ended SeptemberJune 30, 2018,2019, our net interest margin was 4.12%4.06% compared to 4.11%4.12% for the same period in 2017. Although asset yields increased primarily as a result of several Federal Reserve interest rate increases since January 1, 2017, we have also experienced higher funding costs, particularly on the interest rates paid on our borrowings, as these are highly correlated to short-term interest rates set by the Federal Reserve. Interest income for the nine months ended September 30, 2018 was positively impacted by approximately $0.8 million in interest recoveries received2018. The decreases in the first quarter, which primarily related to the same loans that experienced significant allowance for loan loss recoveries discussed below in “Provisions for Loan Losses and Asset Quality.”

The net interest margins for the periodsrealized in 2019 were also impacted byprimarily due to lower loan discount accretion associated with acquired loan portfolios. accretion.


We recorded loan discount accretion amounting to $1.6 million in the third quarter of 2018, compared to $1.7 million in the thirdsecond quarter of 2017.2019, compared to $2.3 million in the second quarter of 2018. For the first ninesix months ofended June 30, 2019 and 2018, and 2017, loan discount accretion amounted to $6.0$3.1 million and $5.1$4.4 million, respectively. The increaseLoan discount accretion had a 13 basis point impact on the net interest margin in the second quarter of 2019 compared to an 18 basis point impact in the second quarter of 2018. For the first six months of 2019 and 2018, loan discount accretion had a 12 basis point impact and an 18 basis point


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impact, respectively, on the net interest margin for the periods. The lower discount accretion in 20182019 was primarily dueattributable to the loan discounts recordedpaydowns in the acquisitionsCompany’s acquired loan portfolios.

Over the past year, the impact on the net interest margin of Carolina Bank and Asheville Savings Bank.

interest-bearing liability costs that have risen by more than earning asset yields has been substantially offset by the impact of the 15.1% growth in noninterest-bearing deposits, which has resulted in total funding costs increasing by approximately the same amount as the increase in earning asset yields.


Provision for Loan Losses and Asset Quality


We recorded a provision for loan losses of $0.1 million in the third quarter of 2018, compared to no provision for loan losses in the third quarter of 2017. For the nine months ended September 30, 2018, we recorded a total negative provision for loan losses of $4.3$0.3 million (reduction of the allowance for loan losses) in the second quarter of 2019 compared to a totalnegative provision for loan losses of $0.7 million in the second quarter of 2018. For the six months ended June 30, 2019, we recorded a provision for loan losses of $0.2 million compared to a negative provision for loan losses of $4.4 million in the same period of 2017. Our provisions for loan losses have been favorably impacted by continued improvement in asset quality, including low charge-offs and declining levels of nonperforming assets.

Total net charge-offs for the third quarter of 2018 amounted to $2.8 million in comparison to net recoveries of $0.6 million in the third quarter of 2017. During the third quarter of 2018, we completed a sale of approximately $5.2 million in smaller balance nonperforming loans that resulted in charge-offs of $2.2 million.

For2018. In the first nine monthsquarter of 2018, we experienced net loan recoveries of $1.5$3.7 million, which drove the negative provision during the period. Our provision for loan losses has remained at a low level over the past several years as a result of strong asset quality, including full payoffs received on four loans in the first quarter of 2018 that had been previously charged-down by approximately $3.3 million. The amounts received in excess of the prior charge-downs were recorded as interest income recoveries, and those four loans were primarily responsible for the $0.8 million in interest recoveries previously noted. For the comparable period of 2017, netlow loan recoveries amounted to $0.1 million.

Our nonperforming assets to total assets ratio was 0.72% at September 30, 2018 compared to 1.16% at September 30, 2017. charge-offs.


The ratio of annualized net charge-offs (recoveries) to average loans for the ninesix months ended SeptemberJune 30, 20182019 was (0.05%)0.02%, compared to 0.00%(0.21%) for the same period of 2017.

We continue2018. Our nonperforming assets to assess loans that may have been impacted by Hurricane Florence and Hurricane Michael. To date, we believe that any losses will not require a significant provision for loan losses.

total assets ratio was 0.57% at June 30, 2019 compared to 0.90% at June 30, 2018.


Noninterest Income


Total noninterest income was $15.4$16.0 million and $12.4$15.9 million for the three months ended SeptemberJune 30, 20182019 and SeptemberJune 30, 2017,2018, respectively. For the ninesix months ended SeptemberJune 30, 2018,2019, noninterest income amounted to $47.4$30.6 million compared to $34.0$31.7 million for the same period of 2017.

Core noninterest2018.


For the second quarter of 2019, increases were experienced in most categories of income, forwith “Other service charges, commissions, and fees” increasing by $1.1 million, or 23.8%, primarily due to higher debit card and credit card interchange fees associated with increased usage. For the thirdsix months ended June 30, 2019, higher “Other service charges, commissions and fees” were substantially offset by lower fees/gains on sales of mortgage loans and SBA loans.

Other gains (losses) amounted to a loss of $0.3 million in the second quarter of 2019 due to miscellaneous items, whereas in the second quarter of 2018, was $15.7we recorded a $0.9 million an increasegain on the sale of 22.3% froma former branch location.

Noninterest Expenses

Noninterest expenses amounted to $40.4 million in the $12.8 million reported for the thirdsecond quarter of 2017. For2019, a 4.7% increase over the first nine months of 2018, core noninterest income amounted to $47.2 million, a 37.9% increase from the $34.2$38.6 million recorded in the comparable period of 2017. 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 acquisitions of Carolina Bank and Asheville Savings Bank were significant contributors to the higher core noninterest income in 2018.

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Index

Another significant contributor to the increases in core noninterest income was increased origination and sales of SBA loans. During the three and nine months ended September 30, 2018, we realized $2.4 million and $8.8 million in gains on SBA loan sales, respectively. In comparison, during the three and nine months ended September 30, 2017, we realized $1.7 million and $3.2 million in gains on SBA loan sales, respectively.

Noninterest Expenses

Noninterest expenses amounted to $39.2 million in the thirdsecond quarter of 2018, comparedprimarily due to $34.4 million recordedincreases in the third quarter of 2017.salaries expense. Noninterest expenses for the ninesix months ended SeptemberJune 30, 20182019 amounted to $121.7$79.7 million compared to $101.5$82.1 million in 2017. The increase2018, a decrease of 2.9%, primarily due to decreases in noninterestmerger and acquisition expense.


Merger and acquisition expenses declined by $0.5 million in 2018 related primarily to our acquisitions of Carolina Bank and Asheville Savings Bank.

Also impacting expenses were other growth initiatives, including continued growth of our SBA consulting firm and SBA lending division, as well as the acquisition of an insurance agency during the thirdsecond quarter of 2017.

2019 compared to the second quarter of 2018, and declined by $3.2 million in the six months ended June 30, 2019 compared to the same period in 2018.


Income Taxes


Our effective tax rate for the thirdsecond quarter of 20182019 was 21.2% compared to 33.3%22.1% in the thirdsecond quarter of 2017.2018. For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, our effective tax rates were 21.8%21.0% and 33.3%22.1%, respectively. The lower 2019 effective tax rate in 2018 wasrates were primarily due to a decrease in the Tax Cuts and Jobs Act, which was signed into law in December 2017 and reduced the federalNorth Carolina corporate income tax rate from 35%3.0% to 21%.

2.5%, which became effective January 1, 2019.


Balance Sheet and Capital




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Total assets at SeptemberJune 30, 20182019 amounted to $5.7$6.0 billion, a 24.4%5.1% increase from a year earlier. Total loans at SeptemberJune 30, 20182019 amounted to $4.2$4.3 billion, a 22.2%4.6% increase from a year earlier, and total deposits amounted to $4.5$4.8 billion at SeptemberJune 30, 2018,2019, a 24.0%6.4% increase from a year earlier. The significant increases were largely due to the acquisition of Asheville Savings Bank on October 1, 2017.

We experienced steady


Annualized loan and deposit growth during the first nine months of 2018, all of which was organic. Loan growth for the nine months ended September 30, 2018 amounted to $148 million, or 4.9% annualized, andfirst half of 2019 was 4.3%. Annualized deposit growth amounted to $121.4 million, or 3.7%for the first half of 2019 was 8.0%. Within deposits, our retail deposits (excludes brokered deposits and internet time deposits) grew at an annualized during that same period. This growth wasrate of 12.5% for the first six months of 2019. As a result of ongoing internal initiatives to enhance loan andthe strong retail deposit growth, includingwe have reduced our recent expansionusage of brokered deposits, which have declined by $87 million, or 36.6%, since June 30, 2018. Additionally, we have paid down our borrowings by $106 million, or 26.0%, over that same period.

Over the past twelve months in order to reduce exposure to the possibility of lower interest rates, we have invested a portion of our interest-bearing cash balances into higher growth markets.fixed rate investment securities. As anticipated, a $41 million deposit received in the first quarter ofresult, from June 30, 2018 was transferred outside the Company in the third quarter of 2018.

to June 30, 2019, interest-bearing cash balances have declined by 38% and investment securities balances have increased by 74%.


We remain well-capitalized by all regulatory standards, with aan estimated Total Risk-Based Capital Ratio at SeptemberJune 30, 20182019 of 13.68%14.60%, an increase from the 12.44%13.17% reported at SeptemberJune 30, 2017. Our tangible common equity to tangible assets ratio was 8.95% at September 30, 2018, an increase of 100 basis points from a year earlier.

2018.

Components of Earnings

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended SeptemberJune 30, 20182019 amounted to $51.8$54.4 million, an increase of $10.2$3.2 million, or 24.5%6.2%, from the $41.6$51.2 million recorded in the thirdsecond quarter of 2017.2018. Net interest income on a tax-equivalent basis for the three month period ended SeptemberJune 30, 20182019 amounted to $52.3$54.8 million, an increase of $9.9$3.2 million, or 23.5%6.3%, from the $42.3$51.6 million recorded in the thirdsecond quarter of 2017.2018. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.

  Three Months Ended September 30, 
($ in thousands) 2018  2017 
Net interest income, as reported $51,845   41,639 
Tax-equivalent adjustment  428   702 
Net interest income, tax-equivalent $52,273   42,341 

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Index

 Three Months Ended June 30,
($ in thousands)2019 2018
Net interest income, as reported$54,409
 51,232
Tax-equivalent adjustment423
 367
Net interest income, tax-equivalent$54,832
 51,599
Net interest income for the ninesix month period ended SeptemberJune 30, 20182019 amounted to $153.6$107.8 million, an increase of $37.7$6.0 million, or 32.6%5.9%, from the $115.9$101.7 million recorded in the first nine monthshalf of 2017.2018. Net interest income on a tax-equivalent basis for the ninesix month period ended SeptemberJune 30, 20182019 amounted to $154.7$108.6 million, an increase of $36.9$6.2 million, or 31.3%6.0%, from the $117.8$102.5 million recorded in the comparable period of 2017.

  Nine Months Ended September 30, 
($ in thousands) 2018  2017 
Net interest income, as reported $153,584   115,851 
Tax-equivalent adjustment  1,151   1,979 
Net interest income, tax-equivalent $154,735   117,830 

2018.

 Six Months Ended June 30,
($ in thousands)2019 2018
Net interest income, as reported$107,770
 101,739
Tax-equivalent adjustment847
 723
Net interest income, tax-equivalent$108,617
 102,462
There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

For the three and ninesix months ended SeptemberJune 30, 2018,2019, the higher net interest income compared to the same period of 20172018 was due primarily to the growth in our loans and deposits, as reflected in the tables below.

outstanding.



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The following table presents an analysis of net interest income.

  For the Three Months Ended September 30, 
  2018  2017 
($ in thousands) Average
Volume		  Average
Rate		  Interest
Earned
or Paid		  Average
Volume		  Average
Rate		  Interest
Earned
or Paid		 
Assets                  
Loans (1) $4,191,751   4.96%  $52,407  $3,404,862   4.84%  $41,549 
Taxable securities  400,861   2.48%   2,501   275,544   2.37%   1,649 
Non-taxable securities  50,373   2.89%   367   54,606   2.90%   399 
Short-term investments,
principally federal funds		  462,996   2.52%   2,944   305,245   1.84%   1,414 
Total interest-earning assets  5,105,981   4.52%   58,219   4,040,257   4.42%   45,011 
                         
Cash and due from banks  78,078           80,191         
Premises and equipment  113,812           96,596         
Other assets  415,069           297,365         
   Total assets $5,712,940          $4,514,409         
                         
Liabilities                        
Interest bearing checking $862,065   0.11%  $235  $688,739   0.06%  $105 
Money market deposits  1,018,933   0.34%   869   794,788   0.19%   372 
Savings deposits  435,579   0.21%   230   402,330   0.21%   208 
Time deposits >$100,000  658,479   1.39%   2,302   494,680   0.84%   1,053 
Other time deposits  272,468   0.39%   270   246,475   0.28%   172 
     Total interest-bearing deposits  3,247,524   0.48%   3,906   2,627,012   0.29%   1,910 
Borrowings  406,652   2.41%   2,468   331,122   1.75%   1,462 
Total interest-bearing liabilities  3,654,176   0.69%   6,374   2,958,134   0.45%   3,372 
                         
Noninterest bearing checking  1,278,488           1,005,307         
Other liabilities  42,716           30,536         
Shareholders’ equity  737,560           520,432         
Total liabilities and
shareholders’ equity		 $5,712,940          $4,514,409         
                         
Net yield on interest-earning
assets and net interest income		      4.03%  $51,845       4.09%  $41,639 
Net yield on interest-earning
assets and net interest income – tax-equivalent (2)		      4.06%  $52,273       4.16%  $42,341 
                         
Interest rate spread      3.83%           3.97%     
                         
Average prime rate      5.01%           4.25%     
(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)Includes tax-equivalent adjustments of $428,000 and $702,000 in 2018 and 2017, 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 for 2018 and 37% for 2017 and is reduced by the related nondeductible portion of interest expense.

 For the Three Months Ended June 30,
 2019 2018
($ in thousands)
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
 
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
Assets 
  
  
  
  
  
Loans (1)$4,329,866
 5.16% $55,652
 $4,133,689
 4.99% $51,451
Taxable securities715,848
 2.80% 4,993
 409,478
 2.41% 2,465
Non-taxable securities34,604
 3.14% 271
 50,531
 2.92% 368
Short-term investments, primarily overnight funds336,966
 2.51% 2,106
 486,674
 2.02% 2,451
Total interest-earning assets5,417,284
 4.67% 63,022
 5,080,372
 4.48% 56,735
            
Cash and due from banks53,853
     94,525
    
Premises and equipment136,813
     114,200
    
Other assets386,645
     382,523
    
Total assets$5,994,595
     $5,671,620
    
            
Liabilities           
Interest bearing checking$892,615
 0.14% $301
 877,270
 0.10% $212
Money market deposits1,099,531
 0.63% 1,725
 1,033,676
 0.27% 707
Savings deposits414,095
 0.30% 309
 442,671
 0.19% 213
Time deposits >$100,000723,218
 1.95% 3,522
 629,319
 1.18% 1,850
Other time deposits262,537
 0.71% 467
 281,704
 0.36% 251
Total interest-bearing deposits3,391,996
 0.75% 6,324
 3,264,640
 0.40% 3,233
Borrowings324,096
 2.83% 2,289
 407,052
 2.24% 2,270
Total interest-bearing liabilities3,716,092
 0.93% 8,613
 3,671,692
 0.60% 5,503
            
Noninterest bearing checking1,418,033
     1,247,919
    
Other liabilities58,339
     34,034
    
Shareholders’ equity802,131
     717,975
    
Total liabilities and
shareholders’ equity
$5,994,595
     5,671,620
    
            
Net yield on interest-earning assets and net interest income  4.03% $54,409
   4.04% $51,232
Net yield on interest-earning assets and net interest income – tax-equivalent (2)  4.06% $54,832
   4.07% $51,599
            
Interest rate spread  3.74%     3.88%  
            
Average prime rate  5.50%     4.80%  
(1)   Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)   Includes tax-equivalent adjustments of $423,000 and $367,000 in 2019 and 2018, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.


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44

  For the Nine Months Ended September 30, 
  2018  2017 
($ in thousands) Average
Volume		  Average
Rate		  Interest
Earned
or Paid		  Average
Volume		  Average
Rate		  Interest
Earned
or Paid		 
Assets                  
Loans (1) $4,141,645   4.97%  $154,028  $3,211,844   4.78%  $114,908 
Taxable securities  406,975   2.48%   7,552   284,588   2.31%   4,914 
Non-taxable securities  51,283   2.91%   1,115   56,092   3.02%   1,269 
Short-term investments,
principally federal funds		  422,268   2.32%   7,320   283,601   1.52%   3,215 
Total interest-earning assets  5,022,171   4.53%   170,015   3,836,125   4.33%   124,306 
                         
Cash and due from banks  88,596           74,135         
Premises and equipment  114,656           92,042         
Other assets  419,269           267,231         
   Total assets $5,644,692          $4,269,533         
                         
Liabilities                        
Interest bearing checking $874,921   0.10%  $646  $676,939   0.06%  $320 
Money market deposits  1,019,399   0.28%   2,151   771,826   0.18%   1,067 
Savings deposits  442,345   0.20%   648   362,164   0.19%   505 
Time deposits >$100,000  629,175   1.20%   5,627   473,200   0.75%   2,641 
Other time deposits  278,950   0.35%   740   248,985   0.27%   511 
     Total interest-bearing deposits  3,244,790   0.40%   9,812   2,533,114   0.27%   5,044 
Borrowings  406,954   2.17%   6,619   294,650   1.55%   3,411 
Total interest-bearing liabilities  3,651,744   0.60%   16,431   2,827,764   0.40%   8,455 
                         
Noninterest bearing checking  1,236,002           932,233         
Other liabilities  37,964           31,782         
Shareholders’ equity  718,982           477,754         
Total liabilities and
shareholders’ equity		 $5,644,692          $4,269,533         
                         
Net yield on interest-earning
assets and net interest income		      4.09%  $153,584       4.04%  $115,851 
Net yield on interest-earning
assets and net interest income –
tax-equivalent (2)		      4.12%  $154,735       4.11%  $117,831 
                         
Interest rate spread      3.93%           3.93%     
                         
Average prime rate      4.78%           4.03%     
(1)Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)Includes tax-equivalent adjustments of $1,151,000
 For the Six Months Ended June 30,
 2019 2018
($ in thousands)
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
 
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
Assets 
  
  
  
  
  
Loans (1)$4,305,069
 5.13% $109,612
 $4,116,592
 4.98% $101,621
Taxable securities685,589
 2.86% 9,730
 410,032
 2.48% 5,051
Non-taxable securities38,452
 3.19% 608
 51,738
 2.92% 748
Short-term investments, primarily overnight funds365,915
 2.65% 4,807
 436,630
 2.02% 4,376
Total interest-earning assets5,395,025
 4.66% 124,757
 5,014,992
 4.50% 111,796
            
Cash and due from banks54,876
     93,855
    
Premises and equipment136,918
     115,078
    
Other assets383,003
     386,643
    
Total assets$5,969,822
     $5,610,568
    
            
Liabilities           
Interest bearing checking$900,327
 0.14% $628
 $881,349
 0.09% $411
Money market deposits1,078,231
 0.58% 3,120
 1,019,632
 0.25% 1,282
Savings deposits420,469
 0.29% 596
 445,728
 0.19% 418
Time deposits >$100,000717,879
 1.88% 6,700
 614,523
 1.09% 3,325
Other time deposits262,854
 0.66% 857
 282,191
 0.34% 470
Total interest-bearing deposits3,379,760
 0.71% 11,901
 3,243,423
 0.37% 5,906
Borrowings365,143
 2.81% 5,086
 407,105
 2.06% 4,151
Total interest-bearing liabilities3,744,903
 0.91% 16,987
 3,650,528
 0.56% 10,057
            
Noninterest bearing checking1,377,370
     1,214,759
    
Other liabilities58,954
     35,588
    
Shareholders’ equity788,595
     709,693
    
Total liabilities and
shareholders’ equity
$5,969,822
     $5,610,568
    
            
Net yield on interest-earning assets and net interest income  4.03% $107,770
   4.09% $101,739
Net yield on interest-earning assets and net interest income – tax-equivalent (2)  4.06% $108,617
   4.12% $102,462
            
Interest rate spread  3.75%     3.94%  
            
Average prime rate  5.50%     4.66%  
(1)   Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)   Includes tax-equivalent adjustments of $847,000 and $723,000 in 2019 and $1,979,000 in 2018, and 2017, 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 for 2018 and 37% for 2017 and is reduced by the related nondeductible portion of interest expense.

The tables above reflect significant increases in our levelsthe 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 loan and deposit balances. These increasesinterest expense.

Average loans outstanding for the second quarter of 2019 were a result of organic growth,$4.330 billion, which was approximately 4%-5% over$196 million, or 4.7%, higher than the periods reflected, and more significantly growth we obtained in our acquisitions. On March 3, 2017, we acquired Carolina Bank, which had $498 million inaverage loans and $585 million in deposits, and on October 1, 2017 we acquired Asheville Savings Bank, which had $606 million in loans and $679 million in deposits.

Our net interest margin (tax-equivalent net interest income divided by average earning assets, referred to as “net yield on interest-earning assets” in the tables above)outstanding for the periods reflected above was fairly stable, ranging from 4.06%-4.16%. Both asset yields and liability costs have increased insecond quarter of 2018 compared to the same periods of 2017 shown above due to increases in the interest rate environment. For the three months ended September 30, 2018, a 24 basis point increase in liability costs exceeded a 10 basis point increase in asset yields and resulted in the net interest margin declining by 10 basis points from 4.16% to 4.06%($4.134 billion). For the ninefirst six months ended September 30, 2018, asset yields and liability costs each increased by 20 basis pointsof 2019, average loans outstanding were $4.305 billion, which led to a virtually unchanged net interest margin of 4.11%-4.12%.

Page 46 

Index

Impacting our net interest margin for all periods reflected inwas $188 million, or 4.6% higher than the tables above are net accretion of purchase accounting premiums/discounts associated with acquiredaverage loans and deposits. For the three months ended September 30, 2018 and 2017, we recorded $1.6 million and $1.8 million, respectively, in net accretion of purchase accounting premiums/discounts that increased net interest income. For the nine months ended September 30, 2018 and 2017, we recorded $6.1 million and $5.2 million, respectively. The increase in accretionoutstanding for the year to datecomparable period of 2018 ($4.117 billion). The higher amount of average loans outstanding in 2018 is2019 was primarily due to the aforementioned acquisitions. Unaccretedour loan discount has increased from $16.9 million at September 30, 2017 to $24.3 million at September 30, 2018 primarily as a resultgrowth initiatives, including our continued focus and expansion into higher growth markets, our hiring of the Asheville Savings Bank acquisition.

experienced bankers and our emphasis on SBA lending.



Page 45

The mix of our loan portfolio remained substantially the same at SeptemberJune 30, 20182019 compared to December 31, 2017,2018, with approximately 88%87% of our loans being real estate loans, 10%11% being commercial, financial, and agricultural loans, and the remaining 2% being consumer installment loans. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

Average total deposits outstanding for the second quarter of 2019 were $4.810 billion, which was $297 million, or 6.6%, higher than the average deposits outstanding for the second quarter of 2018 ($4.513 billion). Average total deposits for the six months ended June 30, 2019 were $4.757 billion, which was $299 million, or 6.7%, higher than the average deposits outstanding for the same period of 2018 ($4.458 billion). We continue to implement strategies to grow deposits, which we believe to be the principal reason for the increases in the past year. Average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $3.561 billion during the first half of 2018 to $3.776 billion during the first half of 2019, representing growth of $215 million, or 6.0%. Average time deposits also increased from $897 million during the first half of 2018 to $981 million for the first half of 2019, an increase of $84 million, or 9.4%.
Average borrowings decreased by $83 million, or 20.4%, and $42 million, or 10.3%, during the three and six months ended June 30, 2019, respectively, in comparison to the prior periods, as strong deposit growth has allowed us to pay down our level of borrowings over the past year.
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 second quarter of 2019 was 4.06%, which was was one basis point lower than the 4.07% realized in the second quarter of 2018. For the six month period ended June 30, 2019, our net interest margin was 4.06% compared to 4.12% for the same period in 2018. The decrease in the net interest margin realized in 2019 was primarily due to lower loan discount accretion, as well as significant interest recoveries realized in the prior year, as discussed in the following paragraphs.
We recorded loan discount accretion of $1.7 million in the second quarter of 2019, compared to $2.3 million in the second quarter of 2018. For the six months ended June 30, 2019 and 2018, loan discount accretion amounted to $3.1 million and $4.4 million, respectively. Loan discount accretion had a 13 basis point impact on the net interest margin in the second quarter of 2019 compared to an 18 basis point impact in the second quarter of 2018. For the first six months of 2019 and 2018, loan discount accretion had a 12 basis point impact and an 18 basis point impact, respectively, on the net interest margin for the periods. The lower discount accretion in 2019 was attributable to paydowns in our acquired loan portfolios.
Additionally, in the first quarter of 2018, we received approximately $750,000 in interest recoveries on loans that had been charged off in the past that added approximately three basis points to the net interest margin for the first six months of 2018.
As derived from the tables above, in comparing the periods in 2019 to the periods in 2018, interest-earning asset yields have increased 16-19 bps, whereas interest-bearing liability costs have increased by 33-35 bps. The impact of the higher rising liability costs has been substantially offset by the impact of the approximately 13% growth in average noninterest-bearing deposits over the past year. Our total cost of funds, which includes noninterest bearing checking accounts at a zero percent cost, was 0.67% for both the three and six months ended June 30, 2019, compared to 0.45% and 0.42% for the three and six months of June 30, 2018, respectively.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”


We recorded a negative provision for loan losses of $0.1$0.3 million in third quarter of 2018 compared to no provision for loan losses for the third quarter of 2017. For the nine months ended September 30, 2018, we recorded total negative provisions for loan losses (reduction of the allowance for loan losses) in the second quarter of $4.3 million2019 compared to provisionsa negative provision for loan losses of $0.7 million in the second quarter of 2018. For the six months ended June 30, 2019, we recorded a provision for loan losses of $0.2 million compared to a negative provision for loan losses of $4.4 million in the same period of 2017.

2018. In the first quarter of 2018, we experienced net loan recoveries of $3.7 million, which drove the negative provision during the period. Our provision for loan losses has remained at a low level over the past several years as a result of strong asset quality, including low loan charge-offs.

Our provision for loan loss levels have been impacted by continued improvement in asset quality. Nonperforming assets amounted to $41.1$34.4 million at SeptemberJune 30, 2018,2019, a decrease of 22.6%32.8% from the $53.0$51.2 million one year earlier.


Page 46

Our nonperforming assets to total assets ratio was 0.72%0.57% at SeptemberJune 30, 20182019 compared to 1.16%0.74% at SeptemberDecember 31, 2018 and 0.90% at June 30, 2017.2018. Annualized net charge-offs (recoveries) as a percentage of average loans for the ninesix months ended SeptemberJune 30, 20182019 was (0.05%),0.02% compared to 0.00%(0.21%) for the same period of 2017.

2018.


Total noninterest income was $15.4$16.0 million in the third quarter of 2018 compared to $12.4and $15.9 million for the third quarter of 2017.three months ended June 30, 2019 and June 30, 2018, respectively. For the ninesix months ended SeptemberJune 30, 2018,2019, noninterest income amounted to $47.4$30.6 million compared to $34.0$31.7 million for the same period of 2017.

2018.

 For the Three Months EndedFor the Six Months Ended
$ in thousandsJune 30, 2019 June 30, 2018June 30, 2019 June 30, 2018
Service charges on deposit accounts$3,210
 3,122
6,155
 6,385
Other service charges, commissions, and fees5,786
 4,674
11,034
 9,159
Fees from presold mortgage loans857
 796
1,402
 1,655
Commissions from sales of insurance and financial products2,204
 2,119
4,233
 4,059
SBA consulting fees921
 1,126
2,184
 2,267
SBA loan sale gains3,069
 2,598
5,131
 6,400
Bank-owned life insurance income631
 628
1,277
 1,251
Foreclosed property gains (losses), net(381) (99)(626) (387)
Other gains (losses), net(308) 908
(226) 912
Noninterest income$15,989
 15,872
30,564
 31,701
Non-GAAP adjustments - Exclude:      
Foreclosed property losses from above381
 99
626
 387
Other gains and losses from above308
 (908)226
 (912)
Adjusted noninterest income$16,678
 15,063
31,416
 31,176

Management evaluates noninterest income on a basis that excludes items that can be volatile in nature, such as foreclosed property gains (losses), net. We consider this adjusted noninterest income. As presented in the table below, coreabove, adjusted noninterest income for the thirdsecond quarter of 20182019 was $15.7$16.7 million, ana 10.7% increase of 22.3% from the $12.8$15.1 million reported for the thirdsecond quarter of 2017. For the first nine months of 2018, core noninterest income amounted to $47.2 million, a 37.9% increase from the $34.2 million recorded in the comparable period of 2017. As noted above, 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, and v) SBA consulting fees, vi) SBA loan sale gains, and vii) bank-owned life insurance income.

The following table presents our core2018. Adjusted noninterest income for the three and nine month periods ending Septembersix months ended June 30, 2018 and 2017, respectively.

  For the Three Months Ended  For the Nine Months Ended 
$ in thousands September 30,
2018		  September 30,
2017		  September 30,
2018		  September 30,
2017		 
             
Service charges on deposit accounts $3,221   2,945   9,606   8,525 
Other service charges, commissions, and fees  5,146   3,468   14,656   10,195 
Fees from presold mortgage loans  576   1,842   2,231   4,121 
Commissions from sales of insurance and financial products  2,425   1,426   6,484   3,304 
SBA consulting fees  1,287   864   3,554   3,174 
SBA loan sale gains  2,373   1,692   8,773   3,241 
Bank-owned life insurance income  641   579   1,892   1,667 
     Core noninterest income $15,669   12,816   47,196   34,227 
                 

2019 was $31.4 million, a 0.8% increase from the $31.2 million reported for the first half of 2018.

As shown in the table above, service charges on deposit accounts increased from $2.9$3.1 million in the thirdsecond quarter of 20172018 to $3.2 million in the thirdsecond quarter of 2018.2019. For the ninesix months ended SeptemberJune 30, 2018,2019, service charges on deposit accounts amounted to $9.6$6.2 million, which is a $1.1$0.2 million increasedecrease from the $8.5$6.4 million recorded in the comparable period of 2017.2018. The increasedecrease in 20182019 was primarily due to the aforementioned acquisitions.

Page 47 

fewer instances of fees earned from customers overdrawing their accounts.
Index

Other service charges, commissions, and fees increased in 20182019 compared to 2017,2018, primarily due to a combination of the aforementioned acquisitions andas a result of higher debit card and credit card interchange fees.fees associated with increased usage. 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 increasedcontinued promotion of this product.

product

Fees from presold mortgages increased from $0.8 million in the second quarter of 2018 to $0.9 million in the second quarter of 2019. For the six months ended June 30, 2019, fees amounted to $0.6$1.4 million, and $2.2a decrease of $0.3 million, forfrom the three and nine month periods ended September 30, 2018, respectively, compared to $1.8$1.7 million and $4.1 million forrecorded in the three and nine month periods ended September 30, 2017, respectively.  The declinescomparable period of 2018. Fees decreased in 2018 were primarily2019 due to ouroverall lower volumes in the mortgage loan department originating a higher percentage of loans with construction components that are held in our loan portfolioindustry and not sold, as well as employee turnover that has occurred in 2018.

within the mortgage department.

Commissions from sales of insurance and financial products amounted to $2.4approximately $2.2 million and $2.1 million for the second quarters of 2019 and 2018, respectively, and $4.2 million and $4.1 million for the first six months of 2019 and 2018, respectively. The increase in 2019 was primarily due to increases in commissions from the sales of our wealth management products.


Page 47

During the three months ended June 30, 2019 and 2018, we realized $3.1 million and $2.6 million in gains on SBA loan sales, respectively. For the six months ended June 30, 2019 and 2018, we realized $5.1 million and $6.4 million in gains on SBA loan sales, respectively. The decline in the first half of 2019 was a result of a combination of a lower sales volume and lower premiums realized.

Other gains (losses) amounted to losses of $0.3 million and $0.2 million in the thirdthree and six months ended June 30, 2019, respectively, and gains of $0.9 million for both the three and six months ended June 30, 2018. Losses in 2019 were due to miscellaneous items, whereas in the second quarter of 2018, comparedwe recorded a $0.9 million gain on the sale of a former branch location.

Noninterest expenses amounted to $1.4$40.4 million in the thirdsecond quarter of 2017.2019, a 4.7% increase over the $38.6 million recorded in the second quarter of 2018. Noninterest expenses for the six months ended June 30, 2019 amounted to $79.7 million compared to $82.1 million in 2018, a decrease of 2.9%.
Personnel expense increased to $24.2 million in the second quarter of 2019 from $22.5 million in the second quarter of 2018. For the ninefirst six months ended September 30,of 2019 and 2018, and 2017, we recorded $6.5personnel expense amounted to $47.7 million and $3.3$46.5 million, respectively, in commissions from sales of insurance and financial products.respectively. The increase was primarily due to the acquisition of an insurance agency in September 2017.

The largest increase in core noninterest income in 2018 was inincreased hiring within our SBA loan sale gains, which resultedconsulting division as we continue to focus on growth and expansion of that business.

The combined amount of occupancy and equipment expense increased slightly from an increase$3.8 million in sales volumes. During the first nine monthssecond quarter of 2018 we sold $121.7 million of the guaranteed portions of newly originated SBA loans, which resulted in $8.8to $3.9 million in gains on sales. In comparison, during the first nine monthssecond quarter of 2017, we sold $41.0 million of the guaranteed portions, resulting in $3.2 million in gains on sales.

Bank-owned life insurance income was $1.92019, and from $7.8 million in the first ninesix months of 2018 and $1.7to $8.0 million in the first nine months of 2017, which increased due to bank-owned life insurance policies assumed in the aforementioned acquisitions.

During the nine months ended September 30, 2017, we recorded $0.2 million in losses from sales of securities. For the comparable period of 2018, we had no sales of securities.

Other gains2019.


Merger and losses for the periods presented represent the net effects of miscellaneous gains and losses that are non-routine in nature. We recorded other gains of $0.8acquisition expenses amounted to $0.1 million in the first nine monthssecond quarter of 2018, which primarily related to a gain on a sale of a previously closed branch building. In the comparable period of 2017, we reported other gains of $0.5 million, which primarily related to the sale of a pool of default judgements to a third-party firm.

Noninterest expenses amounted to $39.22019 compared $0.6 million in the thirdsecond quarter of 2018, a 14.1% increase over2018. For the $34.4 million recorded in the same period of 2017. Noninterest expenses for the ninesix months ended SeptemberJune 30, 2018 amounted to $121.7 million compared to $101.5 million in 2017. The increase in noninterest expenses in 2018 related primarily to the acquisitions we completed in 2017.

Also impacting expenses were other growth initiatives, including continued growth of our SBA consulting firm and SBA lending division.

The acquisition activity was primarily responsible for the increase in salaries expense, which increased to $18.8 million in the third quarter of 2018 from the $16.6 million recorded in the third quarter of 2017. Salaries expense for the first nine months of 2018 amounted to $56.6 million compared to $46.8 million in 2017.

Employee benefits expense was also impacted by the acquisition activity and amounted to $4.1 million in the third quarter of 2018 compared to $3.6 million in the third quarter of 2017. For the first nine months of 2018, employee benefits expense amounted to $12.8 million compared to $11.4 million in 2017. Also increasing expense in 2018 was our increased 401k match effective January 1, 2018, which increased from effectively a 100% match up to 4% of an employee’s salary contribution to a 100% match up to 6% of an employee’s salary contribution.

Occupancy and equipment expense increased in 2018 primarily due to the acquisitions discussed above. For the three months ended September 30, 2018, occupancy and equipment expense totaled $4.2 million compared to $3.5 million in the third quarter of 2017. For the nine months ended September 30, 2018, occupancy and equipment expense totaled $12.0 million compared to $10.3 million in the first nine months of 2017.

Page 48 

Index

Merger2019 merger and acquisition expenses amounted to $0.2 million and $3.6compared to $3.4 million for the three and nine months ended September 30, 2018, respectively, compared to $1.3 million and $4.8 million for the three and nine months ended September 30, 2017, respectively. For the nine months ended September 30, 2018,same period in 2018. The higher merger and acquisition expense includes $1.3 millionexpenses recorded in 2018 related to increasesthe Asheville Savings Bank acquisition which converted its operations into First Bank late in an earn-out liability associated with a prior year acquisition.

the first quarter of 2018.


Intangibles amortization expense increaseddecreased from $0.9$1.5 million in the thirdsecond quarter of 20172018 to $1.7$1.2 million in the thirdsecond quarter of 20182019 and from $2.5$3.1 million in the first nine monthshalf of 20172018 to $5.1$2.6 million in the first nine monthshalf of 2018,2019. The declines were primarily as a result of the amortization of intangible assets associated with acquisitions that we recorded in connection with our acquisitions.

typically have amortization schedules that decline over time.

Other operating expenses amounted to $10.4 million and $8.5$11.0 million for the third quarterssecond quarter of 2018 and 2017, respectively, and $31.72019 compared to $10.2 million in the second quarter of 2018. The increase in 2019 was due to miscellaneous expenses associated with the Company's growth. Other operating expenses amounted to $21.2 million in the first ninesix months of 20182019 compared to $25.7$21.3 million in the first nine monthssame period of 2017, with2018. For the increases primarily dueyear to date period, the acquisitionsdecline in this line item was impacted by efficiencies realized from the conversion of Carolina Bank andthe operations of the Asheville Savings Bank.

Bank into First Bank during the first quarter of 2018.

For the third quarter ofthree months ended June 30, 2019 and 2018, the provision for income taxes was $5.9$6.4 million, an effective tax rate of 21.2%, compared toand $6.5 million, for the same period of 2017, which is an effective tax rate of 33.3%.22.1%, respectively. For the first ninesix months ofended June 30, 2019 and 2018, the provision for income taxes was $18.2$12.3 million, an effective tax rate of 21.8%21.0%, compared to $15.8and $12.3 million, for the same period of 2017, which was an effective tax rate of 33.3%.22.1%, respectively. The lower effective tax rate in 2018decline was due to a decrease in the Tax Cuts and Jobs Act, which was signed into law in December 2017 and reduced the federalNorth Carolina corporate income tax rate from 35%3.0% to 21%.

2.5%, as well as the impact of certain merger expenses recorded in 2018 that were not tax deductible.

The consolidated statements of comprehensive income reflect other comprehensive lossincome of $0.8$9.2 million during the thirdsecond quarter of 2019 compared other comprehensive loss of $1.5 million during the second quarter of 2018. During the six months ended June 30, 2019 and 2018, compared towe recorded other comprehensive income of $0.2$13.8 million during the third quarter of 2017. During the nine months ended September 30, 2018 and 2017, we recorded other comprehensive loss of $7.8 million and other comprehensive income of $2.3$7.0 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. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase, which occurred in the first nine months of 2018 and was primarily responsible for the other comprehensive loss.increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.

Page 49 




Page 48

FINANCIAL CONDITION

Total assets at SeptemberJune 30, 20182019 amounted to $5.7$6.0 billion, a 24.4%5.1% increase from a year earlier. Total loans at SeptemberJune 30, 20182019 amounted to $4.2$4.3 billion, a 22.2%4.6% increase from a year earlier, and total deposits amounted to $4.5$4.8 billion, a 24.0%6.4% 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 SeptemberJune 30, 20182019 and for the first ninesix months of 2018.

October 1, 2017 to
September 30, 2018		 Balance at
beginning
of period		  Internal
Growth,
net		  Growth
from
Acquisitions
(1)		  Balance at
end of
period		  Total
percentage
growth		  Internal
percentage
growth		 
          
          
Total loans $3,429,755   154,693   606,180   4,190,628   22.2%   4.5% 
                         
Deposits – Noninterest bearing checking  1,016,947   129,705   133,756   1,280,408   25.9%   12.8% 
Deposits – Interest bearing checking  683,113   14,169   173,205   870,487   27.4%   2.1% 
Deposits – Money market  793,919   37,320   175,938   1,007,177   26.9%   4.7% 
Deposits – Savings  396,192   (26,640)  62,783   432,335   9.1%   -6.7% 
Deposits – Brokered  215,615   5,638   34,162   255,415   18.5%   2.6% 
Deposits – Internet time  7,995   (4,071)  —   3,924   -50.9%   -50.9% 
Deposits – Time>$100,000  296,006   77,965   35,771   409,742   38.4%   26.3% 
Deposits – Time<$100,000  241,454   (36,091)  63,522   268,885   11.4%   -14.9% 
     Total deposits $3,651,241   197,995   679,137   4,528,373   24.0%   5.4% 
                         
January 1, 2018 to
September 30, 2018		                        
Total loans $4,042,369   148,259   —   4,190,628   3.7%   3.7% 
                         
Deposits – Noninterest bearing checking  1,196,161   84,247   —   1,280,408   7.0%   7.0% 
Deposits – Interest bearing checking  884,254   (13,767)  —   870,487   -1.6%   -1.6% 
Deposits – Money market  982,822   24,355   —   1,007,177   2.5%   2.5% 
Deposits – Savings  454,860   (22,525)  —   432,335   -5.0%   -5.0% 
Deposits – Brokered  239,659   15,756   —   255,415   6.6%   6.6% 
Deposits – Internet time  7,995   (4,071)  —   3,924   -50.9%   -50.9% 
Deposits – Time>$100,000  347,862   61,880   —   409,742   17.8%   17.8% 
Deposits – Time<$100,000  293,342   (24,457)  —   268,885   -8.3%   -8.3% 
     Total deposits $4,406,955   121,418   —   4,528,373   2.8%   2.8% 

(1) Includes the acquisition of Asheville Savings Bank on October 1, 2017, which had $606.2 million in loans and $679.1 million in deposits.

2019.

July 1, 2018 to
June 30, 2019
 
Balance at
beginning
of period
 
Internal
Growth,
net
 
Balance at
end of
period
 
Total
percentage
growth
Total loans $4,149,390
 190,107
 4,339,497
 4.6 %
         
Deposits – Noninterest bearing checking 1,252,214
 188,850
 1,441,064
 15.1 %
Deposits – Interest bearing checking 915,666
 16,279
 931,945
 1.8 %
Deposits – Money market 1,021,659
 82,393
 1,104,052
 8.1 %
Deposits – Savings 440,475
 (27,410) 413,065
 (6.2)%
Deposits – Brokered 238,098
 (87,210) 150,888
 (36.6)%
Deposits – Internet time 6,999
 (5,554) 1,445
 (79.4)%
Deposits – Time>$100,000 402,109
 136,292
 538,401
 33.9 %
Deposits – Time<$100,000 276,401
 (14,207) 262,194
 (5.1)%
Total deposits $4,553,621
 289,433
 4,843,054
 6.4 %
January 1, 2019 to
June 30, 2019
        
Total loans $4,249,064
 90,433
 4,339,497
 2.1 %
         
Deposits – Noninterest bearing checking 1,320,131
 120,933
 1,441,064
 9.2 %
Deposits – Interest bearing checking 916,374
 15,571
 931,945
 1.7 %
Deposits – Money market 1,035,523
 68,529
 1,104,052
 6.6 %
Deposits – Savings 432,389
 (19,324) 413,065
 (4.5)%
Deposits – Brokered 239,875
 (88,987) 150,888
 (37.1)%
Deposits – Internet time 3,428
 (1,983) 1,445
 (57.8)%
Deposits – Time>$100,000 447,619
 90,782
 538,401
 20.3 %
Deposits – Time<$100,000 264,000
 (1,806) 262,194
 (0.7)%
Total deposits $4,659,339
 183,715
 4,843,054
 3.9 %
         
As derived from the table above, for the twelve months preceding SeptemberJune 30, 2018,2019, our total loans increased $760.9$190.1 million, or 22.2%4.6%. The loan growth from acquisitions was due to our acquisitionFor the first six months of Asheville Savings Bank, which had $606 million on the date of acquisition. Internal2019, loan growth was $154.7$90.4 million, or 4.5%,2.1%. Loan growth for the twelve months ended September 30, 2018both periods was organic and was $148.3 million, or 3.7%, for the first nine months of 2018 (4.9% annualized). Internal loan growth has been driven by our continued expansion into high-growth markets.markets, our hiring of experienced bankers and our emphasis on SBA lending. We expect continued growth in our loan portfolio throughout the remainder of 2018.

in 2019.

The mix of our loan portfolio remains substantially the same at SeptemberJune 30, 20182019 compared to December 31, 2017.2018. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Note 86 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

We have also

For both the six and twelve month periods ended June 30, 2019, we experienced internal growth in our core deposit balances. Total deposits increased by $877.1 million for the twelve months ended September 30, 2018, an increase of 24.0%. Of that increase, $679 million was assumed in the Asheville Savings Bank acquisition. Internal growth for that same period amounted to $198.0 million, or 5.4%. For the nine months ended September 30, 2018, deposit growth amounted to $121.4 million, or 2.8% (3.7% annualized). We have generally experienced higher growth in our transaction accounts (checking, money market and savings) compared toand in our retail time deposits, which we believe is due customers favoring transaction accounts due to their higher liquidityexcluding brokered and the fact that transaction accounts have not been paying materially lower interest rates compared tointernet time deposits. However,We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3)


Page 49

continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services. A combination of the significant growth experienced in our retail deposits over the twelve months and comparatively lower loan growth allowed us to reduce our level of brokered deposits over the periods presented. For those same reasons, we were able to pay down our borrowings by $105.9 million over the past year.
Our liquidity levels have recently seen some of our customers with larger balances transfer funds from their money market accounts toremained stable over the time deposit > $100,000 category to attain higher interest rates.

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Index

Our overall liquidity increased since September 30, 2017.past year. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings decreased slightly from 20.2% at June 30, 2018 to 20.1% at June 30, 2019. 

Over the past year, we have also invested a portion of our cash balances into available for sale investment securities, primarily to achieve higher yields and reduce the risk of lower interest rates.  Total securities available for sale increased from 18.1%$334.1 million at SeptemberJune 30, 20172018 to 19.6%$692.0 million at SeptemberJune 30, 2018. Brokered deposits and borrowings as a percent of overall funding remained substantially unchanged among the periods presented.

2019, while total cash balance have declined from $560.1 million to $339.5 million over that same period.

Nonperforming Assets

Nonperforming assets include nonaccrual loans, troubled debt restructurings,TDRs, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows:

 

 

ASSET QUALITY DATA($ in thousands)

 As of/for the
quarter ended
September 30, 2018		  As of/for the
quarter ended
December 31, 2017		  As of/for the
quarter ended
September 30, 2017		 
          
Nonperforming assets            
   Nonaccrual loans $18,267   20,968   23,350 
   Restructured loans – accruing  16,657   19,834   20,330 
   Accruing loans >90 days past due  —   —   — 
      Total nonperforming loans  34,924   40,802   43,680 
   Foreclosed real estate  6,140   12,571   9,356 
          Total nonperforming assets $41,064   53,373   53,036 
             
Purchased credit impaired loans not included above (1) $20,189   23,165   15,034 
             
Asset Quality Ratios – All Assets            
Net charge-offs to average loans – annualized  0.27%   0.13%   (0.07%)
Nonperforming loans to total loans  0.83%   1.01%   1.27% 
Nonperforming assets to total assets  0.72%   0.96%   1.16% 
Allowance for loan losses to total loans  0.49%   0.58%   0.72% 
Allowance for loan losses + unaccreted discount to total loans  1.07%   1.24%   1.21% 
Allowance for loan losses to nonperforming loans  58.83%   57.10%   56.30% 

 
 
ASSET QUALITY DATA ($ in thousands)
 As of/for the quarter ended June 30, 2019 As of/for the quarter ended December 31, 2018 As of/for the quarter ended June 30, 2018
Nonperforming assets      
Nonaccrual loans $17,375
 22,575
 25,494
TDRs – accruing 11,890
 13,418
 17,386
Accruing loans >90 days past due —
 —
 —
Total nonperforming loans 29,265
 35,993
 42,880
Foreclosed real estate 5,107
 7,440
 8,296
Total nonperforming assets $34,372
 43,433
 51,176
       
Purchased credit impaired loans not included above (1) $14,175
 17,393
 20,832
       
Asset Quality Ratios – All Assets      
Net charge-offs to average loans - annualized —% 0.02% (0.07)%
Nonperforming loans to total loans 0.67% 0.85% 1.03 %
Nonperforming assets to total assets 0.57% 0.74% 0.90 %
Allowance for loan losses to total loans 0.48% 0.50% 0.56 %
Allowance for loan losses + unaccreted discount on acquired loans to total loans 0.82% 0.90% 1.16 %
Allowance for loan losses to nonperforming loans 71.04% 58.45% 54.33 %
(1)In the March 3, 2017 acquisition of Carolina Bank and the October 1, 2017 acquisition of Asheville Savings Bank, we acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from the nonperforming loan amounts, including $0.6 million, $0.6 million, and $0.4$0.5 million in PCI loans at SeptemberJune 30, 2018,2019, December 31, 2017,2018, and SeptemberJune 30, 2017,2018, respectively, that were contractually past due 90 days or more.

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.

As noted in the table above, at SeptemberJune 30, 2018,2019, total nonaccrual loans amounted to $18.3$17.4 million, compared to $21.0$22.6 million at December 31, 20172018 and $23.4$25.5 million at SeptemberJune 30, 2017.2018. Nonaccrual loans have generally declined in recent years as our local economies have improved, and we continue to focus on resolving our problem assets. Also, in the third quarter of 2018, we completed a loan sale of approximately $5.2 million in smaller balance nonperforming loans.

The following is the composition, by loan type, of all of our nonaccrual loans at each period end:

($ in thousands) At September 30,
2018		  At December 31,
2017		  At September 30,
2017		 
Commercial, financial, and agricultural $2,092   1,001   996 
Real estate – construction, land development, and other land loans  651   1,822   1,565 
Real estate – mortgage – residential (1-4 family) first mortgages  8,807   12,201   14,878 
Real estate – mortgage – home equity loans/lines of credit  1,419   2,524   2,250 
Real estate – mortgage – commercial and other  5,178   3,345   3,534 
Installment loans to individuals  120   75   127 
   Total nonaccrual loans $18,267   20,968   23,350 



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50

“Restructured loans – accruing”, or troubled debt restructurings (“TDRs”),

TDRs are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At SeptemberJune 30, 2018,2019, total accruing TDRs amounted to $16.7$11.9 million, compared to $19.8$13.4 million at December 31, 20172018 and $20.3$17.4 million at SeptemberJune 30, 2017.

2018.

Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $6.1$5.1 million at SeptemberJune 30, 2018, $12.62019, $7.4 million at December 31, 2017,2018, and $9.4$8.3 million at SeptemberJune 30, 2017.2018. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and the improvement in our overall asset quality. In
The following is the fourth quartercomposition, by loan type, of 2017, we acquired Asheville Savings Bankall of our nonaccrual loans at each period end
($ in thousands)At June 30, 2019 At December 31, 2018 At June 30, 2018
Commercial, financial, and agricultural$1,490
 919
 3,407
Real estate – construction, land development, and other land loans1,420
 2,265
 1,374
Real estate – mortgage – residential (1-4 family) first mortgages8,697
 10,115
 11,513
Real estate – mortgage – home equity loans/lines of credit1,404
 1,685
 1,765
Real estate – mortgage – commercial and other4,260
 7,452
 7,292
Installment loans to individuals104
 139
 143
Total nonaccrual loans$17,375
 22,575
 25,494
The table above indicated decreases in most categories of nonaccrual loans. The decreases reflect stabilization in most of our market areas and assumed approximately $3 millionour increased focus on the resolution of foreclosed real estate in this transaction.

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, 2018  At December 31, 2017  At September 30, 2017 
Vacant land $2,113   6,032   3,617 
1-4 family residential properties  2,446   4,229   3,257 
Commercial real estate  1,581   2,310   2,482 
   Total foreclosed real estate $6,140   12,571   9,356 

($ in thousands)At June 30, 2019 At December 31, 2018 At June 30, 2018
Vacant land and farmland$1,788
 2,035
 2,521
1-4 family residential properties1,452
 2,311
 3,973
Commercial real estate1,867
 3,094
 1,802
Total foreclosed real estate$5,107
 7,440
 8,296















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The following table presents geographical information regarding our nonperforming assets at SeptemberJune 30, 2018.

 As of September 30, 2018 
($ in thousands) Total
Nonperforming
Loans		  Total
Loans		  Nonperforming
Loans to Total
Loans		  Total
Foreclosed
Real Estate		 
             
Region (1)            
Eastern Region (NC) $11,912   883,000   1.3%   259 
Triangle Region (NC)  8,193   889,000   0.9%   984 
Triad Region (NC)  6,562   888,000   0.7%   909 
Charlotte Region (NC)  872   294,000   0.3%   233 
Southern Piedmont Region (NC)  5,158   264,000   2.0%   819 
Western Region (NC)  320   690,000   0.0%   1,233 
South Carolina Region  1,458   148,000   1.0%   661 
Former Virginia Region  —   2,000   0.0%   1,042 
Other  449   133,000   0.3%   — 
      Total $34,924   4,191,000   0.8%   6,140 

2019.
 As of June 30, 2019
($ in thousands)
Total
Nonperforming
Loans
 Total Loans 
Nonperforming
Loans to Total
Loans
 
Total
Foreclosed
Real Estate
Region (1) 
  
    
Eastern Region (NC)$6,955
 924,000
 0.75% $877
Triangle Region (NC)7,217
 928,000
 0.78% 1,053
Triad Region (NC)4,562
 865,000
 0.53% 83
Charlotte Region (NC)774
 338,000
 0.23% 146
Southern Piedmont Region (NC)5,470
 284,000
 1.93% 587
Western Region (NC)658
 680,000
 0.10% 908
South Carolina Region1,083
 157,000
 0.69% 763
Former Virginia Region83
 1,000
 8.30% 690
Other2,463
 162,000
 1.52% —
Total$29,265
 4,339,000
 0.67% $5,107
(1)The counties comprising each region are as follows:

Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret

Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake

Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly, Forsyth, Alamance

Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg

Southern Piedmont North Carolina Region - Anson, Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland

Western North Carolina Region – Buncombe, Henderson, McDowell, Madison, Transylvania

South Carolina Region - Chesterfield, Dillon, Florence

Former Virginia Region - Wythe, Washington, Montgomery, Roanoke

Other includes loans originated on a national basis through the Company’s SBA Lending Division

and through the Company's Credit Card Division

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.

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Index

The factors that influence management’s judgment in determining the amount charged to operating expense include recent loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and current economic conditions.



Page 52

For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense.

($ in thousands) Nine Months
Ended
September 30,		  Twelve Months
Ended
December 31,		  Nine Months
Ended
September 30,		 
  2018  2017  2017 
Loans outstanding at end of period $4,190,628   4,042,369   3,429,755 
Average amount of loans outstanding $4,141,645   3,420,939   3,211,844 
             
Allowance for loan losses, at beginning of year $23,298   23,781   23,781 
Provision (reversal) for loan losses  (4,282)  723   723 
   19,016   24,504   24,504 
Loans charged off:            
Commercial, financial, and agricultural  (1,542)  (1,622)  (1,335)
Real estate – construction, land development & other land loans  (158)  (589)  (312)
Real estate – mortgage – residential (1-4 family) first mortgages  (1,598)  (2,641)  (1,746)
Real estate – mortgage – home equity loans / lines of credit  (378)  (978)  (791)
Real estate – mortgage – commercial and other  (1,398)  (1,182)  (573)
Installment loans to individuals  (494)  (799)  (521)
       Total charge-offs  (5,568)  (7,811)  (5,278)
Recoveries of loans previously charged-off:            
Commercial, financial, and agricultural  971   1,311   848 
Real estate – construction, land development & other land loans  3,568   2,579   2,280 
Real estate – mortgage – residential (1-4 family) first mortgages  671   1,076   806 
Real estate – mortgage – home equity loans / lines of credit  294   333   250 
Real estate – mortgage – commercial and other  1,333   1,027   973 
Installment loans to individuals  261   279   210 
       Total recoveries  7,098   6,605   5,367 
            Net recoveries (charge-offs)  1,530   (1,206)  89 
Allowance for loan losses, at end of period $20,546   23,298   24,593 
             
Ratios:            
   Net charge-offs (recoveries) as a percent of average loans (annualized)  (0.05%)  0.04%   0.00% 
   Allowance for loan losses as a percent of loans at end of period  0.49%   0.58%   0.72% 
   Allowance for loan losses + unaccreted discount as a percent of loans  1.07%   1.24%   1.21% 
             

($ in thousands)
Six Months
Ended
June 30,
2019
 
Twelve Months
Ended
December 31,
2018
 
Six Months
Ended
June 30,
2018
Loans outstanding at end of period$4,339,467
 4,249,064
 4,149,390
Average amount of loans outstanding$4,305,069
 4,161,838
 4,116,592
      
Allowance for loan losses, at beginning of year$21,039
 23,298
 23,298
Provision (reversal) for loan losses192
 (3,589) (4,369)
 21,231
 19,709
 18,929
      
Loans charged off:     
Commercial, financial, and agricultural(936) (2,128) (609)
Real estate – construction, land development & other land loans(293) (158) (32)
Real estate – mortgage – residential (1-4 family) first mortgages(185) (1,734) (415)
Real estate – mortgage – home equity loans / lines of credit(146) (711) (186)
Real estate – mortgage – commercial and other(838) (1,459) (312)
Installment loans to individuals(436) (781) (262)
Total charge-offs(2,834) (6,971) (1,816)
Recoveries of loans previously charged-off:     
Commercial, financial, and agricultural605
 1,195
 812
Real estate – construction, land development & other land loans489
 4,097
 3,387
Real estate – mortgage – residential (1-4 family) first mortgages382
 833
 516
Real estate – mortgage – home equity loans / lines of credit455
 364
 243
Real estate – mortgage – commercial and other374
 1,503
 1,124
Installment loans to individuals87
 309
 103
Total recoveries2,392
 8,301
 6,185
Net (charge-offs) recoveries(442) 1,330
 4,369
Allowance for loan losses, at end of period$20,789
 21,039
 23,298
      
Ratios:     
Net charge-offs (recoveries) as a percent of average loans (annualized)0.02% (0.03)% (0.21)%
Allowance for loan losses as a percent of loans at end of period0.48% 0.50 % 0.56 %
Allowance for loan losses + unaccreted discount on acquired loans as a percent of loans0.82% 0.90 % 1.16 %
We recorded a provision for loan losses of $0.2 million in the first six months of 2019, compared to a negative provision for loan losses (reduction of the allowance for loan losses) of $4.3$4.4 million in the first ninesix months of 2018. In the first six months of 2018, compared to athe Company experienced net loan recoveries of $4.4 million, which drove the negative provision for the period and was the primary reason for the variance in the provision for loan losses of $0.7 million inwhen comparing the first ninesix months of 2017.

The2019 to the first six months of 2018. Other factors impacting the provision for loan losses that we record is driven by anloss are discussed in the following two paragraphs.

Our allowance for loan loss is a mathematical model with the primary factors impacting this model being loan growth, asset quality trends, and net charge-off history. The net charge-off history, component incorporates ourand asset quality trends. Our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years.years as a significant component of estimating the current allowance for loan losses that is necessary. Thus, older periodsyears (and parts thereof) systematically age out and are excluded from the analysis as time goes on. In most recent quarters,years, the new periods have had significantly lower net charge-offs (and net recoveries in some periods) than the older periods rolling out of the model. This has resulted in a lower required amount of allowance for loan losses in our modeling. The low level of net-charge offs (or net recoveries)


Page 53

experienced over the past twoseveral years has been the primary reason for the low (or negative) provisions for loan losses recorded.

As discussed previously, in

Organic loan growth for the third quarterfirst six months of 2019 of $90.4 million was relatively consistent with the $107.0 million realized for first six months of 2018, we completed a loan sale of approximately $5.2 million in smaller balance nonperforming loans that resulted in charge-offs of $2.2 million.

Thewith the variance not significantly impacting the required allowance for loan losseslosses. As it relates to asset quality trends, our total classified and nonaccrual loans amounted to $20.5approximately $61 million at Septemberboth June 30, 2019 and December 31, 2018 compared to $23.3$79.7 million at December 31, 2017 and $24.6 million at SeptemberJune 30, 2017. 2018.

The ratio of our allowance to total loans has declined from 0.72%was 0.48%, 0.50%, and 0.56% at SeptemberJune 30, 2017 to 0.49% at September2019, December 31, 2018, and June 30, 2018, asrespectively. The decline in this ratio was a result of the factors discussed above that impacted our relatively low levels of provision for loan losses, as well as applicablelosses. Our relatively low level of allowance to total loans is significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank in 2017, which had over $1 billion in total loans. Applicable accounting guidance that doesdid not allow us to record an allowance for loan losses upon the acquisition of loans. Insteadloans – instead the acquired loans arewere recorded at their discounted fair value, which includesincluded the consideration of any expected losses. No allowance for loan losses iswill be recorded for the acquired loans untilunless the expected credit losses exceed the remaining unamortized discounts – based on an individual basis for purchased credit impaired loans and on a pooled basis for performing acquired loans. See Critical Accounting Policies above for further discussion. Unaccreted discount on acquired loans, which is available to absorb loan losses, amounted to $24.3$14.8 million, $26.9$17.3 million, and $16.9$20.3 million at SeptemberJune 30, 2019, December 31, 2018, and June 30, 2018, December 31, 2017, and September 30, 2017, respectively. The ratio of allowance for loan losses plus unaccreted discount was 1.07%, 1.24%, and 1.21% at September 30, 2018, December 31, 2017, and September 30, 2017, respectively.

We continue to assess loans that may have been impacted by Hurricane Florence and Hurricane Michael. To date, we believe that any losses will not require a significant provision for loan losses.

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Index

We believe our reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. See “Critical Accounting Policies – Allowance for Loan Losses” above.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and value of other real estate. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations.

Based on the results of our loan analysis and grading program and our evaluation of the allowance for loan losses at SeptemberJune 30, 2018,2019, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2017.

2018.

Liquidity, Commitments, and Contingencies

Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $1.0$1.070 billion line of credit with the Federal Home Loan Bank (of which $353$247 million and $352 million was outstanding at SeptemberJune 30, 20182019 and $354 million was outstanding at December 31, 2017)2018, respectively), 2) a $35 million federal funds line with a correspondent bank (of which none was outstanding at SeptemberJune 30, 20182019 or December 31, 2017)2018), and 3) an approximately $136$132 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at SeptemberJune 30, 20182019 or December 31, 2017)2018). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was reduced by $190 million at Septemberboth June 30, 20182019 and $198 million at December 31, 2017,2018, 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 $657$800 million at SeptemberJune 30, 20182019 compared to $528$664 million at December 31, 2017.

2018.

Our overall liquidity increasedhas remained stable since SeptemberJune 30, 2017.2018. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increaseddecreased slightly from 18.1%20.2% at SeptemberJune 30, 20172018 to 19.6%20.1% at SeptemberJune 30, 2018.

2019.



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We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.

The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2017,2018, detail of which is presented in Table 18 on page 8277 of our 20172018 Annual Report on Form 10-K.

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Index

We are not involved in any other legal proceedings that, in our opinion, could have a material effect on our consolidated financial position.

Off-Balance Sheet Arrangements and Derivative Financial Instruments

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

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, 2018,2019, and have no current plans to do so.

Capital Resources

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. Our banking subsidiary, First Bank, is also regulated by the North Carolina Office of the Commissioner of Banks. 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, 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 capital standards require us to maintain minimum ratios of “Common Equity Tier 1” capital to total risk-weighted assets, “Tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively. Common Equity Tier 1 capital is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier 1 capital is comprised of Common Equity Tier 1 capital plus Additional Tier 1 Capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in Federal 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 increaseincreased each year until fully implemented at 2.5% inon January 1, 2019.

In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators. The Federal Reserve has not advised us of any requirement specifically applicable to us.



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At SeptemberJune 30, 2018,2019, our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.

  September 30,
2018		  December 31,
2017		  September 30,
2017		 
          
Risk-based capital ratios:            
Common equity Tier 1 to Tier 1 risk weighted assets  11.97%   10.72%   10.30% 
Minimum required Common equity Tier 1 capital  6.375%   5.75%   5.75% 
             
Tier I capital to Tier 1 risk weighted assets  13.18%   11.94%   11.74% 
Minimum required Tier 1 capital  7.875%   7.25%   7.25% 
             
Total risk-based capital to Tier II risk weighted assets  13.68%   12.50%   12.44% 
Minimum required total risk-based capital  9.875%   9.25%   9.25% 
             
Leverage capital ratios:            
Tier 1 capital to quarterly average total assets  10.34%   9.58%   9.72% 
Minimum required Tier 1 leverage capital  4.00%   4.00%   4.00% 

 
June 30,
2019
 
December 31,
2018
 
June 30,
2018
Risk-based capital ratios: 
  
  
Common equity Tier 1 to Tier 1 risk weighted assets12.94% 12.28% 11.41%
Minimum required Common equity Tier 1 capital7.00% 6.375% 6.375%
      
Tier I capital to Tier 1 risk weighted assets14.12% 13.48% 12.61%
Minimum required Tier 1 capital8.50% 7.875% 7.875%
      
Total risk-based capital to Tier II risk weighted assets14.60% 13.97% 13.17%
Minimum required total risk-based capital10.50% 9.875% 9.875%
      
Leverage capital ratios: 
  
  
Tier 1 capital to quarterly average total assets10.89% 10.47% 10.05%
Minimum required Tier 1 leverage capital4.00% 4.00% 4.00%
First Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above. At SeptemberJune 30, 2018,2019, First Bank significantly exceeded the minimum ratios established by the regulatory authorities.

In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible assets (“TCE Ratio”). Our TCE ratio was 8.95%9.75% at SeptemberJune 30, 20182019 compared to 8.23%9.07% at December 31, 20172018 and 7.95%8.59% at SeptemberJune 30, 2017.

2018.

BUSINESS DEVELOPMENT MATTERS

The following is a list of business development and other miscellaneous matters affecting First Bancorp and First Bank, our bank subsidiary.

·On September 15, 2018, the Company announced a quarterly cash dividend of $0.10 cents per share payable on October 25, 2018 to shareholders of record on September 30, 2018. The dividend rate represents a 25% increase over the previous dividend rate of $0.08 the Company declared in the third quarter of 2017.

On June 14, 2019, the Company announced a quarterly cash dividend of $0.12 per share payable on July 25, 2019 to shareholders of record on June 30, 2019. The dividend rate represents a 20% increase over the previous dividend rate of $0.10 the Company declared in the second quarter of 2018.
SHARE REPURCHASES

We did not repurchase anyrepurchased 182,000 shares of our common stock during the first ninesix months of 2018.2019 at an average price of $35.82 per share, which totaled $6.5 million. At SeptemberJune 30, 2018,2019, we had approximately 214,000 shares available for repurchase under existing authority from our board of directors.directors to repurchase up to an additional $18.5 million in shares of the Company’s common stock. 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.”

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

Net interest income is our most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, our level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to our various categories of earning assets and interest-bearing liabilities. It is our policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. Our exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income


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and expense based on current interest rates, expected future interest rates, and various intervals of “shock” interest rates. Over the years, we have been able to maintain a fairly consistent yield on average earning assets (net interest margin). Over the past five calendar years, our net interest margin has ranged from a low of 4.03% (realized in 2016) to a high of 4.92%4.58% (realized in 2013)2014). UpFrom 2008 until the endfourth quarter of 2015, the prime rate of interest had remained at 3.25% since 2008. In response to. Beginning in December 2015, the Federal Reserve actions,began steadily increasing the prime rate increased to 3.50% onof interest, which reached a rate of 5.50% in December 31, 2015 and to 3.75% on December 15, 2016. In 2017 and 2018 Federal Reserve actions steadily increased(also the prime rate six additional times, up to 5.25%, which was thecurrent rate at SeptemberJune 30, 2018.2019). The consistency of ourthe net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At SeptemberJune 30, 2018,2019, 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.

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Index

Using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call). At SeptemberJune 30, 2018,2019, we had $1.3$1.4 billion more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only measures the magnitude of the timing differences and does not address earnings, market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of “when” various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities subject to interest rate changes within one year at SeptemberJune 30, 20182019 are deposits totaling $2.3$2.4 billion comprised of checking, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced with, or in the same proportion, as general market indicators.

Overall, we believe that in the near term (twelve months), net interest income will not likely experience significant downward pressure from rising interest rates. Similarly, we would not expect a significant increase in near term net interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. In the short-term (less than 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, in the twelve-month horizon, the impact of having a higher level of interest-sensitive liabilities lessens the short-term effects of changes in interest rates.

Overall, the Company's interest rate modeling indicates that the Company is slightly asset sensitive in a 1-2 year horizon.

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, which resulted in a flat interest rate curve. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the Company, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge, the profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin.

While there have been periods in the last few years that the yield curve has steepened somewhat,slightly, it currently remains relatively flat.flat, even with some points of inversion along the curve. 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 it relates to deposits, the Federal Reserve made no changes to the short term interest rates it sets directly from 2008 until mid-December 2015, and since that time we werehave been 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,a result of the eightnine interest rate increases initiated by the Federal Reserve over the past few years have not resulted insince 2015 and significant competitive pressurepressures in our market area, we have had to


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increase deposit rates, although we are choosingrates. Deposit pricing competition began to payintensify in the second half of 2018 and it has continued. In the first six months of 2019, our deposit costs have risen at a higher rates to price-sensitive customersrate than the increase in certain situations.

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asset yields, which negatively impacted our net interest margin.
Index

As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by certain purchase accounting adjustments related to the acquired banks. The purchase accounting adjustments related to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the loan discount on acquired loans which amounted to $6.0$2.5 million and $5.1$4.0 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that wereare initially recorded and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and susceptible to volatility. The remaining loan discount on acquired accruing loans amounted to $24.3$14.8 million at SeptemberJune 30, 2019 compared to $20.3 million at June 30, 2018.

On July 31, 2019, the Federal Reserve announced a decrease in the federal funds rate of 25 basis points. Based on our most recent interest rate modeling, which assumes steady increases byand our expectation that the Federal Reserve over the next twelve months,will decrease interest rates at least once more during 2019, we project that our net interest margin, consistent with the above discussion, will likely remain fairly stable during that period. We expectdecline slightly over the second half of 2019 due to interest-sensitive asset yields that will decline to increase, and we also expect that wea greater degree than will experience pressure to increase our deposit rates.

interest-sensitive funding costs.

We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign currency positions.

See additional discussion regarding net interest income, as well as discussion of the changes in the annual net interest margin in the section entitled “Net Interest Income” above.

Item 4 – Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the required time periods.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is communicated to our management to allow timely decisions regarding required disclosure.  Based on the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in allowing timely decisions regarding disclosure to be made about material information required to be included in our periodic reports with the SEC. In addition, no change in our internal control over financial reporting has occurred during, or subsequent to, the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1 – Legal Proceedings

Various legal proceedings may arise in the ordinary course of business and may be pending or threatened against the Company and its subsidiaries. Neither the Company nor any of its subsidiaries is involved in any pending legal proceedings that management believes are material to the Company or its consolidated financial position.  If an exposure were to be identified, it is the Company’s policy to establish and accrue appropriate reserves during the accounting period in which a loss is deemed to be probable and the amount is determinable.

Item 1A – Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Forward-Looking Statements” set forth in the


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forepart of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q and in our other filings with the SEC.

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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, 2018 to July 31, 2018———214,241
August 1, 2018 to August 31, 2018———214,241
September 1, 2018 to September 30, 2018———214,241
Total———214,241

Issuer Purchases of Equity Securities
Period 
Total Number of
Shares
Purchased (2)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
April 1, 2019 to April 30, 2019 —
 $—
 $—
 $25,000,000
May 1, 2019 to May 31, 2019 58,400
 35.70
 2,085,141
 $22,914,859
June 1, 2019 to June 30, 2019 123,568
 35.92
 4,438,942
 $18,475,917
Total 181,968
 35.85
 6,524,083
 $18,475,917
Footnotes to the Above Table

(1)All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. On July 30, 2004,February 5, 2019, the Company announced that its board of directors had approved the repurchase of 375,000up to $25,000,000 in shares of the Company’s common stock. The repurchase authorization does not have an expiration date. The Company has no plans or programs to terminate the authorization, or plans under which we do not intend to make further purchases.expires on December 31, 2019.

(2)The table above does not include shares that were used by option holders to satisfy the exercise price of the call 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 SeptemberJune 30, 2018.2019.

During the three months ended SeptemberJune 30, 2018,2019, there were no unregistered sales of the Company’s securities.



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Item 6 - Exhibits

The following exhibits are filed with this report or, as noted, are incorporated by reference. Except as noted below the exhibits identified have Securities and Exchange Commission File No. 000-15572. Management contracts, compensatory plans and arrangements are marked with an asterisk (*).

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

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

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

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

3.a
Articles of Incorporation of the Company and amendments thereto were filed as Exhibits 3.a.i through 3.a.v to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and are incorporated herein by reference.Articles of Amendment to the Articles of Incorporation were filed as Exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and are incorporated herein by reference.Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1.b to the Company’s Registration Statement on Form S-3D filed on June 29, 2010 (Commission File No. 333-167856), and are incorporated herein by reference.reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and are incorporated herein by reference.Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and are incorporated herein by reference.reference.

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Index

3.b
Amended and Restated Bylaws of the Company were filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on February 9, 2018, and are incorporated herein by reference.

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

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

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

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

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

101
The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2018,2019, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

Copies of exhibits are available upon written request to: First Bancorp, Elizabeth B. Bostian, Secretary, 300 SW Broad Street, Southern Pines, North Carolina, 28387



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 FIRST BANCORP
  
August 9, 2019BY:/s/  Richard H. Moore
Richard H. Moore
Chief Executive Officer
(Principal Executive Officer),
and Director
  
  
August 9, 2019November 9, 2018BY:/s/ Richard H. Moore    
Richard H. Moore
Chief Executive Officer
(Principal Executive Officer),
and Director
November 9, 2018BY:/s/  Eric P. Credle
 
Eric P. Credle
Executive Vice President
and Chief Financial Officer



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