UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2020

Commission File Number 0-15572

FIRST BANCORP

(Exact Name of Registrant as Specified in its Charter)



North Carolina			56-1421916
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification Number)

300 SW Broad St.,	Southern Pines,	North Carolina	28387
(Address of Principal Executive Offices)			(Zip Code)

(Registrant's telephone number, including area code)			(910)	246-2500

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered:
Common Stock, No Par Value	FBNC	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

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



Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of the registrant's Common Stock outstanding on ~~October 31, 2019~~April 30, 2020 was ~~29,604,830.~~29,040,827.

INDEX

FIRST BANCORP AND SUBSIDIARIES



	Page

Part I. Financial Information

Item 1 - Financial Statements
Consolidated Balance Sheets - ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	4
Consolidated Statements of Income - For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	5
Consolidated Statements of Comprehensive Income - For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	6
Consolidated Statements of Shareholders’ Equity - For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	7
Consolidated Statements of Cash Flows - For the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	98
Notes to Consolidated Financial Statements	109
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition	3936
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	5655
Item 4 – Controls and Procedures	5856

Part II. Other Information

Item 1 – Legal Proceedings	5857
Item 1A – Risk Factors	5857
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 6 – Exhibits	6059
Signatures	6160

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 ~~2018~~2019 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)	September 30, 2019 (unaudited)			December 31, 2018		March 31, 2020 (unaudited)			December 31, 2019
ASSETS
Cash and due from banks, noninterest-bearing	$	52,621		56,050		$	93,666		64,519
Due from banks, interest-bearing	264,840			406,848		282,683			166,783
Total cash and cash equivalents	317,461			462,898		376,349			231,302

Securities available for sale	705,224			501,351		806,470			821,945
Securities held to maturity (fair values of $74,465 and $99,906)	74,265			101,237
Securities held to maturity (fair values of $62,385 and $68,333)						61,303			67,932

Presold mortgages in process of settlement	16,269			4,279		14,861			19,712
SBA Loans held for sale						18,449			—

Loans	4,396,544			4,249,064		4,552,708			4,453,466
Allowance for loan losses	(19,260		)	(21,039	)	(24,498		)	(21,398	)
Net loans	4,377,284			4,228,025		4,528,210			4,432,068

Premises and equipment	136,668			119,000		113,669			114,859
Operating right-of-use lease assets						19,347			19,669
Accrued interest receivable	16,297			16,004		15,767			16,648
Goodwill	234,368			234,368		234,368			234,368
Other intangible assets	18,456			21,112		15,461			17,217
Foreclosed properties	4,589			7,440		3,487			3,873
Bank-owned life insurance	103,806			101,878		105,083			104,441
Other assets	64,224			66,524		63,234			59,605
Total assets	$	6,068,911		5,864,116		$	6,376,058		6,143,639

LIABILITIES
Deposits: Noninterest bearing checking accounts	$	1,491,494		1,320,131		$	1,580,849		1,515,977
Interest bearing checking accounts	894,777			916,374		922,985			912,784
Money market accounts	1,124,614			1,035,523		1,224,414			1,173,107
Savings accounts	418,043			432,389		431,377			424,415
Time deposits of $100,000 or more	686,554			690,922		639,762			649,947
Other time deposits	259,900			264,000		245,601			255,125
Total deposits	4,875,382			4,659,339		5,044,988			4,931,355
Borrowings	300,656			406,609		402,185			300,671
Accrued interest payable	2,169			1,976		2,100			2,154
Operating lease liabilities						19,578			19,855
Other liabilities	55,722			31,962		45,009			37,203
Total liabilities	5,233,929			5,099,886		5,513,860			5,291,238

Commitments and contingencies

SHAREHOLDERS’ EQUITY
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Issued & outstanding: none and none	—			—		—			—
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 29,604,830 and 29,724,874 shares	429,136			434,453
Issued & outstanding: 29,040,827 and 29,601,264 shares						410,236			429,514
Retained earnings	402,212			341,738		430,709			417,764
Stock in rabbi trust assumed in acquisition	(2,577		)	(3,235	)	(2,602		)	(2,587	)
Rabbi trust obligation	2,577			3,235		2,602			2,587
Accumulated other comprehensive income (loss)	3,634			(11,961	)	21,253			5,123
Total shareholders’ equity	834,982			764,230		862,198			852,401
Total liabilities and shareholders’ equity	$	6,068,911		5,864,116		$	6,376,058		6,143,639

See accompanying notes to unaudited consolidated financial statements.

Page 4

Index

First Bancorp and Subsidiaries

Consolidated Statements of Income


($ in thousands, except share data-unaudited)	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2019			2018		2019		2018		2020		2019
INTEREST INCOME
Interest and fees on loans	$	55,142		52,407		164,754		154,028		$	55,297	53,960
Interest on investment securities:
Taxable interest income	5,130			2,501		14,859		7,552		5,474		4,737
Tax-exempt interest income	212			367		820		1,115		164		337
Other, principally overnight investments	1,898			2,944		6,705		7,320		1,098		2,701
Total interest income	62,382			58,219		187,138		170,015		62,033		61,735

INTEREST EXPENSE
Savings, checking and money market accounts	2,560			1,334		6,904		3,445		2,359		2,009
Time deposits of $100,000 or more	3,519			2,302		10,219		5,627		2,924		3,178
Other time deposits	518			270		1,375		740		490		390
Borrowings	2,007			2,468		7,092		6,619		1,501		2,797
Total interest expense	8,604			6,374		25,590		16,431		7,274		8,374

Net interest income	53,778			51,845		161,548		153,584		54,759		53,361
Provision (reversal) for loan losses	(1,105		)	87		(913	)	(4,282	)
Provision for loan losses										5,590		500
Net interest income after provision for loan losses	54,883			51,758		162,461		157,866		49,169		52,861

NONINTEREST INCOME
Service charges on deposit accounts	3,388			3,221		9,543		9,606		3,337		2,945
Other service charges, commissions and fees	5,814			4,942		16,848		14,101		4,069		4,506
Fees from presold mortgage loans	1,275			576		2,677		2,231		1,841		545
Commissions from sales of insurance and financial products	2,203			2,425		6,436		6,484		2,068		2,029
SBA consulting fees	663			1,287		2,847		3,554		1,027		1,263
SBA loan sale gains	1,917			2,373		7,048		8,773		647		2,062
Bank-owned life insurance income	651			641		1,928		1,892		642		646
Securities gains (losses), net	97			—		97		—
Foreclosed property gains (losses), net	(273		)	(192	)	(899	)	(579	)
Other gains (losses), net	(105		)	(101	)	(331	)	811		74		82
Total noninterest income	15,630			15,172		46,194		46,873		13,705		14,078

NONINTEREST EXPENSES
Salaries expense	19,833			18,771		58,530		56,615		20,110		18,965
Employee benefits expense	4,144			4,061		13,150		12,752		4,547		4,588
Total personnel expense	23,977			22,832		71,680		69,367		24,657		23,553
Occupancy expense	2,786			2,742		8,269		8,087		2,958		2,754
Equipment related expenses	1,231			1,438		3,783		3,931		1,145		1,369
Merger and acquisition expenses	—			167		213		3,568		—		110
Intangibles amortization expense	1,163			1,452		3,737		4,518		1,055		1,332
Foreclosed property losses, net										159		245
Other operating expenses	9,763			10,403		30,948		31,683		10,102		9,411
Total noninterest expenses	38,920			39,034		118,630		121,154		40,076		38,774

Income before income taxes	31,593			27,896		90,025		83,585		22,798		28,165
Income tax expense	6,574			5,905		18,862		18,191		4,618		5,880

Net income	$	25,019		21,991		71,163		65,394		$	18,180	22,285

Earnings per common share:
Basic	$	0.84		0.74		2.39		2.21		$	0.62	0.75
Diluted	0.84			0.74		2.39		2.21		0.62		0.75

Dividends declared per common share	$	0.12		0.10		0.36		0.30		$	0.18	0.12

Weighted average common shares outstanding:
Basic	29,542,001			29,530,203		29,585,383		29,536,273		29,230,788		29,587,217
Diluted	29,684,105			29,621,130		29,759,459		29,639,126		29,399,114		29,743,395

See accompanying notes to unaudited consolidated financial statements.

Page 5

Index

First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income


($ in thousands-unaudited)	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2019			2018		2019		2018		2020			2019
Net income	$	25,019		21,991		71,163		65,394		$	18,180		22,285
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, pretax	2,210			(927	)	19,814		(10,229	)	20,765			5,903
Tax (expense) benefit	(508		)	216		(4,602	)	2,390		(4,772		)	(1,380	)
Reclassification to realized (gains) losses	(97		)	—		(97	)	—
Tax expense (benefit)	22			—		22		—
Postretirement Plans:
Amortization of unrecognized net actuarial loss	155			(87	)	611		16		178			228
Tax benefit	(36		)	20		(153	)	(4	)	(41		)	(54	)
Other comprehensive income (loss)	1,746			(778	)	15,595		(7,827	)	16,130			4,697
Comprehensive income	$	26,765		21,213		86,758		57,567		$	34,310		26,982

See accompanying notes to unaudited consolidated financial statements.

Page 6

Index

First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity


($ in thousands, except share data - unaudited)	Common Stock					Retained Earnings		Stock in Rabbi Trust Assumed in Acquisition			Rabbi Trust Obligation			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity		Common Stock					Retained Earnings		Stock in Rabbi Trust Assumed in Acquisition		Rabbi Trust Obligation	Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
($ in thousands, except share data - unaudited)	Shares		Amount							Shares				Accumulated Other Comprehensive Income (Loss)		Amount								Retained Earnings		Stock in Rabbi Trust Assumed in Acquisition		Rabbi Trust Obligation	Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Three Months Ended September 30, 2018						Retained Earnings
Balances, July 1, 2018	29,703		$	434,117		301,800		Stock in Rabbi Trust Assumed in Acquisition	(3,214	)	Rabbi Trust Obligation		3,214			(11,195	Total Shareholders’ Equity	)		724,722
Three Months Ended March 31, 2019																			Three Months Ended March 31, 2019
Balances, January 1, 2019																			29,725		$	434,453		341,738		(3,235	)	3,235	(11,961	)	764,230

Net income						21,991											21,991							22,285							22,285
Cash dividends declared ($0.10 per common share)						(2,969	)										(2,969	)
Cash dividends declared ($0.12 per common share)																								(3,568	)						(3,568	)
Change in Rabbi Trust Obligation								(10	)		10						—									(10	)	10			—
Stock option exercises	—		—														—
Stock withheld for payment of taxes	(3	)	(264		)												(264	)	(3	)	(91		)								(91	)
Stock-based compensation	29		374														374		24		586										586
Other comprehensive income (loss)														(778	)		(778	)											4,697		4,697

Balances, September 30, 2018	29,729		$	434,227		320,822		(3,224	)		3,224			(11,973	)		743,076
Balances, March 31, 2019																			29,746		$	434,948		360,455		(3,245	)	3,245	(7,264	)	788,139


Three Months Ended September 30, 2019
Balances, July 1, 2019	29,717		432,533			380,748		(2,866	)		2,866			1,888			815,169
Three Months Ended March 31, 2020																			Three Months Ended March 31, 2020
Balances, January 1, 2020																			29,601		$	429,514		417,764		(2,587	)	2,587	5,123		852,401

Net income						25,019											25,019							18,180							18,180
Cash dividends declared ($0.12 per common share)						(3,555	)										(3,555	)
Cash dividends declared ($0.18 per common share)																								(5,235	)						(5,235	)
Change in Rabbi Trust Obligation								289			(289	)					—									(15	)	15			—
Equity issued related to acquisition earn-out	—		—														—
Stock repurchases	(100	)	(3,476		)												(3,476	)	(576	)	(20,000		)								(20,000	)
Stock option exercises	—		—														—
Stock withheld for payment of taxes	(12	)	(467		)												(467	)
Stock-based compensation	—		546														546		16		722										722
Other comprehensive income (loss)														1,746			1,746												16,130		16,130

Balances, September 30, 2019	29,605		$	429,136		402,212		(2,577	)		2,577			3,634			834,982
Balances, March 31, 2020																			29,041		$	410,236		430,709		(2,602	)	2,602	21,253		862,198

See accompanying notes to unaudited consolidated financial statements.

Page 7

~~Index~~

~~First Bancorp and Subsidiaries~~

~~Consolidated Statements of Shareholders’ Equity (continued)~~

($ in thousands, except share data - unaudited) Common Stock Retained
Earnings Stock in
Rabbi
Trust
Assumed
in
Acquisition Rabbi
Trust
Obligation Accumulated
Other
Comprehensive
Income
(Loss) Total
Shareholders’
Equity
Shares Amount
Nine Months Ended September 30, 2018
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 )
Change in Rabbi Trust Obligation 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 )

September 30, 2018 29,729
$ 434,227
320,822
(3,224 ) 3,224
(11,973 ) 743,076

Nine Months Ended September 30, 2019
Balances, January 1, 2019 29,725
434,453
341,738
(3,235 ) 3,235
(11,961 ) 764,230

Net income

71,163

71,163
Cash dividends declared ($0.36 per common share)

(10,689 )

(10,689 )
Change in Rabbi Trust Obligation

658
(658 )

—
Equity issued related to acquisition earn-out 78
3,070
3,070
Stock repurchases (282 ) (10,000 ) (10,000 )
Stock option exercises 9
129
129
Stock withheld for payment of taxes (15 ) (558 ) (558 )
Stock-based compensation 90
2,042
2,042
Other comprehensive income (loss) 15,595
15,595

Balances, September 30, 2019 29,605
$ 429,136
402,212
(2,577 ) 2,577
3,634
834,982

~~See accompanying notes to unaudited consolidated financial statements.~~

~~Page 8~~

Index

First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows


($ in thousands-unaudited)	Nine Months Ended September 30,					Three Months Ended March 31,
	2019			2018		2020			2019
Cash Flows From Operating Activities
Net income	$	71,163		65,394		$	18,180		22,285
Reconciliation of net income to net cash provided by operating activities:
Provision (reversal) for loan losses	(913		)	(4,282	)
Provision for loan losses						5,590			500
Net security premium amortization	1,827			2,184		804			459
Loan discount accretion	(4,473		)	(5,982	)	(1,841		)	(1,419	)
Other purchase accounting accretion and amortization, net	(16		)	(165	)	14			(13	)
Foreclosed property (gains) losses and write-downs, net	899			579
Gains on securities available for sale	(97		)	—
Other losses (gains)	331			(811	)
Increase in net deferred loan costs	(261		)	(1,475	)
Foreclosed property losses and write-downs, net						159			245
Other gains						(74		)	(82	)
Decrease (increase) in net deferred loan costs						320			(325	)
Depreciation of premises and equipment	4,326			4,420		1,563			1,468
Amortization of operating lease right-of-use assets	1,372			—		496			475
Repayments of lease obligations	(1,250		)	—		(452		)	(455	)
Stock-based compensation expense	1,748			1,201		513			403
Amortization of intangible assets	3,737			4,518		1,055			1,332
Amortization of SBA servicing assets	975			555		918			299
Fees/gains from sale of presold mortgages and SBA loans	(9,725		)	(11,004	)	(2,488		)	(2,607	)
Origination of presold mortgage loans in process of settlement	(108,723		)	(97,081	)	(48,143		)	(19,025	)
Proceeds from sales of presold mortgage loans in process of settlement	99,606			105,506		54,764			20,506
Origination of SBA loans for sale	(125,982		)	(162,782	)	(36,081		)	(38,329	)
Proceeds from sales of SBA loans	101,349			130,460		16,031			30,678
Increase in accrued interest receivable	(293		)	(888	)
Decrease (increase) in accrued interest receivable						881			(512	)
Increase in other assets	(4,061		)	(893	)	(1,738		)	(4,493	)
Increase in accrued interest payable	193			681
Increase (decrease) in other liabilities	1,690			(6,448	)
(Decrease) increase in accrued interest payable						(54		)	365
Increase in other liabilities						3,255			5,254
Net cash provided by operating activities	33,422			23,687		13,672			17,009

Cash Flows From Investing Activities
Purchases of securities available for sale	(339,030		)	(48,975	)	(9,423		)	(161,892	)
Purchases of securities held to maturity						(3,624		)	—
Proceeds from maturities/issuer calls of securities available for sale	114,003			27,609		45,037			29,313
Proceeds from maturities/issuer calls of securities held to maturity	26,316			12,841		10,075			10,098
Proceeds from sales of securities available for sale	39,797			—
Redemptions (purchases) of FRB and FHLB stock, net	4,088			(6,129	)
Purchases of FRB and FHLB stock, net						(4,572		)	(308	)
Net increase in loans	(116,664		)	(103,091	)	(95,680		)	(45,018	)
Proceeds from sales of foreclosed properties	4,628			6,829		889			1,513
Purchases of premises and equipment	(2,714		)	(6,656	)	(1,321		)	(1,450	)
Proceeds from sales of premises and equipment	1,148			2,739		189			279
Net cash used by investing activities	(268,428		)	(114,833	)	(58,430		)	(167,465	)

Cash Flows From Financing Activities
Net increase in deposits	216,195			121,719		113,664			137,957
Net decrease in borrowings	(106,089		)	(1,086	)
Net increase (decrease) in short-term borrowings						(48,000		)	—
Proceeds from long-term borrowings						150,000			—
Payments on long-term borrowings						(531		)	(529	)
Cash dividends paid – common stock	(10,108		)	(8,308	)	(5,328		)	(2,972	)
Repurchases of common stock	(10,000		)	—		(20,000		)	—
Proceeds from stock option exercises	129			324
Stock withheld for payment of taxes	(558		)	(264	)
Payment of taxes related to stock withheld						—			(91	)
Net cash provided by financing activities	89,569			112,385		189,805			134,365

(Decrease) increase in cash and cash equivalents	(145,437		)	21,239
Increase (decrease) in cash and cash equivalents						145,047			(16,091	)
Cash and cash equivalents, beginning of period	462,898			489,490		231,302			462,898

Cash and cash equivalents, end of period	$	317,461		510,729		$	376,349		446,807

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest	$	25,397		15,750		$	7,328		8,009
Cash paid during the period for income taxes	20,106			17,333		20			103
Non-cash transactions:
Unrealized gain (loss) on securities available for sale, net of taxes	15,137			(7,839	)
Foreclosed loans transferred to other real estate	2,676			2,159
Initial recognition of operating lease right-of-use assets	19,459			—
Initial recognition of operating lease liabilities	19,459			—
Non-cash: Unrealized gain (loss) on securities available for sale, net of taxes						15,993			4,523
Non-cash: Foreclosed loans transferred to other real estate						662			708
Non-cash: Initial recognition of operating lease right-of-use assets						—			19,406
Non-cash: Initial recognition of operating lease liabilities						—			19,406

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements



(unaudited)	For the Period Ended ~~September 30, 2019~~March 31, 2020

Note 1 - Basis of Presentation and Risks and Uncertainties

Basis of Presentation

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of ~~September 30, 2019,~~March 31, 2020, the consolidated results of operations orfor the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ and the consolidated cash flows for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. All such adjustments were of a normal, recurring nature. Reference is made to the ~~2018~~2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for a discussion of accounting policies and other relevant information with respect to the financial statements. The results of operations for the periods ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.

Risks and Uncertainties

The coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies have and may continue to impact many of the Company’s customers. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time. The Company has given hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encourages customers to reach out for assistance to support their individual circumstances.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, which the Company has applied, modifications deemed to be COVID-19-related would not be considered a troubled debt restructuring (“TDR”) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification would not meet the requirements under accounting principles generally accepted in the United States of America to be a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. Under these terms, as of March 31, 2020, the Company had processed payment deferrals for 315 loans with an aggregate loan balance of $120 million. Through April 30, 2020, the number of deferrals increased to 1,269 with an aggregate loan balance of $647 million. These deferrals were generally no more than 90 days in duration.

Additionally, the Company is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. In April and early May 2020, the Company approved 2,799 PPP loans totaling approximately $249.5 million under the allocation approved by Congress, of which $208.0 million had been funded at May 6, 2020.

The Company identified several loan portfolio categories totaling approximately $553 million that it considered to be most “at-risk” from the COVID-19 pandemic, including hotels, restaurants, retail stores, travel accommodations, child care facilities, arts and entertainment, barber shops and beauty salons, car and boat dealers, and mini-storage facilities, as well as all credit cards. As a result of the analysis, the Company recorded an approximately $4.3 million COVID-19 related provision for loan losses, which brought the total provision for loan losses to $5.6 million for the three months ended March 31, 2020. The amount was determined as if the risk grades for the loans in these portfolios had been adjusted downwards and then applying the historical loss rates associated with those risk grades.

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

Note 2 – Accounting Policies

Accounting Standards:

Note 1 to the ~~2018~~2019 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.

SBA Loans Held for Sale - SBA Loans Held for Sale represent the guaranteed portion of SBA loans that the Company intends to sell in the near future. These loans are carried at the lower of cost or market as determined on an individual loan basis.

Accounting Standards Adopted in ~~2019~~

In February 2016, the Financial Accounting Standards Board (“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 new 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 did 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 the Company on January 1, 2019 and adoption did not 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~~

~~Page 10~~

~~Index~~

financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. The guidance also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The Company will apply the 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 did not 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 continues its ongoing analysis on the impact of this guidance on its consolidated financial statements. In that regard, a cross-functional 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 the new guidance. The Company has provided core data to the vendor and continues to validate and enhance the data. Implementation efforts continue with model development and validation. While the Company is currently unable to reasonably estimate the impact of adopting the guidance, the Company expects the adoption of this guidance to significantly increase its allowance for loan losses. The impact of adoption is expected to be significantly influenced by the composition, characteristics and quality of the Company's loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.2020

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~~were 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~~2020 and the adoption of this amendment todid not have a material effect on ~~its~~the Company's financial statements. The Company's policy is to test goodwill for impairment annually on October 31 or on an interim basis if an event triggering impairment may have occurred. During the period ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis. Under the new simplified guidance, the Company determined that none of it's goodwill was impaired as of March 31, 2020. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments were effective on January 1, 2020. These amendments did not have a material effect on the Company's financial statements.

In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments were effective for ~~fiscal years,~~the Company on January 1, 2020 and ~~interim periods within those fiscal years, beginning after December 15, 2019. Early~~their 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 doesdid not ~~expect these amendments to~~ 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 losses" and record an allowance that, when deducted from the amortized cost basis of the financial assets, presents the net amount expected to be collected on the financial assets. In May 2019, the FASB issued additional guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of the CECL model. The Company does not expect to elect this option. The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecasts. Except as discussed below, the Company would have applied the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, which, for the Company, is January 1, 2020, with future adjustments to credit loss

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expectations recorded through the income statement as charges or credits to earnings. In the first quarter of 2020, in response to the COVID-19 pandemic, the CARES Act was enacted by the United States Congress and signed by the President. This CARES Act included an election to defer the implementation of CECL until the earlier of the cessation of the national emergency, or December 31, 2020. The Company is prepared for CECL implementation but elected to defer its effective date, as permitted by the CARES Act, because of the challenges associated with developing a reliable forecast of losses that may result from the unprecedented COVID-19 pandemic. Upon the adoption of CECL, the Company expects its allowance for credit losses related to all financial assets will increase to approximately $40-$44 million as of January 1, 2020 compared to its allowance for loan losses at December 31, 2019 of approximately $21 million. As noted above, this initial impact will be reflected as a cumulative-effect adjustment to retained earnings.

In August 2018, the FASB amended the 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 March ~~2019,~~2020, the FASB issued guidance to ~~address concerns companies had raised about an~~provide temporary optional guidance to ease the potential burden in accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.for reference rate reform. The amendments ~~will be~~are effective ~~for the Company for reporting periods beginning after~~as of March 12, 2020 through December ~~15, 2019. Early adoption is permitted.~~31, 2022. 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.

~~Page 11~~

~~Index~~

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

Note 3 – Reclassifications

Certain amounts reported in the periods ended ~~September 30, 2018~~March 31, 2019 and December 31, ~~2018~~2019 may have been reclassified to conform to the presentation for ~~September 30, 2019.~~March 31, 2020. 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 – Stock-Based Compensation ~~Plans~~

The Company recorded total stock-based compensation expense of ~~$546,000~~$513,000 and ~~$374,000~~$403,000 for the three months ended ~~September 30,~~March 31, 2020 and 2019, respectively. The Company recognized $118,000 and ~~2018, respectively, and $1,748,000 and $1,201,000~~$93,000 of income tax benefits related to stock-based compensation expense in the income statement for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~Stock-based~~

At March 31, 2020, the sole equity-based compensation ~~expense~~plan for the Company ~~relates to equity awards granted to employees and directors.~~

~~At September 30, 2019, the Company had the following stock-based compensation plans:~~is the First Bancorp 2014 Equity Plan ~~and the First Bancorp 2007 Equity Plan. The Company’s shareholders~~(the "Equity Plan"), which was approved ~~each plan. The First Bancorp 2014 Equity Plan became effective upon the approval of~~by shareholders on May 8, 2014. As of ~~September 30, 2019,~~March 31, 2020, the ~~First Bancorp 2014~~ Equity Plan ~~was the only plan that~~ had ~~shares available for future grants, and there were 675,319~~616,757 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~~plans' participants with those of the Company and its shareholders. The ~~First Bancorp 2014~~ Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.

Recent equity awards to employees have been made in the form of shares of restricted stock with service vesting conditions only. Compensation expense for these awards is recorded over the requisite service periods. Upon forfeiture, any previously recognized compensation cost is reversed. Upon a change in control (as defined in the plans), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.

Certain of the Company’s ~~awards~~equity grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company recognizes compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for each incremental award. Compensation expense is based on the estimated number of stock options and awards that will

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ultimately vest. Over the past five years, there have ~~only~~ been ~~minimal~~insignificant amounts of forfeitures, and therefore the Company assumes that all awards granted with service conditions only will vest. The Company issues new shares of common stock when options are exercised.

In addition to employee equity awards, the Company's practice is to grant common shares, valued at approximately $32,000, to each non-employee director (currently 11 in total) in June of each year. Compensation expense associated with these director awards is recognized on the date of award since there are no vesting conditions. 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 per share, which was the closing price of the Company's common stock on that date, and resulted in $352,000 in expense. The expense associated with director grants is classified as "other operating expense" in the Consolidated Statements of Income.

The following table presents information regarding the activity for the first ~~nine~~three months of ~~2019~~2020 related to the Company’s outstanding restricted stock:

~~Page 12~~

~~Index~~


	Long-Term Restricted Stock				Long-Term Restricted Stock
	Number of Units		Weighted-Average Grant-Date Fair Value		Number of Units		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2019	129,251		$	32.39
Nonvested at January 1, 2020					159,366		$	36.79
Granted during the period	82,826		36.36		15,969		36.29
Vested during the period	(37,961	)	21.69		(1,042	)	28.80
Forfeited or expired during the period	(954	)	41.93		—		—

Nonvested at September 30, 2019	173,162		$	36.58
Nonvested at March 31, 2020					174,293		$	36.79

Total unrecognized compensation expense as of ~~September 30, 2019~~March 31, 2020 amounted to ~~$3,608,000~~$2,957,000 with a weighted-average remaining term of ~~2.2~~1.9 years. ~~The~~For the nonvested awards that are outstanding at March 31, 2020, the Company expects to record ~~$1,872,000~~$1,821,000 in compensation expense in the next twelve months, ~~$516,000~~$1,440,000 of which ~~will~~is expected to be recorded in the remaining ~~quarter~~quarters of ~~2019.~~2020.

Prior to 2010, stock options were the primary form of stock-based compensation utilized by the Company. At ~~September 30, 2019,~~March 31, 2020, there were 0 stock options outstanding. ~~The following table presents information regarding the activity for the first nine 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 September 30, 2019 —
$ —
0 $ —

Exercisable at September 30, 2019 —
$ —
0 $ —

During both the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ there were 0 stock option exercises. ~~During the nine months ended September 30, 2019 and 2018, the Company received $129,000 and $324,000, respectively, as a result of stock option exercises.~~

Note 5 – Earnings Per Common Share

Basic Earnings Per Common Share is calculated by dividing net income, less income allocated to participating 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, 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 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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~~Index~~

dilutive securities is based on the weighted average number of shares that ~~are~~would have been issuable if the end of the reporting period were the end of the contingency period.

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

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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,
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 $ 25,019
$ 21,991

Less: income allocated to participating securities (119 ) —

Basic EPS per common share $ 24,900
29,542,001
$ 0.84
$ 21,991
29,530,203
$ 0.74

Diluted EPS:
Net income $ 25,019
29,542,001
$ 21,991
29,530,203

Effect of Dilutive Securities —
142,104
—
90,927

Diluted EPS per common share $ 25,019
29,684,105
$ 0.84
$ 21,991
29,621,130
$ 0.74

For the Nine Months Ended September
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 $ 71,163
$ 65,394

Less: income allocated to participating securities (329 ) —

Basic EPS per common share $ 70,834
29,585,383
$ 2.39
$ 65,394
29,536,273
$ 2.21

Diluted EPS:
Net income $ 71,163
29,585,383
$ 65,394
29,536,273

Effect of Dilutive Securities —
174,076
—
102,853

Diluted EPS per common share $ 71,163
29,759,459
$ 2.39
$ 65,394
29,639,126
$ 2.21



	For the Three Months Ended March 31,
	2020						2019
($ in thousands except per share amounts)	Per Share Amount			Shares (Denominator)	Per Share Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS:
Net income	$	18,180					$	22,285
Less: income allocated to participating securities	(81		)				—
Basic EPS per common share	$	18,099		29,230,788	$	0.62	$	22,285	29,587,217	$	0.75

Diluted EPS:
Net income	$	18,180		29,230,788			$	22,285	29,587,217
Effect of Dilutive Securities	—			168,326			—		156,178
Diluted EPS per common share	$	18,180		29,399,114	$	0.62	$	22,285	29,743,395	$	0.75

For both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ there were 0 options that were antidilutive.

~~Page 14~~

~~Index~~

Note 6 – Securities

The book values and approximate fair values of investment securities at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are summarized as follows:


($ in thousands)	September 30, 2019						December 31, 2018								March 31, 2020										December 31, 2019
	Amortized Cost		Fair Value	Unrealized			Amortized Cost		Fair Value		Unrealized				Amortized Cost			Fair Value			Unrealized				Amortized Cost		Fair Value			Unrealized
	Amortized Cost		Fair Value	Gains	(Losses)			Gains			(Losses)			Gains				Fair Value		(Losses)				Gains	Amortized Cost		Fair Value		(Losses)
Securities available for sale:							Amortized Cost								Amortized Cost
Government-sponsored enterprise securities	$	30,000	30,053	55	(2	)	82,995		Fair Value	82,662		63		(396	)	$	5,000		5,032			32		—		20,000		20,009			17		(8	)
Mortgage-backed securities	634,176		640,488	7,794	(1,482	)	396,995		385,551		39		(11,483	)	727,261			756,926			29,892		(227	)	758,491		767,285			9,463		(669	)
Corporate bonds	33,721		34,683	1,052	(90	)	33,751		33,138		76		(689	)	43,701			44,512			866		(55	)	33,711		34,651			1,025		(85	)
Total available for sale	$	697,897	705,224	8,901	(1,574	)	513,741		501,351		178		(12,568	)	$	775,962		806,470			30,790		(282	)	812,202		821,945			10,505		(762	)

Securities held to maturity:
Mortgage-backed securities	$	43,968	43,801	—	(167	)	52,048		50,241		—		(1,807	)	$	39,113		39,992			879		—		41,423		41,542			125		(6	)
State and local governments	30,297		30,664	369	(2	)	49,189		49,665		525		(49	)	22,190			22,393			209		(6	)	26,509		26,791			285		(3	)
Total held to maturity	$	74,265	74,465	369	(169	)	101,237		99,906		525		(1,856	)	$	61,303		62,385			1,088		(6	)	67,932		68,333			410		(9	)

All of the Company’s mortgage-backed securities were issued by government-sponsored corporations, except for private mortgage-backed securities with a fair value of $1.0 million and $1.1 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019, respectively.

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The following table presents information regarding securities with unrealized losses at ~~September 30, 2019:~~

March 31, 2020:


($ in thousands)	Securities in an Unrealized Loss Position for Less than 12 Months			Securities in an Unrealized Loss Position for More than 12 Months		Total		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	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Government-sponsored enterprise securities	$	4,998	2	—	—	4,998	2	$	—	—	—	—	—	—
Mortgage-backed securities	123,726		625	118,579	1,024	242,305	1,649	3,389		28	10,570	199	13,959	227
Corporate bonds	—		—	910	90	910	90	3,949		50	995	5	4,944	55
State and local governments	—		—	940	2	940	2	3,615		6	—	—	3,615	6
Total temporarily impaired securities	$	128,724	627	120,429	1,116	249,153	1,743	$	10,953	84	11,565	204	22,518	288

The following table presents information regarding securities with unrealized losses at December 31, ~~2018:~~

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		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	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	$	4,992	8	—	—	4,992	8
Mortgage-backed securities	82,525		351	294,305	12,939	376,830	13,290	77,274		293	50,851	382	128,125	675
Corporate bonds	20,704		433	5,817	256	26,521	689	—		—	915	85	915	85
State and local governments	595		1	6,641	48	7,236	49	—		—	934	3	934	3
Total temporarily impaired securities	$	108,745	863	320,445	13,561	429,190	14,424	$	82,266	301	52,700	470	134,966	771

~~Page 15~~

~~Index~~

In the above tables, all of the securities that were in an unrealized loss position at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. The Company evaluated the collectability of each of these bonds and concluded that there was 0 other-than-temporary impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.

As of March 31, 2020 and December 31, 2019, the Company's security portfolio held 22 securities and 54 securities, respectively, that were in an unrealized loss position.

The book values and approximate fair values of investment securities at ~~September 30, 2019,~~March 31, 2020, by contractual maturity, are summarized in the table below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Securities Available for Sale			Securities Held to Maturity		Securities Available for Sale			Securities Held to Maturity
($ in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Securities
Due within one year	$	—	—	1,165	1,168	$	—	—	1,730	1,750
Due after one year but within five years	58,721		59,661	21,645	21,925	28,701		29,567	11,496	11,639
Due after five years but within ten years	—		—	6,673	6,718	15,000		15,032	5,342	5,389
Due after ten years	5,000		5,075	814	853	5,000		4,945	3,622	3,615
Mortgage-backed securities	634,176		640,488	43,968	43,801	727,261		756,926	39,113	39,992
Total securities	$	697,897	705,224	74,265	74,465	$	775,962	806,470	61,303	62,385

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 investment securities with carrying values of ~~$287,418,000~~$254,486,000 and ~~$234,382,000,~~$260,826,000, respectively, were pledged as collateral for public deposits.

In the three and nine months ended September 2019, the Company received proceeds from sales of securities of $39,797,000 and recorded gains of $97,000 from the sales. There were 0 securities sales in the first nine months of 2018.

Page 14

Index

Included in “other assets” in the Consolidated Balance Sheets are cost-method investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond (“FRB”) stock totaling $37,952,000 and $33,380,000 ~~and $37,468,000~~ at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The FHLB stock had a cost and fair value of $20,329,000 and $15,789,000 ~~and $20,036,000~~ at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, and serves as part of the collateral for the Company’s line of credit with the FHLB and is also a requirement for membership in the FHLB system. The FRB stock had a cost and fair value of $17,623,000 and $17,591,000 ~~and $17,432,000~~ at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, and is a requirement for FRB member bank qualification. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end.

The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain litigation against ~~Visa.~~Visa, to which the Company is not a party. The Class B shares have transfer restrictions, and the conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at ~~September 30, 2019~~March 31, 2020 was approximately 1.62, which means the Company would receive approximately 20,051 Class A shares if the stock had converted on that date. This Class B stock does not have a readily determinable fair value and is ~~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 16~~

~~Index~~

Note 7 – Loans and Asset Quality Information

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


($ in thousands)	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Amount		Percentage		Amount		Percentage		Amount		Percentage		Amount		Percentage
All loans:

Commercial, financial, and agricultural	$	486,768	11	%	$	457,037	11	%	$	521,470	12	%	$	504,271	11	%
Real estate – construction, land development & other land loans	471,326		11	%	518,976		12	%	590,485		13	%	530,866		12	%
Real estate – mortgage – residential (1-4 family) first mortgages	1,093,619		25	%	1,054,176		25	%	1,083,022		24	%	1,105,014		25	%
Real estate – mortgage – home equity loans / lines of credit	343,378		8	%	359,162		8	%	331,170		7	%	337,922		8	%
Real estate – mortgage – commercial and other	1,928,931		44	%	1,787,022		42	%	1,970,716		43	%	1,917,280		43	%
Installment loans to individuals	70,962		1	%	71,392		2	%
Consumer loans									54,133		1	%	56,172		1	%
Subtotal	4,394,984		100	%	4,247,765		100	%	4,550,996		100	%	4,451,525		100	%
Unamortized net deferred loan costs	1,560				1,299				1,712				1,941
Total loans	$	4,396,544			$	4,249,064			$	4,552,708			$	4,453,466

Included in the table above are the following amounts of SBA loans:


($ in thousands)	September 30, 2019		December 31, 2018	March 31, 2020		December 31, 2019
Guaranteed portions of SBA Loans included in table above	$	47,280	53,205	$	27,985	54,400
Unguaranteed portions of SBA Loans included in table above	112,976		97,572	119,857		110,782
Total SBA loans included in the table above	$	160,256	150,777	$	147,842	165,182

Sold portions of SBA loans with servicing retained - not included in table above	$	308,842	230,424	$	324,231	316,730

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there was a remaining unaccreted discount on the retained portion of sold SBA loans amounting to ~~$7.2~~$6.8 million and ~~$5.7~~$7.1 million, respectively.

The Company has several acquired loan portfolios as a result of merger and acquisition transactions. In these transactions, the Company recorded loans at their fair value as required by applicable accounting guidance. Included in these loan portfolios were 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 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.

Page 15

Index

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there was a remaining accretable discount of ~~$12.1~~$10.3 million and ~~$15.0~~$11.1 million, respectively, related to purchased non-impaired loans. ~~Both types of~~The 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 ~~recorded investment~~carrying value of ~~purchased credit impaired (“PCI”)~~PCI loans.


PCI loans	For the Nine Months Ended September 30, 2019			For the Year Ended September 30, 2018		For the Three Months Ended March 31, 2020			For the Three Months Ended March 31, 2019
Balance at beginning of period	$	17,393		23,165		$	12,664		17,393
Change due to payments received and accretion	(3,694		)	(2,994	)	(2,841		)	(1,556	)
Change due to loan charge-offs	(11		)	—		(10		)	(8	)
Transfers to foreclosed real estate	—			(10	)	—			—
Other	110			28		26			38
Balance at end of period	$	13,798		20,189		$	9,839		15,867

~~Page 17~~

~~Index~~

The following table presents changes in the accretable yield for PCI loans.


Accretable Yield for PCI loans	For the Nine Months Ended September 30, 2019			For the Nine Months Ended September 30, 2018		For the Three Months Ended March 31, 2020			For the Three Months Ended March 31, 2019
Balance at beginning of period	$	4,750		4,688		$	4,149		4,750
Accretion	(1,050		)	(1,169	)	(567		)	(392	)
Reclassification from (to) nonaccretable difference	583			712		304			237
Other, net	211			831		(453		)	550
Balance at end of period	$	4,494		5,062		$	3,433		5,145

During the first ~~nine~~three months of ~~2019,~~2020, the Company received ~~$291,000~~$408,000 in payments that exceeded the carrying amount of the related PCI loans, of which ~~$263,000~~$336,000 was recognized as loan discount accretion income, ~~and $28,000~~$58,000 was recorded as additional loan interest ~~income.~~income, and $14,000 was recorded as a recovery. During the first ~~nine~~three months of ~~2018,~~2019, the Company received ~~$225,000~~$133,000 in payments that exceeded the carrying amount of the related PCI loans, of which ~~$184,000~~$112,000 was recognized as loan discount accretion income and ~~$41,000~~$21,000 was recorded as additional loan interest income.

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, 2019		December 31, 2018	March 31, 2020		December 31, 2019
Nonperforming assets
Nonaccrual loans	$	19,720	22,575	$	25,066	24,866
TDRs- accruing	9,566		13,418
Restructured loans - accruing				9,747		9,053
Accruing loans > 90 days past due	—		—	—		—
Total nonperforming loans	29,286		35,993	34,813		33,919
Foreclosed real estate	4,589		7,440	3,487		3,873
Total nonperforming assets	$	33,875	43,433	$	38,300	37,792

Purchased credit impaired loans not included above (1)	$	13,798	17,393	$	9,839	12,664

(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 ~~$1.1~~$0.7 million and ~~$0.6~~$0.8 million in PCI loans at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, that were contractually past due 90 days or more.

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had ~~$1.0~~$2.2 million and ~~$0.7~~$0.6 million in residential mortgage loans in process of foreclosure, respectively.

Page 16

Index

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


($ in thousands)	September 30, 2019		December 31, 2018	March 31, 2020		December 31, 2019
Commercial, financial, and agricultural	$	2,472	919	$	3,703	5,518
Real estate – construction, land development & other land loans	1,235		2,265	958		1,067
Real estate – mortgage – residential (1-4 family) first mortgages	7,661		10,115	8,581		7,552
Real estate – mortgage – home equity loans / lines of credit	1,878		1,685	1,874		1,797
Real estate – mortgage – commercial and other	6,370		7,452	9,837		8,820
Installment loans to individuals	104		139
Consumer loans				113		112
Total	$	19,720	22,575	$	25,066	24,866

~~Page 18~~

~~Index~~

The following table presents an analysis of the payment status of the Company’s loans as of ~~September 30, 2019.~~

March 31, 2020. Due to the onset of the COVID-19 pandemic not occurring until late in the first quarter of 2020, as well as the Company's COVID-19 deferral program, the past due amounts below were not impacted by the pandemic.


($ 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		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	$	5,995	95	—	2,472	477,964	486,526		$	2,387	201	—	3,703	514,992	521,283
Real estate – construction, land development & other land loans	803		—	—	1,235	469,119	471,157		1,333		42	—	958	587,989	590,322
Real estate – mortgage – residential (1-4 family) first mortgages	2,392		1,185	—	7,661	1,076,708	1,087,946		10,829		30	—	8,581	1,058,281	1,077,721
Real estate – mortgage – home equity loans / lines of credit	712		399	—	1,878	340,180	343,169		1,532		155	—	1,874	327,516	331,077
Real estate – mortgage – commercial and other	3,376		121	—	6,370	1,911,677	1,921,544		4,850		7,164	—	9,837	1,944,844	1,966,695
Installment loans to individuals	299		46	—	104	70,395	70,844
Consumer loans									129		67	—	113	53,750	54,059
Purchased credit impaired	6		390	1,065	—	12,337	13,798		625		15	746	—	8,453	9,839
Total	$	13,583	2,236	1,065	19,720	4,358,380	4,394,984		$	21,685	7,674	746	25,066	4,495,825	4,550,996
Unamortized net deferred loan costs							1,560								1,712
Total loans							$	4,396,544							$	4,552,708

The following table presents an analysis of the payment status of the Company’s loans as of December 31, ~~2018.~~2019.


($ in thousands)	Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due	Accruing 90 Days or More Past Due	Nonaccrual Loans	Accruing Current	Total Loans Receivable		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		$	752	—	—	5,518	497,788	504,058
Real estate – construction, land development & other land loans	849		212	—	2,265	515,472	518,798		37		152	—	1,067	529,444	530,700
Real estate – mortgage – residential (1-4 family) first mortgages	14,178		1,369	—	10,115	1,022,262	1,047,924		10,858		5,056	—	7,552	1,076,205	1,099,671
Real estate – mortgage – home equity loans / lines of credit	1,048		254	—	1,685	355,831	358,818		770		300	—	1,797	334,832	337,699
Real estate – mortgage – commercial and other	709		520	—	7,452	1,768,205	1,776,886		4,257		—	—	8,820	1,897,573	1,910,650
Installment loans to individuals	359		220	—	139	70,422	71,140
Consumer loans									344		137	—	112	55,490	56,083
Purchased credit impaired	990		138	583	—	15,682	17,393		218		38	762	—	11,646	12,664
Total	$	18,324	2,718	583	22,575	4,203,565	4,247,765		$	17,236	5,683	762	24,866	4,402,978	4,451,525
Unamortized net deferred loan costs							1,299								1,941
Total loans							$	4,249,064							$	4,453,466

Page 17

Index

The following table presents the activity in the allowance for loan losses for all loans for the three months ended March 31, 2020.



($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development & Other Land Loans		Real Estate – Residential (1-4 Family) First Mortgages		Real Estate – Mortgage – Home Equity Lines of Credit		Real Estate – Mortgage – Commercial and Other		Consumer Loans		Unallocated	Total
As of and for the three months ended March 31, 2020

Beginning balance	$	4,553		1,976		3,832		1,127		8,938		972		—	21,398
Charge-offs	(2,460		)	(40	)	(195	)	(68	)	(263	)	(287	)	—	(3,313		)
Recoveries	217			290		91		83		47		95		—	823
Provisions	1,894			373		645		252		2,191		235		—	5,590
Ending balance	$	4,204		2,599		4,373		1,394		10,913		1,015		—	24,498

Ending balance as of March 31, 2020: Allowance for loan losses
Individually evaluated for impairment	$	1,093		73		739		90		1,233		—		—	3,228
Collectively evaluated for impairment	$	3,069		2,526		3,528		1,304		9,680		1,006		—	21,113
Purchased credit impaired	$	42		—		106		—		—		9		—	157

Loans receivable as of March 31, 2020
Ending balance – total	$	521,470		590,485		1,083,022		331,170		1,970,716		54,133		—	4,550,996
Unamortized net deferred loan costs															1,712
Total loans															$	4,552,708

Ending balances as of March 31, 2020: Loans
Individually evaluated for impairment	$	3,050		756		9,915		433		11,862		—		—	26,016
Collectively evaluated for impairment	$	518,233		589,566		1,067,805		330,644		1,954,834		54,059		—	4,515,141
Purchased credit impaired	$	187		163		5,302		93		4,020		74		—	9,839

Page 18

Index

The following table presents the activity in the allowance for loan losses for the year ended December 31, 2019.



($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development & Other Land Loans		Real Estate – Residential (1-4 Family) First Mortgages		Real Estate – Mortgage – Home Equity Lines of Credit		Real Estate – Mortgage – Commercial and Other		Consumer Loans		Unallocated		Total
As of and for the year ended December 31, 2019

Beginning balance	$	2,889		2,243		5,197		1,665		7,983		952		110		21,039
Charge-offs	(2,473		)	(553	)	(657	)	(307	)	(1,556	)	(757	)	—		(6,303		)
Recoveries	980			1,275		705		629		575		235		—		4,399
Provisions	3,157			(989	)	(1,413	)	(860	)	1,936		542		(110	)	2,263
Ending balance	$	4,553		1,976		3,832		1,127		8,938		972		—		21,398

Ending balances as of December 31, 2019: Allowance for loan losses
Individually evaluated for impairment	$	1,791		50		750		—		983		—		—		3,574
Collectively evaluated for impairment	$	2,720		1,926		2,976		1,127		7,931		961		—		17,641
Purchased credit impaired	$	42		—		106		—		24		11		—		183

Loans receivable as of December 31, 2019:
Ending balance – total	$	504,271		530,866		1,105,014		337,922		1,917,280		56,172		—		4,451,525
Unamortized net deferred loan costs																1,941
Total loans																$	4,453,466

Ending balances as of December 31, 2019: Loans
Individually evaluated for impairment	$	4,957		796		9,546		333		9,570		—		—		25,202
Collectively evaluated for impairment	$	499,101		529,904		1,090,125		337,366		1,901,080		56,083		—		4,413,659
Purchased credit impaired	$	213		166		5,343		223		6,630		89		—		12,664

Page 19

Index

The following table presents the activity in the allowance for loan losses for all loans for the three ~~and nine~~ months ended ~~September 30,~~March 31, 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 September 30, 2019

Beginning balance $ 3,218
1,815
4,123
1,271
8,852
1,211
299
20,789
Charge-offs (288 ) (47 ) (194 ) (70 ) (617 ) (119 ) —
(1,335 )
Recoveries 163
308
139
58
176
67
—
911
Provisions (226 ) (270 ) (112 ) (122 ) (199 ) (141 ) (35 ) (1,105 )
Ending balance $ 2,867
1,806
3,956
1,137
8,212
1,018
264
19,260

As of and for the nine months ended September 30, 2019

Beginning balance $ 2,889
2,243
5,197
1,665
7,983
952
110
21,039
Charge-offs (1,224 ) (340 ) (379 ) (216 ) (1,455 ) (555 ) —
(4,169 )
Recoveries 768
797
521
513
550
154
—
3,303
Provisions 434
(894 ) (1,383 ) (825 ) 1,134
467
154
(913 )
Ending balance $ 2,867
1,806
3,956
1,137
8,212
1,018
264
19,260

Ending balance as of September 30, 2019: Allowance for loan losses
Individually evaluated for impairment $ 168
45
828
—
230
—
—
1,271
Collectively evaluated for impairment $ 2,657
1,761
3,060
1,137
7,925
1,005
264
17,809
Purchased credit impaired $ 42
—
68
—
57
13
—
180

Loans receivable as of September 30, 2019
Ending balance – total $ 486,768
471,326
1,093,619
343,378
1,928,931
70,962
—
4,394,984
Unamortized net deferred loan costs 1,560
Total loans $ 4,396,544

Ending balances as of September 30, 2019: Loans
Individually evaluated for impairment $ 1,090
804
9,942
338
6,941
—
—
19,115
Collectively evaluated for impairment $ 485,436
470,353
1,078,004
342,831
1,914,603
70,844
—
4,362,071
Purchased credit impaired $ 242
169
5,673
209
7,387
118
—
13,798

~~Page 20~~

~~Index~~

~~The following table presents the activity in the allowance for loan losses for the year ended December 31, 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 )
Recoveries 1,195
4,097
833
364
1,503
309
—
8,301
Provisions 711
(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 21~~

~~Index~~

~~The following table presents the activity in the allowance for loan losses for all loans for the three and nine months ended September 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		Unallocated		Total		Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans		Real Estate – Residential (1-4 Family) First Mortgages		Real Estate – Mortgage – Home Equity Lines of Credit		Real Estate – Mortgage – Commercial and Other		Consumer Loans		Unallocated		Total
As of and for the three months ended September 30, 2018
As of and for the three months ended March 31, 2019																		As of and for the three months ended March 31, 2019

Beginning balance	$	2,268		2,692		7,059		2,250		7,295		897		837		23,298		$	2,889		2,243		5,197		1,665		7,983		952		110		21,039
Charge-offs	(933		)	(126	)	(1,183	)	(192	)	(1,086	)	(232	)	—		(3,752	)	(246		)	(264	)	(30	)	(80	)	(836	)	(281	)	—		(1,737	)
Recoveries	159			181		155		51		209		158		—		913		414			287		160		128		271		33		—		1,293
Provisions	1,221			(366	)	(664	)	(330	)	753		79		(606	)	87		652			18		(817	)	(339	)	702		302		(18	)	500
Ending balance	$	2,715		2,381		5,367		1,779		7,171		902		231		20,546		$	3,709		2,284		4,510		1,374		8,120		1,006		92		21,095

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
Ending balances as of March 31, 2019: Allowance for loan losses																		Ending balances as of March 31, 2019: Allowance for loan losses
Individually evaluated for impairment	$	126		—		1,004		—		502		—		—		1,632		$	857		28		858		—		312		—		—		2,055
Collectively evaluated for impairment	$	2,585		2,335		4,306		1,765		6,662		887		231		18,771		$	2,852		2,256		3,596		1,362		7,723		990		92		18,871
Purchased credit impaired	$	4		46		57		14		7		15		—		143		$	—		—		56		12		85		16		—		169

Loans receivable as of September 30, 2018
Loans receivable as of March 31, 2019																		Loans receivable as of March 31, 2019
Ending balance – total	$	435,730		559,450		1,038,436		362,829		1,723,598		70,096		—		4,190,139		$	468,388		553,760		1,061,049		354,669		1,794,794		69,503		—		4,302,163
Unamortized net deferred loan fees																489																	1,624
Total loans																4,190,628																	4,303,787

Ending balances as of September 30, 2018: Loans
Ending balances as of March 31, 2019: Loans																		Ending balances as of March 31, 2019: Loans
Individually evaluated for impairment	$	1,981		2,642		12,617		22		10,490		—		—		27,752		$	1,044		797		10,891		21		8,396		—		—		21,149
Collectively evaluated for impairment	$	433,485		556,283		1,019,645		362,462		1,700,519		69,804		—		4,142,198		$	467,139		552,788		1,044,104		354,316		1,777,481		69,319		—		4,265,147
Purchased credit impaired	$	264		525		6,174		345		12,589		292		—		20,189		$	205		175		6,054		332		8,917		184		—		15,867

Page 2220

Index

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of ~~September 30, 2019.~~March 31, 2020.


($ in thousands)	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment
Impaired loans with no related allowance recorded:

Commercial, financial, and agricultural	$	18	20	—	89	$	19	51	—	18
Real estate – mortgage – construction, land development & other land loans	227		263	—	403	116		168	—	169
Real estate – mortgage – residential (1-4 family) first mortgages	3,713		3,951	—	4,443	4,901		5,160	—	4,601
Real estate – mortgage –home equity loans / lines of credit	338		358	—	100	330		358	—	332
Real estate – mortgage –commercial and other	2,781		3,758	—	3,390	5,471		7,035	—	4,057
Installment loans to individuals	—		—	—	—
Consumer loans						—		—	—	—
Total impaired loans with no allowance	$	7,077	8,350	—	8,425	$	10,837	12,772	—	9,177

Impaired loans with an allowance recorded:

Commercial, financial, and agricultural	$	1,072	1,125	168	866	$	3,031	3,063	1,093	3,986
Real estate – mortgage – construction, land development & other land loans	577		577	45	589	640		649	73	608
Real estate – mortgage – residential (1-4 family) first mortgages	6,229		6,466	828	6,446	5,014		5,244	739	5,130
Real estate – mortgage –home equity loans / lines of credit	—		—	—	69	103		103	90	52
Real estate – mortgage –commercial and other	4,160		4,795	230	4,689	6,391		6,821	1,233	6,659
Installment loans to individuals	—		—	—	—
Consumer loans						—		—	—	—
Total impaired loans with allowance	$	12,038	12,963	1,271	12,659	$	15,179	15,880	3,228	16,435

Interest income recorded on impaired loans during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~insignificant.~~insignificant, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on accruing restructured loans.

Page 2321

Index

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, ~~2018.~~2019.


($ in thousands)	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment
Impaired loans with no related allowance recorded:

Commercial, financial, and agricultural	$	310	310	—	957	$	16	19	—	74
Real estate – mortgage – construction, land development & other land loans	485		803	—	2,366	221		263	—	366
Real estate – mortgage – residential (1-4 family) first mortgages	4,626		4,948	—	4,804	4,300		4,539	—	4,415
Real estate – mortgage –home equity loans / lines of credit	22		31	—	91	333		357	—	147
Real estate – mortgage –commercial and other	3,475		4,237	—	3,670	2,643		3,328	—	3,240
Installment loans to individuals	—		—	—	—
Consumer loans						—		—	—	—
Total impaired loans with no allowance	$	8,918	10,329	—	11,888	$	7,513	8,506	—	8,242

Impaired loans with an allowance recorded:

Commercial, financial, and agricultural	$	386	387	226	422	$	4,941	4,995	1,791	1,681
Real estate – mortgage – construction, land development & other land loans	860		864	134	385	575		575	50	586
Real estate – mortgage – residential (1-4 family) first mortgages	7,765		7,904	955	8,963	5,246		5,469	750	6,206
Real estate – mortgage –home equity loans / lines of credit	274		275	48	184	—		—	—	55
Real estate – mortgage –commercial and other	6,050		6,054	906	5,911	6,927		7,914	983	5,136
Installment loans to individuals	—		—	—	2
Consumer loans						—		—	—	—
Total impaired loans with allowance	$	15,335	15,484	2,269	15,867	$	17,689	18,953	3,574	13,664

Interest income recorded on impaired loans during the year ended December 31, ~~2018~~2019 was ~~insignificant.~~$1.3 million, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on accruing restructured loans.

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 2422

Index

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



	Risk Grade	Description
Pass:
	1	Loans with virtually no risk, including cash secured loans.
	2	Loans with documented significant overall financial strength. These loans have minimum chance of loss due to the presence of multiple sources of repayment – each clearly sufficient to satisfy the obligation.
	3	Loans with documented satisfactory overall financial strength. These loans have a low loss potential due to presence of at least two clearly identified sources of repayment – each of which is sufficient to satisfy the obligation under the present circumstances.
	4	Loans to borrowers with acceptable financial condition. These loans could have signs of minor operational weaknesses, lack of adequate financial information, or loans supported by collateral with questionable value or marketability.
	5	Loans that represent above average risk due to minor weaknesses and warrant closer scrutiny by management. Collateral is generally required and felt to provide reasonable coverage with realizable liquidation values in normal circumstances. Repayment performance is satisfactory.
	P (Pass)	Consumer loans (<$500,000) that are of satisfactory credit quality with borrowers who exhibit good personal credit history, average personal financial strength and moderate debt levels. These loans generally conform to Bank policy, but may include approved mitigated exceptions to the guidelines.
Special Mention:
	6	Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank.
Classified:
	7	An existing loan inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
	8	Loans that have a well-defined weakness that make the collection or liquidation in full highly questionable and improbable. Loss appears imminent, but the exact amount and timing is uncertain.
	9	Loans that are considered uncollectible and are in the process of being charged-off. This grade is a temporary grade assigned for administrative purposes until the charge-off is completed.
	F (Fail)	Consumer loans (<$500,000) with a well-defined weakness, such as exceptions of any kind with no mitigating factors, history of paying outside the terms of the note, insufficient income to support the current level of debt, etc.

The following table presents the Company’s recorded investment in loans by credit quality indicators as of ~~September 30, 2019.~~March 31, 2020. Due to the onset of the COVID-19 pandemic not occurring until late in the first quarter of 2020, the special mention and classified loans levels shown below were not impacted by the pandemic.


($ in thousands)	Pass		Special Mention Loans	Classified Accruing Loans	Classified Nonaccrual Loans	Total	Pass		Special Mention Loans	Classified Accruing Loans	Classified Nonaccrual Loans	Total
Commercial, financial, and agricultural	$	471,225	7,735	5,094	2,472	486,526	$	504,858	7,736	4,986	3,703	521,283
Real estate – construction, land development & other land loans	463,122		4,640	2,160	1,235	471,157	583,176		4,743	1,445	958	590,322
Real estate – mortgage – residential (1-4 family) first mortgages	1,047,592		15,193	17,500	7,661	1,087,946	1,046,994		8,427	13,719	8,581	1,077,721
Real estate – mortgage – home equity loans / lines of credit	334,054		1,267	5,970	1,878	343,169	322,000		1,217	5,986	1,874	331,077
Real estate – mortgage – commercial and other	1,888,049		20,081	7,044	6,370	1,921,544	1,920,923		28,557	7,378	9,837	1,966,695
Installment loans to individuals	70,122		218	400	104	70,844
Consumer loans							53,532		207	207	113	54,059
Purchased credit impaired	8,279		2,797	2,722	—	13,798	8,022		87	1,730	—	9,839
Total	$	4,282,443	51,931	40,890	19,720	4,394,984	$	4,439,505	50,974	35,451	25,066	4,550,996
Unamortized net deferred loan costs						1,560						1,712
Total loans						4,396,544						4,552,708

Page 2523

Index

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, ~~2018.~~2019.


($ in thousands)	Pass		Special Mention Loans	Classified Accruing Loans	Classified Nonaccrual Loans	Total	Pass		Special Mention Loans	Classified Accruing Loans	Classified Nonaccrual Loans	Total
Commercial, financial, and agricultural	$	452,372	3,056	459	919	456,806	$	486,081	7,998	4,461	5,518	504,058
Real estate – construction, land development & other land loans	509,251		5,668	1,614	2,265	518,798	522,767		4,075	2,791	1,067	530,700
Real estate – mortgage – residential (1-4 family) first mortgages	1,004,458		12,238	21,113	10,115	1,047,924	1,063,735		13,187	15,197	7,552	1,099,671
Real estate – mortgage – home equity loans / lines of credit	348,792		1,688	6,653	1,685	358,818	328,903		1,258	5,741	1,797	337,699
Real estate – mortgage – commercial and other	1,750,810		14,484	4,140	7,452	1,776,886	1,873,594		20,800	7,436	8,820	1,910,650
Installment loans to individuals	70,357		231	413	139	71,140
Consumer loans							55,203		413	355	112	56,083
Purchased credit impaired	8,355		5,214	3,824	—	17,393	8,098		2,590	1,976	—	12,664
Total	$	4,144,395	42,579	38,216	22,575	4,247,765	$	4,338,381	50,321	37,957	24,866	4,451,525
Unamortized net deferred loan costs						1,299						1,941
Total loans						4,249,064						4,453,466

Troubled Debt Restructurings

The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, ~~restructuring amortization schedules~~extension of terms and other actions intended to minimize potential losses. As previously noted, under the CARES Act and banking regulator guidance, which the Company has applied, modifications deemed to be COVID-19-related are not considered a troubled debt restructuring if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. Under these terms, as of March 31, 2020, the Company had processed payment deferrals for 315 loans with an aggregate loan balance of $120 million. Through April 30, 2020, the number of deferrals increased to 1,269 with an aggregate loan balance of $647 million. These deferrals were generally no more than 90 days in duration and are not included in the troubled debt restructurings disclosed in this report. The Company continues to accrue interest on these loans during the deferral period.

The vast majority of the Company’s troubled debt restructurings ~~are due~~modified during the periods ended March 31, 2020 and March 31, 2019 related to interest rate reductions combined with ~~restructured amortization schedules.~~extension of terms. The Company does not generally grant principal forgiveness.

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

Page 24

Index

The following table presents information related to loans modified in a troubled debt restructuring during the three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.



($ in thousands)	For the three months ended March 31, 2020					For the three months ended March 31, 2019
	Number of Contracts	Pre- Modification Restructured Balances		Post- Modification Restructured Balances		Number of Contracts	Pre- Modification Restructured Balances		Post- Modification Restructured Balances
TDRs – Accruing
Commercial, financial, and agricultural	2	$	143	$	143	—	$	—	$	—
Real estate – construction, land development & other land loans	—	—		—		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	—	—		—		2	254		258
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—
Consumer loans	—	—		—		—	—		—
TDRs – Nonaccrual
Commercial, financial, and agricultural	—	—		—		—	—		—
Real estate – construction, land development & other land loans	—	—		—		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	—	—		—		—	—		—
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—
Consumer loans	—	—		—		—	—		—
Total TDRs arising during period	2	$	143	$	143	2	$	254	$	258

~~Page 26~~

~~Index~~

($ in thousands) For the three months ended
September 30, 2019 For the three months ended
September 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 agricultural —
$ —
$ —
—
$ —
$ —
Real estate – construction, land development & other land loans —
—
—
—
—
—
Real estate – mortgage – residential (1-4 family) first mortgages 1
133
133
—
—
—
Real estate – mortgage – home equity loans / lines of credit —
—
—
—
—
—
Real estate – mortgage – commercial and other —
—
—
—
—
—
Installment loans to individuals —
—
—
—
—
—
TDRs – Nonaccrual

Commercial, financial, and agricultural —
—
—
—
—
—
Real estate – construction, land development & other land loans —
—
—
—
—
—
Real estate – mortgage – residential (1-4 family) first mortgages —
—
—
—
—
—
Real estate – mortgage – home equity loans / lines of credit —
—
—
—
—
—
Real estate – mortgage – commercial and other —
—
—
—
—
—
Installment loans to individuals —
—
—
—
—
—
Total TDRs arising during period 1
$ 133
$ 133
—
$ —
$ —

~~Page 27~~

~~Index~~

~~The following table presents information related to loans modified in a troubled debt restructuring during the nine months ended September 30, 2019 and 2018.~~

($ in thousands) For the nine months ended
September 30, 2019 For the nine months ended
September 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 agricultural 1
$ 143
$ 143
—
$ —
$ —
Real estate – construction, land development & other land loans —
—
—
—
—
—
Real estate – mortgage – residential (1-4 family) first mortgages 3
387
391
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 period 4
$ 530
$ 534
4
$ 333
$ 343

~~Page 28~~

~~Index~~

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ 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.

~~Accruing restructured loans that were modified in the previous 12 months and that defaulted during the nine months ended September 30, 2019 and 2018 are presented in the table below.~~


($ in thousands)	For the Nine Months Ended September 30, 2019			For the Nine Months Ended September 30, 2018			For the Three Months Ended March 31, 2020			For the Three Months Ended March 31, 2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing TDRs that subsequently defaulted
Real estate – mortgage – residential (1-4 family first mortgages)	1	$	93	1	$	60	—	$	—	1	$	93
Real estate – mortgage – commercial and other	—	—		3	1,333		—	—		—	—
Total accruing TDRs that subsequently defaulted	1	$	93	4	$	1,393	—	$	—	1	$	93

~~There were 0 accruing restructured loans that were modified in the previous 12 months and defaulted during the three months ended September 30, 2019 or 2018.~~

Page 25

Index

Note 8 – Goodwill and Other Intangible Assets

The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, and the carrying amount of unamortized intangible assets as of those same dates.


	September 30, 2019			December 31, 2018		March 31, 2020			December 31, 2019
($ in thousands)	Gross Carrying Amount		Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization	Gross Carrying Amount		Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization
Amortizable intangible assets:
Customer lists	$	6,013	2,048	6,013	1,637	$	6,013	2,316	6,013	2,185
Core deposit intangibles	28,440		19,650	28,440	16,469	28,440		21,510	28,440	20,610
SBA servicing asset	7,528		2,028	5,472	1,053	7,993		3,311	7,776	2,393
Other	1,303		1,102	1,303	957	1,303		1,151	1,303	1,127
Total	$	43,284	24,828	41,228	20,116	$	43,749	28,288	43,532	26,315

Unamortizable intangible assets:
Goodwill	$	234,368		234,368		$	234,368		234,368

The Company recorded $2,056,000 and $2,755,000 in servicing assets associated with the guaranteed portion of SBA loans originated and sold during the first nine months of 2019 and 2018, respectively. During the first nine months of 2019 and 2018, the Company recorded $975,000 and $555,000, 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 initially recorded at fair value and amortized over the expected lives of the related loans and are tested for impairment on a quarterly basis. SBA servicing asset amortization expense is recorded within noninterest income as an offset to ~~offset~~ SBA servicing fees within the line item "Other service charges, commissions, and fees." As noted in the table above, the Company has a SBA servicing asset at March 31, 2020 with a remaining book value of $4,682,000. The Company recorded $217,000 and $600,000 in servicing assets associated with the guaranteed portion of SBA loans originated and sold during the first three months of 2020 and 2019, respectively. During the first three months of 2020 and 2019, the Company recorded $918,000 and $299,000, respectively, in related amortization expense. Included in the amortization expense for the first three months of 2020 is an impairment charge of approximately $500,000 due to a decrease in the fair value of the asset resulting from deteriorations in market conditions as of March 31, 2020.

Amortization expense of all other intangible assets totaled ~~$1,163,000~~$1,055,000 and ~~$1,452,000~~$1,332,000 for the three months ended ~~September 30,~~March 31, 2020 and 2019, respectively.

During the period ended March 31, 2020, the economic turmoil and ~~2018, respectively,~~market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's stock price and ~~$3,737,000 and $4,518,000~~market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis. In this analysis, the Company determined that none of it's goodwill was impaired as of March 31, 2020. Management will continue to evaluate the economic conditions at future reporting periods for ~~the nine months ended September 30, 2019 and 2018, respectively.~~applicable changes.

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The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets. These amounts will be recorded as "Intangibles amortization expense" within the noninterest expense section of the Consolidated Statements of Income. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets. Additionally, as noted in the table above, the Company has a SBA servicing asset at September 30, 2019 with a remaining book value of $5,500,000. This servicing asset will be amortized over the lives of the related loans, with such amortization expense recorded as a reduction of servicing

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


($ in thousands)	Estimated Amortization Expense		Estimated Amortization Expense
October 1 to December 31, 2019	$	1,121
2020	3,841
April 1 to December 31, 2020			$	2,786
2021	2,927		2,927
2022	2,022		2,022
2023	1,041		1,041
2024			404
Thereafter	2,004		1,599
Total	$	12,956	$	10,779

Note 9 – Pension Plans

The Company has historically sponsored 2 defined benefit pension plans – a qualified retirement plan (the “Pension Plan”) which was generally available to all employees, and a Supplemental Executive Retirement Plan (the “SERP”), which was for the benefit of certain senior management executives of the Company. Effective December 31, 2012, the Company froze both plans for all participants. Although no previously accrued benefits were lost, employees no longer accrue benefits for service subsequent to 2012.

The Company recorded periodic pension cost totaling ~~$244,000~~$216,000 and ~~$136,000~~$244,000 for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $732,000 and $408,000 for the nine months ended September 30, 2019 and 2018,~~ respectively. The following table contains the components of the pension cost.

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

—

—

32

—

32
Interest cost 367

328

82

40

449

368
Expected return on plan assets (360 )
(177 )
—

—

(360 )
(177 )
Amortization of net (gain)/loss 282

(93 )
(127 )
6

155

(87 )
Net periodic pension cost $ 289

58

(45 )
78

244

136

For the Nine Months Ended September 30,
($ in thousands) 2019
Pension Plan 2018
Pension Plan 2019
SERP 2018
SERP 2019 Total
Both Plans 2018 Total
Both Plans
Service cost $ —
—
—
94
—
94
Interest cost 1,111
984
164
150
1,275
1,134
Expected return on plan assets (1,154 ) (836 ) —
—
(1,154 ) (836 )
Amortization of net (gain)/loss 733
26
(122 ) (10 ) 611
16
Net periodic pension cost $ 690
174
42
234
732
408



	For the Three Months Ended March 31,
($ in thousands)	2020 Pension Plan			2019 Pension Plan		2020 SERP		2019 SERP	2020 Total Both Plans		2019 Total Both Plans
Service cost	$	—		—		—		—	—		—
Interest cost	308			372		55		41	363		413
Expected return on plan assets	(325		)	(397	)	—		—	(325	)	(397	)
Amortization of net (gain)/loss	219			223		(41	)	5	178		228
Net periodic pension cost	$	202		198		14		46	216		244

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

The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants and are intended to be deductible for income tax purposes. The Company did 0t contribute to the Pension Plan in the first ~~nine~~three months of ~~2019~~2020 and does 0t expect to contribute to the Pension Plan in the remainder of ~~2019.~~2020.

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

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Note 10 – Accumulated Other Comprehensive Income (Loss)

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


($ in thousands)	September 30, 2019			December 31, 2018		March 31, 2020			December 31, 2019
Unrealized gain (loss) on securities available for sale	$	7,327		(12,390	)	$	30,508		9,743
Deferred tax asset (liability)	(1,684		)	2,896		(7,011		)	(2,239	)
Net unrealized gain (loss) on securities available for sale	5,643			(9,494	)	23,497			7,504

Additional pension asset (liability)	(2,609		)	(3,220	)
Postretirement plans asset (liability)						(2,913		)	(3,092	)
Deferred tax asset (liability)	600			753		669			711
Net additional pension asset (liability)	(2,009		)	(2,467	)
Net postretirement plans asset (liability)						(2,244		)	(2,381	)

Total accumulated other comprehensive income (loss)	$	3,634		(11,961	)	$	21,253		5,123

The following table discloses the changes in accumulated other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 (all amounts are net of tax).


($ in thousands)	Unrealized Gain (Loss) on Securities Available for Sale			Additional Pension Asset (Liability)		Total		Unrealized Gain (Loss) on Securities Available for Sale		Postretirement Plans Asset (Liability)		Total
Beginning balance at January 1, 2019	$	(9,494	)	(2,467	)	(11,961	)
Beginning balance at January 1, 2020								$	7,504	(2,381	)	5,123
Other comprehensive income (loss) before reclassifications	15,212			—		15,212		15,993		—		15,993
Amounts reclassified from accumulated other comprehensive income	(75		)	458		383		—		137		137
Net current-period other comprehensive income (loss)	15,137			458		15,595		15,993		137		16,130

Ending balance at September 30, 2019	$	5,643		(2,009	)	3,634
Ending balance at March 31, 2020								$	23,497	(2,244	)	21,253

The following table discloses the changes in accumulated other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 (all amounts are net of tax).


($ in thousands)	Unrealized Gain (Loss) on Securities Available for Sale			Additional Pension Asset (Liability)		Total		Unrealized Gain (Loss) on Securities Available for Sale			Postretirement Plans Asset (Liability)		Total
Beginning balance at January 1, 2018	$	(1,694	)	(2,452	)	(4,146	)
Beginning balance at January 1, 2019								$	(9,494	)	(2,467	)	(11,961	)
Other comprehensive income (loss) before reclassifications	(7,839		)	—		(7,839	)	4,523			—		4,523
Amounts reclassified from accumulated other comprehensive income	—			12		12		—			174		174
Net current-period other comprehensive income (loss)	(7,839		)	12		(7,827	)	4,523			174		4,697

Ending balance at September 30, 2018	$	(9,533	)	(2,440	)	(11,973	)
Ending balance at March 31, 2019								$	(4,971	)	(2,293	)	(7,264	)

Amounts reclassified from accumulated other comprehensive income for Unrealized Gain (Loss) on Securities Available for Sale represent realized securities gains or losses, net of tax effects. Amounts reclassified from accumulated other comprehensive income for Postretirement Plans Asset (Liability) represent amortization of amounts included in Accumulated Other Comprehensive Income, net of taxes, and are recorded in the "Other operating expenses" line item of the Consolidated Statements of Income.

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Note 11 – Fair Value

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

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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

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

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at ~~September 30, 2019.~~March 31, 2020.

											($ in thousands)
Description of Financial Instruments	Fair Value at September 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Fair Value at March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Recurring
Securities available for sale:
Government-sponsored enterprise securities	$	30,053	—	30,053	—	$	5,032	—	5,032	—
Mortgage-backed securities	640,488		—	640,488	—	756,927		—	756,927	—
Corporate bonds	34,683		—	34,683	—	44,511		—	44,511	—
Total available for sale securities	$	705,224	—	705,224	—	$	806,470	—	806,470	—

Presold mortgages in process of settlement						$	14,861	14,861	—	—

Nonrecurring
Impaired loans	$	12,406	—	—	12,406	$	14,979	—	—	14,979
Foreclosed real estate	2,294		—	—	2,294	1,681		—	—	1,681

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The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, ~~2018.~~

2019.


($ 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)	Fair Value at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Recurring
Securities available for sale:
Government-sponsored enterprise securities	$	82,662	—	82,662	—	$	20,009	—	20,009	—
Mortgage-backed securities	385,551		—	385,551	—	767,285		—	767,285	—
Corporate bonds	33,138		—	33,138	—	34,651		—	34,651	—
Total available for sale securities	$	501,351	—	501,351	—	$	821,945	—	821,945	—

Presold mortgages in process of settlement						$	19,712	19,712	—	—

Nonrecurring
Impaired loans	$	13,071	—	—	13,071	$	16,215	—	—	16,215
Foreclosed real estate	7,440		—	—	7,440	1,830		—	—	1,830

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~~Index~~

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

Presold Mortgages in Process of Settlement - The fair value is based on the committed price that an investor has agreed to pay for the loan and is considered a Level 1 input.

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

The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. 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.

Impaired loans — Fair values for impaired loans in the above table are measured on a non-recurring basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is generally determined by third-party appraisers using an income or market valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Appraisals used in this analysis are generally obtained at least annually based on when the loans first became impaired, and thus the appraisals are not necessarily as of the period ends presented. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

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

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of ~~September 30, 2019,~~March 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

~~Page 33~~

~~Index~~

($ in thousands)

Description

Fair Value at
September 30, 2019

Valuation

Technique

Significant Unobservable

Inputs

Range of Significant

Unobservable

Input Values

Fair Value at
March 31, 2020

Valuation

Technique

Significant Unobservable

Inputs

Range (Weighted Average)

Impaired loans

12,406

Appraised value; PV of expected cash flows

Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell

0-10%

Impaired loans - valued at collateral value

9,649

Appraised value

Discounts applied for estimated costs to sell

10%

Impaired loans - valued at PV of expected cash flows

5,330

PV of expected cash flows

Discount rates used in the calculation of PV of expected cash flows

4-11% (6.31%)

Foreclosed real estate

2,294

Appraised value; List or contract price

Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell

0-10%

1,681

Appraised value

Discounts for estimated costs to sell

10%

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, ~~2018,~~2019, the significant unobservable inputs used in the fair value measurements were as follows:

($ in thousands)

Description

Fair Value at
December 31, 2018

Valuation

Technique

Significant Unobservable

Inputs

Range

of Significant

Unobservable

Input Values

Fair Value at
December 31, 2019

Valuation

Technique

Significant Unobservable

Inputs

Range (Weighted Average)

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%

Impaired loans - valued at collateral value

10,718

Appraised value

Discounts applied for estimated costs to sell

10%

Impaired loans - valued at PV of expected cash flows

5,497

PV of expected cash flows

Discount rates used in the calculation of PV of expected cash flows

4-11% (6.50%)

Foreclosed real estate

7,440

Appraised value; List or contract price

Discounts to reflect current market conditions and estimated costs to sell

0-10%

1,830

Appraised value

Discounts for estimated costs to sell

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 nine months ended September 30, 2019 or 2018.

For the nine months ended September 30, 2019 and 2018, the increase (decrease) in the fair value of securities available for sale was $19,814,000 and ($10,229,000), respectively, which is included in other comprehensive income (net of tax benefit (expense) of ($4,602,000) and $2,390,000, respectively). Fair value measurement methods at September 30, 2019 and 2018 are consistent with those used in prior reporting periods.

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The carrying amounts and estimated fair values of financial instruments not carried at ~~September 30, 2019~~fair value at March 31, 2020 and December 31, ~~2018~~2019 are as follows:

~~Page 34~~

~~Index~~


		September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
($ in thousands)	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value	Carrying Amount	Estimated Fair Value	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value	Carrying Amount	Estimated Fair Value
Cash and due from banks, noninterest-bearing	Level 1	$	52,621	52,621	56,050	56,050	Level 1	$	93,666	93,666	64,519	64,519
Due from banks, interest-bearing	Level 1	264,840		264,840	406,848	406,848	Level 1	282,683		282,683	166,783	166,783
Securities available for sale	Level 2	705,224		705,224	501,351	501,351
Securities held to maturity	Level 2	74,265		74,465	101,237	99,906	Level 2	61,303		62,385	67,932	68,333
Presold mortgages in process of settlement	Level 1	16,269		16,269	4,279	4,279
SBA loans held for sale							Level 2	18,449		19,332	—	—
Total loans, net of allowance	Level 3	4,377,284		4,341,770	4,228,025	4,181,139	Level 3	4,528,210		4,428,870	4,432,068	4,407,610
Accrued interest receivable	Level 1	16,297		16,297	16,004	16,004	Level 1	15,767		15,767	16,648	16,648
Bank-owned life insurance	Level 1	103,806		103,806	101,878	101,878	Level 1	105,083		105,083	104,441	104,441
SBA Servicing Asset	Level 3	5,500		5,966	4,419	4,617	Level 3	4,682		4,906	5,383	5,649

Deposits	Level 2	4,875,382		4,874,274	4,659,339	4,653,522	Level 2	5,044,988		5,045,800	4,931,355	4,930,751
Borrowings	Level 2	300,656		294,913	406,609	402,556	Level 2	402,185		393,542	300,671	295,399
Accrued interest payable	Level 2	2,169		2,169	1,976	1,972	Level 2	2,100		2,100	2,154	2,154

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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

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Note 12 – Revenue from Contracts with Customers

All of the Company’s revenues that are in the scope of the “Revenue from Contracts with Customers” accounting standard (“~~Topic~~ASC 606”) are recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Items outside the scope of ~~Topic~~ASC 606 are noted as such.

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~~Index~~


	For the Three Months Ended					For the Nine Months Ended				For the Three Months Ended
$ in thousands	September 30, 2019			September 30, 2018		September 30, 2019		September 30, 2018		March 31, 2020		March 31, 2019
Noninterest Income
In-scope of Topic 606:
In-scope of ASC 606:
Service charges on deposit accounts:	$	3,388		3,221		9,543		9,606		$	3,337	2,945
Other service charges, commissions, and fees:
Interchange income	3,975			3,374		11,754		9,917		2,887		2,809
Other service charges and fees	1,839			1,568		5,094		4,184		1,182		1,697
Commissions from sales of insurance and financial products:
Insurance income	1,355			1,627		4,027		4,530		1,198		1,368
Wealth management income	848			798		2,409		1,954		870		661
SBA consulting fees	663			1,287		2,847		3,554		1,027		1,263
Foreclosed property gains (losses), net	(273		)	(192	)	(899	)	(579	)
Noninterest income (in-scope of Topic 606)	11,795			11,683		34,775		33,166
Noninterest income (out-of-scope of Topic 606)	3,835			3,489		11,419		13,707
Noninterest income (in-scope of ASC 606)										10,501		10,743
Noninterest income (out-of-scope of ASC 606)										3,204		3,335
Total noninterest income	$	15,630		15,172		46,194		46,873		$	13,705	14,078

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

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

Other service charges, commissions, and fees: The Company earns interchange income on its customers’ debit and credit card usage and earns fees from other services utilized by its customers. Interchange income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange expenses were presented on a gross basis prior to the adoption of ASC 606 and are presented on a net basis in 2019 and 2020. Other service charges include revenue from 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.

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Wealth Management Income primarily consists of commissions received on financial product sales, such as annuities. The Company’s performance obligation is generally satisfied upon the issuance of the 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.~~

~~Page 36~~

~~Index~~

period, for which the performance obligation has been satisfied.

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

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

Note 13 – Leases

~~Effective January 1, 2019,~~The Company enters into leases in the ~~Company adopted new accounting guidance regarding~~ ~~Leases~~ ~~(Topic 842).~~normal course of business. As of ~~September 30, 2019,~~March 31, 2020, the Company leased 8 branch offices for which the land and buildings are leased and 9 branch offices for which the land is leased but the building is owned. The Company also leases ~~1 loan production office and~~ office space for several operational departments. All of the Company’s leases ~~have historically qualified as~~are operating leases under ~~prior~~applicable accounting ~~guidance,~~standards 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 ~~19.80~~20.3 years as of ~~September 30, 2019.~~March 31, 2020. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. As permitted by applicable accounting standards, the Company has elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company's Consolidated Balance Sheets.

~~The discount rate that was~~Leases are classified as either operating or finance leases at the lease commencement date, and as previously noted, all of the Company's leases have been determined to be operating leases. Lease expense for ~~each~~operating leases and short-term leases is recognized on a straight-line basis over the lease ~~was~~term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the ~~Company’s~~estimated present value of lease payments over the lease term.

The Company uses its incremental borrowing rate, ~~at lease inception,~~ on a collateralized basis, ~~over a similar term. For operating leases existing prior~~at lease commencement to ~~January 1, 2019,~~calculate the present value of lease payments when the rate ~~for~~implicit in the ~~remaining~~ lease ~~term as of January 1, 2019 was used.~~is not known. The weighted average discount rate for leases was ~~3.30%~~3.26% as of ~~September 30, 2019.~~March 31, 2020.

Total operating lease expense was ~~$1.9~~$0.7 million and $0.6 million for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020 and 2019, respectively. The right-of-use assets ~~included in premises and equipment,~~ and lease liabilities ~~included in other liabilities,~~ were ~~$20.6~~$19.3 million and ~~$20.7~~$19.6 million as of ~~September 30, 2019,~~March 31, 2020, respectively.

~~Estimated~~Future undiscounted lease payments for ~~the Company’s~~ operating leases with initial terms of one year or more as of ~~September 30, 2019 were~~March 31, 2020 are as follows.


($ in thousands)	Maturity Analysis of Lease Liabilities
October 1 to December 31, 2019	$	583
2020	2,504
April 1 to December 31, 2020				$	1,853
2021	2,329			2,257
2022	1,941			1,898
2023	1,848			1,776
2024				1,574
Thereafter	21,145			19,564
Total estimated lease payments	30,350
Total undiscounted lease payments				28,922
Less effect of discounting	(9,607		)	(9,344		)
Present value of estimated lease payments (lease liability)	$	20,743		$	19,578

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Note 14 - Shareholders' Equity

~~Future obligations~~Stock Repurchases

During the first three months of 2020, the Company repurchased approximately 576,406 shares of the Company's common stock at an average stock price of $34.70 per share, which totaled $20 million, under a $40 million repurchase authorization publicly announced in November 2019. The Company has $20 million remaining of the $40 million repurchase authorization. The Company suspended repurchases in March 2020 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
2020 1,973
2021 1,344
2022 869
2023 768
Thereafter 4,082
Total estimated lease payments $ 11,304

the foreseeable future.

Note 1415 - ~~Equity Issuance~~Borrowings

The following tables present information regarding the Company’s outstanding borrowings at March, 31, 2020 and December 31, 2019 - dollars are in thousands:



Description	Due date	Call Feature	March 31, 2020			Interest Rate
FHLB Term Note	4/6/2020	None	$	50,000		1.01% fixed
FHLB Term Note	5/6/2020	None	50,000			0.88% fixed
FHLB Term Note	5/29/2020	None	40,000			1.62% fixed
FHLB Term Note	6/8/2020	None	50,000			0.71% fixed
FHLB Term Note	6/18/2020	None	50,000			0.41% fixed
FHLB Term Note	9/4/2020	None	50,000			0.64% fixed
FHLB Term Note	9/18/2020	None	50,000			0.50% fixed
FHLB Principal Reducing Credit	7/24/2023	None	158			1.00% fixed
FHLB Principal Reducing Credit	12/22/2023	None	1,020			1.25% fixed
FHLB Principal Reducing Credit	1/15/2026	None	6,000			1.98% fixed
FHLB Principal Reducing Credit	6/26/2028	None	242			0.25% fixed
FHLB Principal Reducing Credit	7/17/2028	None	54			0.00% fixed
FHLB Principal Reducing Credit	8/18/2028	None	179			1.00% fixed
FHLB Principal Reducing Credit	8/22/2028	None	179			1.00% fixed
FHLB Principal Reducing Credit	12/20/2028	None	364			0.50% fixed
Trust Preferred Securities	1/23/2034	Quarterly by Company beginning 1/23/2009	20,620			4.47% at 3/31/2020 adjustable rate 3 month LIBOR + 2.70%
Trust Preferred Securities	6/15/2036	Quarterly by Company beginning 6/15/2011	25,774			2.13% at 3/31/2020 adjustable rate 3 month LIBOR + 1.39%
Trust Preferred Securities	1/7/2035	Quarterly by Company beginning 1/7/2010	10,310			3.28% at 3/31/2020 adjustable rate 3 month LIBOR + 2.00%
Total borrowings/ weighted average rate as of		March 31, 2020	$	404,900		1.16%
Unamortized discount on acquired borrowings			(2,715		)
Total borrowings			$	402,185

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

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

Critical Accounting Policies

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

Allowance for Loan Losses

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

As previously noted, and as permitted by the CARES Act, we elected to defer the implementation of CECL until the earlier of the cessation of the national emergency or December 31, 2020 because of the challenges associated with developing a reliable forecast of losses that may result from the unprecedented COVID-19 pandemic. Accordingly, the Company's provision for loan losses for the first quarter of 2020 is based on the limited information available and the conditions that existed at March 31, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses and the remaining discussion below is based on that methodology. Upon the adoption of CECL, the Company expects its allowance for credit losses related to all financial assets will increase to approximately $40-$44 million as of January 1, 2020 compared to its allowance for loan losses at December 31, 2019 of approximately $21 million. As previously discussed, this initial impact will be reflected as a cumulative-effect adjustment to retained earnings.

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

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

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

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

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

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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.

See "Allowance for Loan Losses and Loan Loss Experience" for additional discussion.

Intangible Assets

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

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

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

Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis, with the annual evaluation occurring on October 31 of each year, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill. We have three reporting units – 1) First Bank with $222.7 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.

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In our ~~October 31, 2018~~2019 goodwill impairment evaluation, we concluded that the goodwill for each of our reporting units was not impaired. Additionally, during the period ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis. In this analysis, the Company determined that none of it's goodwill was impaired as of March 31, 2020. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

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

Fair Value and Discount Accretion of Acquired Loans

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

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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 and accounting standards that are pending adoption.

Recent Developments: COVID-19

In March 2020, the outbreak of the Coronavirus Disease 2019 (COVID-19) was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has caused economic and social disruption resulting in unprecedented uncertainty, volatility and disruption in financial markets, and has placed significant health, economic and other major pressures throughout the communities we serve, the United States and globally. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, material decreases in oil and gas prices and in business valuations, changes in consumer behavior related to pandemic fears, and aggressive measures by the federal government.

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

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

The CARES Act also includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Under these terms, as of March 31, 2020, the Company had processed payment deferrals for 315 loans with an aggregate loan balance of $120 million. Through April 30, 2020, the number of deferrals increased to 1,269 with an aggregate loan balance of $647 million. These deferrals were generally no more than 90 days in duration.

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

Employees, Customers and Communities

The Company is supporting the health and safety of its employees and customers, and complying with government directives, through responsible operations administered under its Board approved business continuity plan and protocols:

All branches currently operate on a "drive-thru only" basis, except by appointment.

The Company has implemented an employee work-from-home plan where possible.

Extra precautions are being taken to safeguard health and safety in branch facilities.

The Company is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. In April and

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early May 2020, the Company approved 2,799 PPP loans totaling approximately $249.5 million under the allocation approved by Congress.

The Company has implemented a short-term deferral modification program that complies with federal banking regulator's interagency guidance and is working with borrowers effected by COVID-19 on a case by case basis. Under these terms, as of March 31, 2020, the Company had processed payment deferrals for 315 loans with an aggregate loan balance of $120 million. Through April 30, 2020, the number of deferrals increased to 1,269 with an aggregate loan balance of $647 million. These deferrals were generally no more than 90 days in duration.

Capital, Liquidity & Credit

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

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

Asset quality remains solid, with nonperforming assets to total assets amounting to 0.60% at March 31, 2020 compared to 0.62% at December 31, 2019.

The Company identified several loan portfolio categories totaling approximately $553 million that it considered to be most “at-risk” from the COVID-19 pandemic, including hotels, restaurants, retail stores, travel accommodations, child care facilities, arts and entertainment, barber shops and beauty salons, car and boat dealers, and mini-storage facilities, as well as all credit cards. As a result the analysis, the Company recorded an approximately $4.3 million COVID-19 related provision for loan losses, which brought the total provision for loan losses to $5.6 million for the three months ended March 31, 2020. The amount was determined as if the risk grades for the loans in these portfolios had been adjusted downwards and then applying historical loss rates associated with those risk grades.

FINANCIAL OVERVIEW

Net income amounted to ~~$25.0~~$18.2 million, or ~~$0.84~~$0.62 per diluted common share, for the three months ended ~~September 30, 2019, an increase~~March 31, 2020, a decrease of ~~13.5%~~17.3% in earnings per share from the ~~$22.0~~$22.3 million, or ~~$0.74~~$0.75 per diluted common share, recorded in the ~~third~~first quarter of ~~2018.~~2019.

~~For the nine months ended September 30, 2019, we recorded net income of $71.2 million, or $2.39 per diluted common share,~~The decrease in earnings was primarily due to an increase in the provision for loan losses, which amounted to $5.6 million in the first quarter of ~~8.1%~~2020 compared to $0.5 million in ~~earnings per share from~~ the ~~$65.4~~first quarter of 2019. The 2020 amount reflects approximately $4.3 million ~~or $2.21 per diluted common share,~~in provision related to COVID-19. As permitted by the CARES Act, the Company elected to defer the implementation of the Current Expected Credit Loss (CECL) methodology. Accordingly, our provision for loan losses for the ~~nine months ended September 30, 2018.~~first quarter of 2020 is based on the limited information available and the conditions that existed at March 31, 2020 related to COVID-19, and calculated under the pre-CECL incurred loss methodology for determining loan losses. See further discussion below.

Net Interest Income and Net Interest Margin

Net interest income for the ~~third~~first quarter of ~~2019~~2020 was ~~$53.8~~$54.8 million, a ~~3.7%~~2.6% increase from the ~~$51.8~~$53.4 million recorded in the ~~third~~first quarter of ~~2018. Net interest income for the first nine months of 2019 amounted to $161.5 million, a 5.2%~~2019. The increase ~~from the $153.6 million recorded in the comparable period of 2018. The increases~~ in net interest income ~~for the periods presented were~~was primarily due to growth in interest-earning assets, which have increased by ~~6.7%~~approximately 4% over the past ~~year.~~year, but was partially offset by a lower net interest margin.

Our net interest margin ~~(tax-equivalent~~(a non-GAAP measure calculated by dividing tax-equivalent net interest income ~~divided~~ by average earning assets) for the ~~third~~first quarter of ~~2019~~2020 was ~~3.95%~~3.96%, which was 810 basis points lower than the ~~4.03%~~4.06% realized in the ~~third~~first quarter of ~~2018. For the nine month period ended September 30, 2019, our net interest~~2019. The lower margin was ~~4.02% compared to 4.09% for the same period in 2018. The lower margins were~~primarily due to ~~a combination~~the impact of lower ~~loan discount accretion and funding costs that rose~~interest rates. Since August 2019, the Federal Reserve Board has decreased interest rates by ~~more than~~225 basis points, which resulted in asset ~~yields.~~

~~We recorded loan discount accretion of $1.3 million in~~yields declining by 20 basis points from the ~~third~~first quarter of 2019, ~~compared to $1.6 million in the third quarter~~while our cost of 2018. For the nine months ended September 30, 2019 and 2018, loan discount accretion amounted to $4.5 million and $6.0 million, respectively. The lower loan discount accretion accounted for approximately 3funds declined by 10 basis ~~points out of the 8 basis point decline in the net interest margin when comparing the third quarter of 2019 to 2018~~points.

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~~and for 5 basis points of the 7 basis point decline on a year to date basis. The lower discount accretion was attributable to paydowns in our acquired loan portfolios.~~

Provision for Loan Losses and Asset Quality

WeAs previously noted, we deferred implementation of CECL and recorded a ~~negative~~ provision for loan losses of ~~$1.1~~$5.6 million ~~(reduction of the allowance for loan losses)~~ in the ~~third~~first quarter of ~~2019~~2020 compared to a provision for loan losses of ~~$0.1~~$0.5 million in the third quarter of 2018. For the nine months ended September 30, 2019, we recorded a negative provision for loan losses of $0.9 million compared to a negative provision for loan losses of $4.3 million in the same period of 2018. In the first quarter of ~~2018, we experienced~~2019. The 2020 amount reflects approximately $4.3 million in provision related to COVID-19 and was based on the limited information available and the conditions that existed at March 31, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses. See "Summary of Loan Loss Experience" for more discussion.

Total net ~~loan recoveries~~charge-offs for the first quarter of ~~$3.7~~2020 amounted to $2.5 million, ~~resulting~~or 0.22% of average loans, compared to net charge-offs of $0.4 million, or 0.04% of average loans, in the ~~negative provision during 2018. Our provision~~first quarter of 2019. Approximately $1.7 million of the first quarter charge-offs had been previously specifically reserved for ~~loan losses has remained at low levels over the past several years as a result of strong asset quality, including low loan charge-offs.~~

The ratio of annualized net charge-offs (recoveries) to average loans for the nine months ended September 30, 2019 was 0.03%, compared to (0.05%) for the same period of 2018. Our nonperforming assets to total assets ratio was 0.56% at September 30, 2019 compared to 0.74% at December 31, ~~2018.~~2019. Total nonperforming assets amounted to $38.3 million at March 31, 2020 compared to $37.8 million at December 31, 2019.

Noninterest Income

Total noninterest income was ~~$15.6~~$13.7 million and ~~$15.2~~$14.1 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~For the nine months ended September 30, 2019, noninterest income amounted to $46.2 million compared to $46.9 million for the same period of 2018.~~

~~For the third quarter of 2019, we experienced strong increases in “Other~~The line item "Other service charges, commissions, and ~~fees,”~~fees" includes $0.5 million of impairment of our SBA servicing asset due to ~~higher debit card and credit card interchange fees associated~~the lower fair value of that asset resulting from market conditions at March 31, 2020. Fees from presold mortgages amounted to $1.8 million for the first quarter of 2020 compared to $0.5 million in the first quarter of 2019, with ~~increased usage, and "Fees from Presold Mortgages," as a result of higher~~the increase being primarily due to lower interest rates that resulted in increases in mortgage loan ~~originations. Offsetting those increases was lower SBA consulting fee income and lower~~ volume.

SBA loan sale gains ~~which both declined due to lower origination activity.~~

For the nine months ended September 30, 2019, higher “Other service charges, commissions and fees” were substantially offset by lower SBA consulting fee income and lower gains on sales of SBA loans.

~~Other gains (losses)~~ amounted to ~~a loss~~$0.6 million for the first quarter of ~~$0.3~~2020 compared to $2.1 million in the first ~~nine months~~quarter of ~~2019 due~~2019. We had intended to ~~miscellaneous items, whereas~~sell an additional $18.4 million of SBA loans in the first ~~nine months~~quarter of ~~2018,~~2020, however sales scheduled to occur in late March did not occur due to market conditions. Accordingly, we ~~recorded a net gain of $0.8 million, which included a $0.9 million gain on~~have reflected those loans as "held for sale" in the ~~sale of a former branch location.~~accompanying Balance Sheet.

Noninterest Expenses

Noninterest expenses amounted to ~~$38.9~~$40.1 million in the ~~third~~first quarter of ~~2019, a 0.3% decrease from the $39.0~~2020 compared to $38.8 million recorded in the ~~third~~first quarter of ~~2018. Noninterest expenses for the nine months ended September 30,~~ 2019, ~~amounted to $118.6 million compared to $121.2 million in 2018, a decrease~~an increase of ~~2.1%.~~

Personnel expense increased by 3%-5% for the periods in 2019 compared 2018, which was offset by lower intangible amortization, merger expenses and other miscellaneous expenses (including lower FDIC insurance expense which is discussed in the components of earnings section below)3.4%.

Income Taxes

Our effective tax rate was 20.3% for the ~~third~~first quarter of ~~2019 was 20.8%~~2020, compared to ~~21.2%~~20.9% in the ~~third~~first quarter of 2018. For the nine months ended September 30, 2019 and 2018, our effective tax rates were 21.0% and 21.8%, respectively. The lower 2019 effective tax rates were primarily due to a decrease in the North Carolina corporate income tax rate from 3.0% to 2.5%, which became effective January 1, 2019.

Balance Sheet and Capital

Total assets at ~~September 30, 2019~~March 31, 2020 amounted to $6.1 billion, a 3.5% increase from December 31, 2018. Total loans at September 30, 2019 amounted to $4.4 billion, a 3.5% increase from December 31, 2018, and total deposits amounted to $4.9 billion at September 30, 2019, a 4.6% increase from December 31, 2018.

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~~Annualized loan~~$6.4 billion. Loan growth for the ~~first nine~~three months ~~of 2019 was 4.6%. Annualized~~ended March 31, 2020 amounted to $99.2 million, or 9.0% annualized, and deposit growth for the first nine months of 2019 was 6.2%. Within deposits, our retail deposits (excludes brokered deposits and internet time deposits) grew at an annualized rate of 9.9% for the first nine months of 2019. As a result of the strong retail deposit growth, we have been ableamounted to ~~reduce to our level of brokered deposits, which have declined by $112~~$113.6 million, or ~~46.8%, since December 31, 2018. Additionally, we have paid down our borrowings by $106 million, or 26.1%, over that same time period.~~

In late 2018 and early 2019, in order to reduce exposure to the possibility of lower interest rates, we invested a portion of our interest-bearing cash balances into fixed rate investment securities. As a result, from December 31, 2018 to September 30, 2019, interest-bearing cash balances have declined by 34.9% and investment securities balances have increased by 29.4%.

During the third quarter of 2019, we repurchased 99,625 shares of the Company’s common stock at an average price of $34.89, which totaled $3.5 million. For the first nine months of 2019, we repurchased 281,593 shares at an average cost of $35.48 for a total of $10 million. We have $15 million of remaining repurchase authority and, depending on market conditions, may continue share repurchases up to that limit during the last quarter of 2019.9.3% annualized.

We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at ~~September 30, 2019~~March 31, 2020 of ~~14.88%, an increase from the 13.97% reported at December 31, 2018.~~14.51%.

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Components of Earnings

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended ~~September 30, 2019~~March 31, 2020 amounted to ~~$53.8~~$54.8 million, an increase of ~~$1.9~~$1.4 million, or ~~3.7%~~2.6%, from the ~~$51.8~~$53.4 million recorded in the ~~third~~first quarter of ~~2018.~~2019. Net interest income on a tax-equivalent basis for the three month period ended ~~September 30, 2019~~March 31, 2020 amounted to ~~$54.2~~$55.1 million, an increase of ~~$1.9~~$1.3 million, or ~~3.7%~~2.4%, from the ~~$52.3~~$53.8 million recorded in the ~~third~~first quarter of ~~2018.~~2019. 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) 2019 2018
Net interest income, as reported $ 53,778
51,845
Tax-equivalent adjustment 413
428
Net interest income, tax-equivalent $ 54,191
52,273

Net interest income for the nine month period ended September 30, 2019 amounted to $161.5 million, an increase of $8.0 million, or 5.2%, from the $153.6 million recorded in the first nine months of 2018. Net interest income on a tax-equivalent basis for the nine month period ended September 30, 2019 amounted to $162.8 million, an increase of $8.1 million, or 5.2%, from the $154.7 million recorded in the comparable period of 2018.


	Nine Months Ended September 30,			Three Months Ended March 31,
($ in thousands)	2019		2018	2020		2019
Net interest income, as reported	$	161,548	153,584	$	54,759	53,361
Tax-equivalent adjustment	1,260		1,151	334		424
Net interest income, tax-equivalent	$	162,808	154,735	$	55,093	53,785

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 nine~~ months ended ~~September 30, 2019,~~March 31, 2020, the higher net interest income compared to the ~~comparable periods~~same period of ~~2018~~2019 was primarily due to growth in interest-earning ~~assets, including higher amounts of loans and securities. The growth in interest-earning assets was driven by funds provided from growth in deposits.~~assets.

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The following table presents an analysis of net interest income.


	For the Three Months Ended September 30,												For the Three Months Ended March 31,
	2019						2018						2020						2019
($ in thousands)	Average Volume		Average Rate		Interest Earned or Paid		Average Volume		Average Rate		Interest Earned or Paid		Average Volume		Average Rate		Interest Earned or Paid		Average Volume		Average Rate		Interest Earned or Paid
Assets
Loans (1)	$	4,354,477	5.02	%	$	55,142	$	4,191,751	4.96	%	$	52,407	$	4,512,893	4.93	%	$	55,297	$	4,280,272	5.11	%	$	53,960
Taxable securities	747,044		2.72	%	5,129		400,861		2.48	%	2,501		834,528		2.64	%	5,474		651,878		2.95	%	4,737
Non-taxable securities	27,711		3.04	%	212		50,373		2.89	%	367		21,719		3.04	%	164		45,752		2.99	%	337
Short-term investments, primarily overnight funds	310,781		2.42	%	1,898		500,435		2.33	%	2,944		226,797		1.95	%	1,098		394,864		2.77	%	2,701
Total interest-earning assets	5,440,013		4.55	%	62,381		5,143,420		4.49	%	58,219		5,595,937		4.46	%	62,033		5,372,766		4.66	%	61,735

Cash and due from banks	54,132						78,078						63,218						55,899
Premises and equipment	136,468						113,812						114,323						118,911
Other assets	391,366						377,630						409,620						397,473
Total assets	$	6,021,979					$	5,712,940					$	6,183,098					$	5,945,049

Liabilities
Interest bearing checking	$	883,002	0.15	%	$	338	862,065		0.11	%	$	235	$	899,004	0.18	%	$	408	908,039		0.15	%	$	327
Money market deposits	1,124,240		0.68	%	1,915		1,018,933		0.34	%	869		1,203,129		0.56	%	1,683		1,056,931		0.54	%	1,395
Savings deposits	416,732		0.29	%	307		435,579		0.21	%	230		426,225		0.25	%	269		426,843		0.27	%	287
Time deposits >$100,000	692,417		2.02	%	3,519		658,479		1.39	%	2,302		644,113		1.83	%	2,924		712,540		1.81	%	3,178
Other time deposits	261,424		0.79	%	518		272,468		0.39	%	270		250,860		0.78	%	489		263,171		0.60	%	390
Total interest-bearing deposits	3,377,815		0.77	%	6,597		3,247,524		0.48	%	3,906		3,423,331		0.68	%	5,773		3,367,524		0.67	%	5,577
Borrowings	300,714		2.65	%	2,006		406,652		2.41	%	2,468		316,136		1.91	%	1,501		406,190		2.79	%	2,797
Total interest-bearing liabilities	3,678,529		0.93	%	8,603		3,654,176		0.69	%	6,374		3,739,467		0.78	%	7,274		3,773,714		0.90	%	8,374

Noninterest bearing checking	1,460,759						1,278,488						1,526,868						1,336,707
Other liabilities	55,777						42,716						58,171						59,569
Shareholders’ equity	826,914						737,560						858,592						775,059
Total liabilities and shareholders’ equity	$	6,021,979					5,712,940						$	6,183,098					$	5,945,049

Net yield on interest-earning assets and net interest income			3.92	%	$	53,778			4.00	%	$	51,845			3.94	%	$	54,759			4.03	%	$	53,361
Net yield on interest-earning assets and net interest income – tax-equivalent (2)			3.95	%	$	54,191			4.03	%	$	52,273			3.96	%	$	55,093			4.06	%	$	53,785

Interest rate spread			3.62	%					3.80	%					3.68	%					3.76	%

Average prime rate			5.27	%					5.01	%					4.42	%					5.50	%

(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

(2) Includes tax-equivalent adjustments of ~~$413,000~~$334,000 and ~~$428,000~~$424,000 in ~~2019~~2020 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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For the Nine Months Ended September 30,
2019 2018
($ in thousands)
Average
Volume

Average
Rate

Interest
Earned
or Paid

Average
Volume

Average
Rate

Interest
Earned
or Paid
Assets

Loans (1) $ 4,322,078
5.10 % $ 164,754
$ 4,141,645
4.97 % $ 154,028
Taxable securities 706,300
2.81 % 14,859
406,975
2.48 % 7,552
Non-taxable securities 34,833
3.15 % 820
51,283
2.91 % 1,115
Short-term investments, primarily overnight funds 347,335
2.58 % 6,705
457,908
2.14 % 7,320
Total interest-earning assets 5,410,546
4.62 % 187,138
5,057,811
4.49 % 170,015

Cash and due from banks 54,579
88,596

Premises and equipment 136,550
114,656

Other assets 384,966
383,629

Total assets $ 5,986,641
$ 5,644,692

Liabilities
Interest bearing checking $ 894,488
0.14 % $ 966
$ 874,921
0.10 % $ 646
Money market deposits 1,093,736
0.62 % 5,036
1,019,399
0.28 % 2,151
Savings deposits 419,210
0.29 % 903
442,345
0.20 % 648
Time deposits >$100,000 709,247
1.93 % 10,221
629,175
1.20 % 5,627
Other time deposits 262,424
0.70 % 1,372
278,950
0.35 % 740
Total interest-bearing deposits 3,379,105
0.73 % 18,498
3,244,790
0.40 % 9,812
Borrowings 343,431
2.76 % 7,092
406,954
2.17 % 6,619
Total interest-bearing liabilities 3,722,536
0.92 % 25,590
3,651,744
0.60 % 16,431

Noninterest bearing checking 1,405,830
1,236,002

Other liabilities 57,047
37,964

Shareholders’ equity 801,228
718,982

Total liabilities and
shareholders’ equity
$ 5,986,641
$ 5,644,692

Net yield on interest-earning assets and net interest income 3.99 % $ 161,548
4.06 % $ 153,584
Net yield on interest-earning assets and net interest income – tax-equivalent (2) 4.02 % $ 162,808
4.09 % $ 154,735

Interest rate spread 3.70 % 3.89 %

Average prime rate 5.42 % 4.78 %

~~(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.~~

~~(2) Includes tax-equivalent adjustments of $1,260,000 and $1,151,000 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.

Average loans outstanding for the ~~third~~first quarter of ~~2019~~2020 were ~~$4.354~~$4.513 billion, which was ~~$163~~$233 million, or ~~3.9%~~5.4%, higher than the average loans outstanding for the ~~third~~first quarter of ~~2018~~2019 ($4.192 billion). For the first nine months of 2019, average loans outstanding were $4.322 billion, which was $180 million, or 4.4% higher than the average loans outstanding for the comparable period of 2018 ($4.1424.280 billion). The higher amount of average loans outstanding in ~~2019~~2020 was primarily due to our loan growth initiatives, including our continued focus and expansion into higher growth markets, our hiring of experienced bankers and our emphasis on SBA lending.

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~~As previously noted, in~~In late 2018 and early 2019, in order to reduce exposure to the possibility of lower interest rates, we invested a portion of our interest-bearing cash balances into fixed rate investment securities. As a result, as shown in the

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tables above, our average balance of taxable securities grew by ~~$346~~$183 million, or ~~86.4%~~28.0% when comparing the ~~third~~first quarter of ~~2019~~2020 to the ~~third~~first quarter of ~~2018. On a year to date basis, average taxable securities increased by $299 million, or 73.5%, when comparing 2019 to 2018.~~2019.

The increases in loans and securities were partially funded from the banks overnight funds, which declined for the periods in ~~2019~~2020 compared to ~~2018,~~2019, as shown in the tables above. However the larger source of funding arose from growth in our deposit balances, as discussed in the following paragraph.

Average total deposits outstanding for the ~~third~~first quarter of ~~2019~~2020 were ~~$4.839~~$4.950 billion, which was ~~$313~~$246 million, or ~~6.9%~~5.2%, higher than the average deposits outstanding for the ~~third~~first quarter of ~~2018~~2019 ($4.526 billion). Average total deposits for the nine months ended September 30, 2019 were $4.785 billion, which was $304 million, or 6.8%, higher than the average deposits outstanding for the same period of 2018 ($4.4814.704 billion). We continue to implement strategies to grow deposits, which we believe to be the principal reason for the increases in our deposit ~~balances in 2019.~~balances. Average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from ~~$3.573~~$3.729 billion during the first ~~nine~~three months of ~~2018~~2019 to ~~$3.813~~$4.055 billion during the first ~~nine~~three months of ~~2019,~~2020, representing growth of ~~$240~~$327 million, or ~~6.7%~~8.8%. ~~Average time deposits also increased from $908 million during the first nine months of 2018 to $972 million for the first nine months of 2019, an increase of $64 million, or 7.0%.~~

The funding provided by the growth in deposits also allowed us to pay down our borrowings in 2019. Average borrowings decreased by $106 million, or 26.1%, and $63.5 million, or 15.6%, during the three and nine months ended September 30, 2019, respectively, in comparison to the prior periods.

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

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the ~~third~~first quarter of ~~2019~~2020 was ~~3.95%~~3.96%, which was 810 basis points lower than the ~~4.03%~~4.06% realized in the ~~third~~first quarter of ~~2018. For the nine month period ended September 30, 2019, our net interest~~2019. The lower margin was ~~4.02% compared to 4.09% for the same period in 2018. The lower margins were~~primarily due to ~~a combination~~the impact of lower interest rates, which were partially offset by higher loan discount ~~accretion and funding costs that rose by more than asset yields.~~accretion.

We recorded loan discount accretion of ~~$1.3~~$1.8 million in the ~~third~~first quarter of ~~2019,~~2020, compared to ~~$1.6~~$1.4 million in the ~~third~~first quarter of ~~2018. For the nine months ended September 30, 2019 and 2018,~~2019. The higher loan discount accretion amounted to $4.5 million and $6.0 million, respectively. The lower loan discount accretion accounted for approximately 3 basis points out of the 8 basis point decline in the net interest margin when comparing the third quarter of 2019 to 2018 and for 5 basis points of the 7 basis point decline on a year to date basis. The lower discount accretion was attributable ~~to paydowns in our acquired~~ loan ~~portfolios.~~payoffs and higher accretion on SBA loans.

As derived from the ~~tables~~table above, in comparing ~~the periods in~~2020 to 2019, ~~to the periods in 2018,~~ interest-earning asset yields ~~increased 6~~decreased 20 basis points in the ~~third~~first quarter of ~~2019~~2020 compared to the ~~third~~first quarter of ~~2018,~~2019, while interest-bearing liability costs ~~increased~~decreased by 2412 basis points over that same period. ~~On a year to date basis, interest-earning asset yields increased 13~~Since August 2019, the Federal Reserve Board has decreased interest rates by 225 basis points, which resulted in ~~2019 compared~~significant declines in our asset yields. We have been able to ~~2018, whereas interest-bearing liability~~reduce our deposit costs, ~~increased by 32 basis points. The narrowing of that spread in 2019 was primarily due to flattening of the yield curve and competitive pressures.~~

The impact of the higher rising interest-bearing liability costs in 2019 has been partially offset by the impact of the approximately 13% growth in average noninterest-bearing deposits since December 31, 2018. Our total cost of funds, which includes noninterest bearing checking accounts at a zero percent cost only rose by 15 basis points (from 0.51% to 0.66%) and 22 basis points (from 0.45% to 0.67%) for the three and nine month periods in 2019, respectively, comparedbut not to the same ~~periods of 2018.~~

~~Also slightly impacting comparability of~~level as the ~~net interest margin for the first nine months~~reduction experienced in 2019 versus 2018 was $750,000 in interest recoveries received in the first quarter of 2018 related to loans that had been charged off in the past, which added approximately 2 basis points to the net interest margin for the first nine months of 2018.our asset yields.

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

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~~Index~~

We recorded a ~~negative~~ provision for loan losses of ~~$1.1~~$5.6 million ~~(reduction of the allowance for loan losses)~~ in the ~~third~~first quarter of ~~2019~~2020 compared to a provision for loan losses of ~~$0.1~~$0.5 million in the ~~third~~first quarter of ~~2018. For the nine months ended September 30, 2019, we recorded a negative~~2019. As previously discussed, our provision for loan losses ~~of $0.9 million compared to a negative provision for loan losses of~~in 2020 reflects approximately $4.3 million in provision related to COVID-19 and was based on the ~~same period of 2018. In~~limited information available and the ~~first quarter of 2018, we experienced net~~conditions that existed at March 31, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan recoveries of $3.7 million, resulting in the negative provision during 2018. Our provision for loan losses has remained at low levels over the past several years as a result of strong asset quality, including low loan charge-offs.losses.

~~Our provision for loan loss levels have been impacted by continued improvement in asset quality.~~ Nonperforming assets amounted to ~~$33.9~~$38.3 million at ~~September 30, 2019, a decrease of 22% from the $43.4~~March 31, 2020 compared to $37.8 million at December 31, ~~2018.~~2019. Our nonperforming assets to total assets ratio was ~~0.56%~~0.60% at ~~September 30, 2019~~March 31, 2020 compared to ~~0.74%~~0.62% at December 31, ~~2018.~~2019. The ratio of annualized net charge-offs ~~(recoveries)~~ to average loans for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~0.03%~~0.22%, compared to ~~(0.05%)~~0.04% for the same period of ~~2018.~~2019.

For the Three Months Ended For the Nine Months Ended
$ in thousands September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Service charges on deposit accounts $ 3,388
3,221
9,543
9,606
Other service charges, commissions, and fees 5,814
4,942
16,848
14,101
Fees from presold mortgage loans 1,275
576
2,677
2,231
Commissions from sales of insurance and financial products 2,203
2,425
6,436
6,484
SBA consulting fees 663
1,287
2,847
3,554
SBA loan sale gains 1,917
2,373
7,048
8,773
Bank-owned life insurance income 651
641
1,928
1,892
Foreclosed property gains (losses), net (273 ) (192 ) (899 ) (579 )
Securities gains (losses), net 97
—
97
—
Other gains (losses), net (105 ) (101 ) (331 ) 811
Noninterest income $ 15,630
15,172
46,194
46,873
Non-GAAP adjustments - Exclude:
Foreclosed property losses from above 273
192
899
579
Securities gains (losses), net (97 ) —
(97 ) —
Other gains and losses from above 105
101
331
(811 )
Adjusted noninterest income $ 15,911
15,465
47,327
46,641

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 and believe it reflects regular sources of noninterest income, that are within the control of management. As presented in the table above, adjusted noninterest income for the third quarter of 2019 was $15.9 million, a 2.9% increase from the $15.5 million reported for the third quarter of 2018. Adjusted noninterest income for the nine months ended September 30, 2019 was $47.3 million, a 1.5% increase from the $46.6 million reported for the first nine months of 2018.

~~As shown in the table above, service~~Service charges on deposit accounts increased from ~~$3.2~~$2.9 million in the ~~third~~first quarter of ~~2018~~2019 to ~~$3.4~~$3.3 million in the ~~third~~first quarter of ~~2019,~~2020, an increase that we believe is due to promotion of new deposit products. For the nine months ended September 30, 2019, service charges on deposit accounts amounted to $9.5 million, which is a $0.1 million decrease from the $9.6 million recorded in the comparable period of 2018.

Other service charges, commissions, and fees ~~increased~~decreased in ~~2019~~2020 compared to ~~2018,~~2019, primarily asdue to a ~~result of higher debit card and credit card interchange 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~~$0.5 million impairment recorded on our SBA servicing asset due to the ~~growth in checking accounts and increased customer usage~~lower fair value of ~~debit cards, we have experienced increases in this line item. Interchange income~~that asset resulting from ~~credit~~

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~~Index~~

~~cards has also increased due to growth in the number and usage of credit cards, which we believe is a result of continued promotion of this product~~market conditions at March 31, 2020.

Fees from presold mortgages increased significantly from ~~$0.6~~$0.5 million in the ~~third~~first quarter of ~~2018~~2019 to ~~$1.3~~$1.8 million in the ~~third~~first quarter of ~~2019. For the nine months ended September 30, 2019, fees amounted to $2.7 million, an increase of $0.4 million, from the $2.2 million recorded in the comparable period of 2018.~~2020. The higher fees in ~~2019~~2020 are due to hiring additional originators, as well a increased volumes in the mortgage industry due to declining interest rates.

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Commissions from sales of insurance and financial products did not vary significantly for the periods presented, amounting to approximately ~~$2.2~~$2.1 million and ~~$2.4 million for the third quarters of 2019 and 2018, respectively, and $6.4 million and $6.5~~$2.0 million for the first ~~nine months~~quarters of ~~2019~~2020 and ~~2018,~~2019, respectively.

Both SBA consulting fees and SBA loans sale gains were lower in ~~2019~~2020 compared to ~~2018.~~2019. For the three months ended ~~September 30, 2019,~~March 31, 2020, SBA consulting fees amounted to ~~$0.7~~$1.0 million compared to $1.3 million in the ~~third~~first quarter of 2018. The quarterly decline was also the driver for these fees being lower on a year to date basis, with these fees amounting to $2.8 million for the nine months ended September 30, 2019 compared to $3.6 million for the first nine months of 2018.2019. As it relates to SBA loan sale gains, we recorded ~~$1.9~~$0.6 million for the ~~third~~first quarter of ~~2019~~2020 compared to ~~$2.4~~$2.1 million for the ~~third~~first quarter of ~~2018. For the nine months ended September 30, 2019 and 2018, we recorded $7.0 million and $8.8 million in gains on SBA loan sales, respectively.~~2019. The declines in both of these SBA items was due to lower origination ~~activity, which~~activity. Additionally, we ~~believe was primarily caused by the timing of the funding of loans in the pipeline. Lower loan sale premiums in 2019 also impacted loan sale gains.~~

~~In the third quarter of 2019, we sold $39.7~~had $18.4 million in ~~available for sale securities~~SBA loans that ~~resulted~~we intended to sell in ~~$0.1 million~~March 2020, but the sales scheduled to occur in ~~gains. There were no sales in 2018.~~

Other gains (losses) amounted to losses of $0.1 million and $0.3 million in the three and nine months ended September 30, 2019, respectively, and losses of $0.1 million and gains of $0.8 million for the three and nine months ended September 30, 2018. Losses in 2019 werelate March did not occur due to ~~miscellaneous items, whereas~~market conditions. Accordingly, we reflect those loans as "held for sale" in ~~the second quarter of 2018, we recorded a $0.9 million gain on the sale of a former branch location.~~our Consolidated Balance Sheets.

Noninterest expenses amounted to ~~$38.9~~$40.1 million in the ~~third~~first quarter of ~~2019,~~2020, a ~~0.3% decrease~~3.4% increase from the ~~$39.0~~$38.8 million recorded in the ~~third~~first quarter of ~~2018. Noninterest expenses for the nine months ended September 30, 2019 amounted to $118.6 million compared to $121.2 million in 2018, a decrease of 2.1%.~~2019.

Personnel expense increased ~~5.0%~~4.7% to ~~$24.0~~$24.7 million in the ~~third~~first quarter of ~~2019~~2020 from ~~$22.8~~$23.6 million in the ~~third~~first quarter of ~~2018. For the first nine months of 2019, personnel expense increased 3.3% to $71.7 million from $69.4 million~~2019. The increase in ~~the prior year period. The increases in 2019 were~~2020 was primarily due to the Company's growth initiatives.

The combined amount of occupancy and equipment expense did not vary significantly among the periods ~~presented.~~

Merger expenses declined significantly in 2019. There were no merger and acquisition expenses in the third quarter of 2019 compared $0.2 million in the third quarter of 2018. For the nine months ended September 30, 2019 merger and acquisition expenses amounted to $0.2 million compared to $3.6presented, amounting $4.1 million for the same period in 2018. The higher merger and acquisition expenses recorded in 2018 related to the Asheville Savings Bank acquisition which converted its operations into First Bank in the first quarter of 2018.both three month periods.

Intangibles amortization expense decreased from ~~$1.5 million in the third quarter of 2018 to $1.2 million in the third quarter of 2019 and from $4.5~~$1.3 million in the first ~~nine months~~quarter of ~~2018~~2019 to ~~$3.7~~$1.1 million in the first ~~nine months~~quarter of ~~2019.~~2020. The ~~declines were~~decline was primarily as a result of the amortization of intangible assets associated with acquisitions that typically have amortization schedules that decline over time.

Other operating expenses amounted to ~~$9.8~~$10.1 million for the ~~third~~first quarter of ~~2019~~2020 compared to ~~$10.4 million in the third quarter of 2018. Other operating expenses amounted to $30.9~~$9.4 million in the first nine months of 2019 compared to $31.7 million in the same period of 2018. For the year to date period, the decline in this line item was impacted by efficiencies realized from the conversion of the operations of the Asheville Savings Bank into First Bank during the first quarter of 2018. Also, as a result of FDIC assessment credits allocated to the Company, we recorded no FDIC insurance expense for the third quarter of 2019, an increase of 7.3%. The increase was primarily due to increased software and ~~also reversed a $400,000 expense accrual~~

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~~that had been recorded~~supplies costs in ~~the second quarter of 2019. We expect our remaining credits to result in no insurance expense in the fourth quarter of 2019 and to cover approximately one month of expense in the first quarter of~~ 2020.

For the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the provision for income taxes was ~~$6.6~~$4.6 million, an effective tax rate of ~~20.8%~~20.3%, and $5.9 million, an effective tax rate of ~~21.2%~~20.9%, respectively. For the nine months ended September 30, 2019 and 2018, the provision for income taxes was $18.9 million, an effective tax rate of 21.0%, and $18.2 million, an effective tax rate of 21.8%, respectively. The decline was due to a decrease in the North Carolina corporate income tax rate from 3.0% to 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 income of ~~$1.7~~$16.1 million during the ~~third~~first quarter of ~~2019~~2020 compared ~~other comprehensive loss of $0.8 million during the third quarter of 2018. During the nine months ended September 30, 2019 and 2018, we recorded~~to other comprehensive income of ~~$15.6~~$4.7 million ~~and other comprehensive loss~~during the first quarter of ~~$7.8 million, respectively.~~2019. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains ~~(losses)~~ of our available for sale ~~securities.~~securities resulting from declines in interest rates. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.

FINANCIAL CONDITION

Total assets at ~~September 30, 2019~~March 31, 2020 amounted to ~~$6.1~~$6.4 billion, a ~~3.5%~~3.8% increase from December 31, ~~2018.~~2019. Total loans at ~~September 30, 2019~~March 31, 2020 amounted to ~~$4.4~~$4.6 billion, a ~~3.5%~~2.2% increase from December 31, ~~2018,~~2019, and total deposits amounted to ~~$4.9~~$5.0 billion, a ~~4.6%~~2.3% increase from December 31, ~~2018.~~2019.

The following table presents information regarding the nature of changes in our levels of loans and deposits for the first ~~nine~~three months of ~~2019.~~2020.

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January 1, 2019 to September 30, 2019	Balance at beginning of period		Internal Growth, net		Balance at end of period	Total percentage growth
$ in thousands
January 1, 2020 to March 31, 2020								Balance at beginning of period		Internal Growth, net		Balance at end of period	Total percentage growth
Total loans	$	4,249,064	147,480		4,396,544	3.5	%	$	4,453,466	99,242		4,552,708	2.2	%

Deposits – Noninterest bearing checking	1,320,131		171,363		1,491,494	13.0	%	1,515,977		64,872		1,580,849	4.3	%
Deposits – Interest bearing checking	916,374		(21,597	)	894,777	(2.4	)%	912,784		10,201		922,985	1.1	%
Deposits – Money market	1,035,523		89,091		1,124,614	8.6	%	1,173,107		51,307		1,224,414	4.4	%
Deposits – Savings	432,389		(14,346	)	418,043	(3.3	)%	424,415		6,962		431,377	1.6	%
Deposits – Brokered	239,875		(112,356	)	127,519	(46.8	)%	86,141		(499	)	85,642	(0.6	)%
Deposits – Internet time	3,428		(1,983	)	1,445	(57.8	)%	698		—		698	—	%
Deposits – Time>$100,000	447,619		109,971		557,590	24.6	%	563,108		(9,686	)	553,422	(1.7	)%
Deposits – Time<$100,000	264,000		(4,100	)	259,900	(1.6	)%	255,125		(9,524	)	245,601	(3.7	)%
Total deposits	$	4,659,339	216,043		4,875,382	4.6	%	$	4,931,355	113,633		5,044,988	2.3	%

As derived from the table above, for the first ~~nine~~three months of ~~2019,~~2020, loan growth was ~~$147.5~~$99.2 million, or ~~3.5% (4.6%~~2.2% (9.0% on an annualized basis). Loan growth for the period was organic and driven by our continued expansion into high-growth markets, our hiring of experienced bankers and our emphasis on SBA lending. We expect continued growth in our loan portfolio for the remainder of ~~2019.~~2020. In April and early May 2020, the Company approved approximately $249.5 million in PPP loans under the allocation approved by Congress.

The mix of our loan portfolio remains substantially the same at ~~September 30, 2019~~March 31, 2020 compared to December 31, ~~2018.~~2019. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Note 67 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

For the ~~nine~~three month period ended ~~September 30, 2019,~~March 31, 2020, we experienced internal growth in our core deposit accounts (checking, money market and savings) ~~and in our retail time deposits, which exclude brokered and internet time~~

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~~deposits.~~. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.

A combination of the significant growth experienced in our retail deposits in 2019 and comparatively lower loan growth allowed us to reduce our level of brokered deposits over the periods presented, which have declined by $112 million, or 46.8%, since December 31, 2018. For those same reasons, we were able to pay down our borrowings by $106 million over the same period.

Our liquidity levels have increased over the past year. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from ~~21.0%~~21.4% at December 31, ~~2018~~2019 to ~~21.5%~~22.8% at ~~September 30, 2019.~~

Over the past nine months, we have also invested a portion of our cash balances into fixed rate 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 $501.4 million at DecemberMarch 31, ~~2018 to $705.2 million at September 30, 2019, while total cash balance have declined from $462.9 million to $317.5 million over that same period.~~2020.

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Nonperforming Assets

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


ASSET QUALITY DATA ($ in thousands)	As of/for the quarter ended September 30, 2019			As of/for the quarter ended December 31, 2018		As of/for the quarter ended March 31, 2020			As of/for the quarter ended December 31, 2019
Nonperforming assets
Nonaccrual loans	$	19,720		22,575		$	25,066		24,866
TDRs – accruing	9,566			13,418
Restructured loans – accruing						9,747			9,053
Accruing loans >90 days past due	—			—		—			—
Total nonperforming loans	29,286			35,993		34,813			33,919
Foreclosed real estate	4,589			7,440		3,487			3,873
Total nonperforming assets	$	33,875		43,433		$	38,300		37,792

Purchased credit impaired loans not included above (1)	$	13,798		17,393		$	9,839		12,664

Asset Quality Ratios – All Assets
Net charge-offs to average loans - annualized	0.04		%	0.02	%	0.22		%	0.09	%
Nonperforming loans to total loans	0.67		%	0.85	%	0.76		%	0.76	%
Nonperforming assets to total assets	0.56		%	0.74	%	0.60		%	0.62	%
Allowance for loan losses to total loans	0.44		%	0.50	%	0.54		%	0.48	%
Allowance for loan losses to nonperforming loans	65.77		%	58.45	%	70.37		%	63.09	%

(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 ~~$1.1~~$0.7 million and ~~$0.6~~$0.8 million in PCI loans at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, that were contractually past due 90 days or more.

Due to the onset of the COVID-19 pandemic not occurring until late in the first quarter of 2020, the nonperforming asset amounts in the table above were not impacted by the pandemic, and loans for which the the Company has granted payment deferrals under the COVID-19 relief provisions previously discussed are not included in the table above or in the Company's past due amounts disclosed elsewhere in this document. While there are still many uncertainties associated with the pandemic and the stimulus measures taken by the United States government to address it, higher unemployment levels and business closures would generally be expected to result in higher levels of nonperformining assets in the future.

We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the allowance for loan losses discussed below.

As noted in the table above, at ~~September 30, 2019,~~March 31, 2020, total nonaccrual loans amounted to ~~$19.7~~$25.1 million, compared to ~~$22.6~~$24.9 million at December 31, ~~2018. Nonaccrual~~2019. The increase was primarily driven by SBA loans ~~are at low levels and have generally declined~~that were placed on nonaccrual status in ~~recent years as our local economies have improved, and we continue to focus on resolving our problem assets.~~2020.

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~~TDRs~~Restructured loans (TDRs) are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At ~~September 30, 2019,~~March 31, 2020, total accruing TDRs amounted to ~~$9.6~~$9.7 million, compared to ~~$13.4~~$9.1 million at December 31, ~~2018.~~2019. As previously discussed, COVID-19 related deferrals, which amounted to $120 million at March 31, 2020 are excluded from TDR consideration at March 31, 2020.

Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to ~~$4.6~~$3.5 million at ~~September 30, 2019~~March 31, 2020 and ~~$7.4~~$3.9 million at December 31, ~~2018.~~2019. 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.

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


($ in thousands)	At September 30, 2019		At December 31, 2018	At March 31, 2020		At December 31, 2019
Commercial, financial, and agricultural	$	2,472	919	$	3,703	5,518
Real estate – construction, land development, and other land loans	1,235		2,265	958		1,067
Real estate – mortgage – residential (1-4 family) first mortgages	7,661		10,115	8,581		7,552
Real estate – mortgage – home equity loans/lines of credit	1,878		1,685	1,874		1,797
Real estate – mortgage – commercial and other	6,370		7,452	9,837		8,820
Installment loans to individuals	104		139
Consumer loans				113		112
Total nonaccrual loans	$	19,720	22,575	$	25,066	24,866

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

We believe that the fair values of the items of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. The following table presents the detail of all of our foreclosed real estate at each period end:


($ in thousands)	At September 30, 2019		At December 31, 2018	At March 31, 2020		At December 31, 2019
Vacant land and farmland	$	1,733	2,035	$	1,707	1,752
1-4 family residential properties	1,220		2,311	876		974
Commercial real estate	1,636		3,094	904		1,147
Total foreclosed real estate	$	4,589	7,440	$	3,487	3,873

The following table presents geographical information regarding our nonperforming assets at ~~September 30, 2019.~~March 31, 2020.


	As of September 30, 2019							As of March 31, 2020
($ in thousands)	Total Nonperforming Loans		Total Loans	Nonperforming Loans to Total Loans		Total Foreclosed Real Estate		Total Nonperforming Loans		Total Loans	Nonperforming Loans to Total Loans		Total Foreclosed Real Estate
Region (1)
Eastern Region (NC)	$	6,344	927,000	0.68	%	$	617	$	5,457	1,013,000	0.54	%	$	517
Triangle Region (NC)	7,426		951,000	0.78	%	706		7,004		978,000	0.72	%	1,049
Triad Region (NC)	4,305		885,000	0.49	%	480		6,058		891,000	0.68	%	229
Charlotte Region (NC)	950		332,000	0.29	%	—		1,750		359,000	0.49	%	—
Southern Piedmont Region (NC)	3,185		285,000	1.12	%	360		3,272		275,000	1.19	%	201
Western Region (NC)	673		667,000	0.10	%	738		1,039		660,000	0.16	%	411
South Carolina Region	765		163,000	0.47	%	822		964		189,000	0.51	%	459
Former Virginia Region	191		1,000	19.10	%	444		83		1,000	8.30	%	351
Other	5,447		186,000	2.93	%	422		9,186		187,000	4.91	%	270
Total	$	29,286	4,397,000	0.67	%	$	4,589	$	34,813	4,553,000	0.76	%	$	3,487


(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

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

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

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

South Carolina Region - Chesterfield, Dillon, Florence

Former Virginia Region - Wythe, Washington, Montgomery, Roanoke

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

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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~~Recoveries realized during the period are credited to this allowance.

We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area.

The 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.

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


($ in thousands)	Nine Months Ended September 30, 2019			Twelve Months Ended December 31, 2018		Nine Months Ended September 30, 2018		Three Months Ended March 31, 2020			Twelve Months Ended December 31, 2019		Three Months Ended March 31, 2019
Loans outstanding at end of period	$	4,396,544		4,249,064		4,190,628		$	4,552,708		4,453,466		4,303,787
Average amount of loans outstanding	$	4,322,078		4,161,838		4,141,645		$	4,512,893		4,346,331		4,280,272

Allowance for loan losses, at beginning of year	$	21,039		23,298		23,298		$	21,398		21,039		21,039
Provision (reversal) for loan losses	(913		)	(3,589	)	(4,282	)
Provision for loan losses								5,590			2,263		500
	20,126			19,709		19,016		26,988			23,302		21,539

Loans charged off:
Commercial, financial, and agricultural	(1,224		)	(2,128	)	(1,542	)	(2,460		)	(2,473	)	(246	)
Real estate – construction, land development & other land loans	(340		)	(158	)	(158	)	(40		)	(553	)	(264	)
Real estate – mortgage – residential (1-4 family) first mortgages	(379		)	(1,734	)	(1,598	)	(195		)	(657	)	(30	)
Real estate – mortgage – home equity loans / lines of credit	(216		)	(711	)	(378	)	(68		)	(307	)	(80	)
Real estate – mortgage – commercial and other	(1,455		)	(1,459	)	(1,398	)	(263		)	(1,556	)	(836	)
Installment loans to individuals	(555		)	(781	)	(494	)
Consumer loans								(287		)	(757	)	(281	)
Total charge-offs	(4,169		)	(6,971	)	(5,568	)	(3,313		)	(6,303	)	(1,737	)
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural	768			1,195		971		217			980		414
Real estate – construction, land development & other land loans	797			4,097		3,568		290			1,275		287
Real estate – mortgage – residential (1-4 family) first mortgages	521			833		671		91			705		160
Real estate – mortgage – home equity loans / lines of credit	513			364		294		83			629		128
Real estate – mortgage – commercial and other	550			1,503		1,333		47			575		271
Installment loans to individuals	154			309		261
Consumer loans								95			235		33
Total recoveries	3,303			8,301		7,098		823			4,399		1,293
Net (charge-offs) recoveries	(866		)	1,330		1,530		(2,490		)	(1,904	)	(444	)
Allowance for loan losses, at end of period	$	19,260		21,039		20,546		$	24,498		21,398		21,095

Ratios:
Net charge-offs (recoveries) as a percent of average loans (annualized)	0.03		%	(0.03	)%	(0.05	)%	0.22		%	0.09	%	0.04	%
Allowance for loan losses as a percent of loans at end of period	0.44		%	0.50	%	0.49	%	0.54		%	0.48	%	0.49	%

We recorded a ~~negative provision for loan losses (reduction of the allowance for loan losses) of $0.9 million in the first nine months of 2019, compared to a negative~~ provision for loan losses of ~~$4.3~~$5.6 million in the first ~~nine~~three months of 2018. In the first nine months of 2018, the Company experienced net loan recoveries of $1.5 million, which drove the negative provision for the period and was the primary reason for the variance in the2020, compared to a provision for loan losses ~~when comparing~~of $0.5 million in the first ~~nine~~three months of ~~2019~~2019. The increase was primarily due to a provision recorded related to the ~~first nine months~~economic impacts of ~~2018. Other factors impacting~~ the ~~provision for loan loss are~~COVID-19 pandemic, as discussed ~~in the following two paragraphs.~~

below. Our allowance for loan loss is a mathematical model with the primary factors impacting this model being loan growth, net charge-off history, and asset quality ~~trends.~~trends, as well as specific reserves we set aside on certain individual loans exhibiting signs of deterioration. Our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the current allowance for loan losses that is necessary. Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on. In recent years, the new periods have had ~~significantly~~generally lower net charge-offs (and net recoveries in some periods) than the older periods rolling out of the ~~model. This has resulted~~model, and thus mostly offset upward adjustments to the allowance that would normally be required to reflect new loan growth and the net charge-offs experienced, resulting in agenerally lower required amount of allowance for loan losses in our modeling. The low level of net-charge offs (or net recoveries) experienced over the past several years has been the primary reason for the low (or negative) provisions for loan losses.

In March 2020, the COVID-19 pandemic began to impact our nation. The subsequent closures of many businesses and job losses ~~recorded.~~are leading to widespread negative economic impacts. The U.S. Government has taken steps to lessen the negative impacts. In determining a COVID-19 related provision, we reviewed current data related to the

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negative economic impacts. We also reviewed deferrals that had been requested from borrowers and also reviewed the industries most at risk from the immediate impact of the shutdown. In this analysis, we identified approximately $553 million of loans to the following industries: hotels, restaurants, retail stores, travel accommodations, child care facilities, arts and entertainment, barber shops and beauty salons, car and boat dealers, and mini-storage facilities, as well as all credit cards. Existing risk grades were adjusted downwards for each of the loans in these industries for the purposes of this special provision and historical loss rates were applied.

The ratio of our allowance to total loans was ~~0.44%~~0.54% and ~~0.50%~~0.48% at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The ~~decline~~increase in this ratio was a result of the factors discussed above that impacted our ~~low levels~~increased level of provision for loan ~~losses.~~ losses in 2020.

Our ~~relatively low level~~ratio of allowance to total loans is significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank in 2017, which had over $1 billion in total loans. Applicable accounting guidance did not allow us to record an allowance for loan losses upon the acquisition of loans – instead the acquired loans were recorded at their discounted fair value, which included the consideration of any expected losses. No allowance for loan losses is recorded for the acquired loans unless the expected credit losses exceed the remaining unamortized discounts – based on an individual basis for purchased credit impaired loans and on a pooled basis for performing acquired loans. See Critical Accounting Policies above for further discussion. Unaccreted discount on acquired loans, which is available to absorb loan losses on those acquired loans, amounted to ~~$13.8~~$11.5 million and ~~$17.3~~$12.7 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

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

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 ~~September 30, 2019,~~March 31, 2020, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, ~~2018.~~2019.

Liquidity, Commitments, and Contingencies

Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash. Thus far in the COVID-19 pandemic, we have seen our liquidity levels increase, with increases in deposits accounts leading to higher cash levels.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately ~~$1.045~~$1.023 billion line of credit with the ~~Federal Home Loan Bank~~FHLB (of which $348 million and $247 million ~~and $352 million was~~were outstanding at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively), 2) a $35 million federal funds line with a correspondent bank (of which none was outstanding at ~~September 30, 2019~~March 31, 2020 or December 31, ~~2018)~~2019), and 3) an approximately ~~$130~~$123 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at ~~September 30, 2019~~March 31, 2020 or December 31, ~~2018)~~2019). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was reduced by $190 million at both ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, as a result of our pledging letters of credit for public deposits at each of those dates. Unused and available lines of credit amounted to ~~$773~~$814 million at ~~September 30, 2019~~March 31, 2020 compared to ~~$664~~$744 million at December 31, ~~2018.~~2019.

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Our overall liquidity has increased since December 31, ~~2018~~2019 due primarily to deposit growth which has exceeded loan growth. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from ~~21.0%~~21.4% at December 31, ~~2018~~2019 to ~~21.5%~~22.8% at ~~September 30, 2019.~~March 31, 2020.

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

The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, ~~2018,~~2019, detail of which is presented in Table 18 on page 7766 of our ~~2018~~2019 Annual Report on Form 10-K.

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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 ~~September 30, 2019,~~March 31, 2020, 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”~~FRB”) and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. Our banking subsidiary, First Bank, is also regulated by the FRB and the North Carolina Office of the Commissioner of Banks. We must comply with regulatory capital requirements established by the FRB. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.

~~We must comply~~

In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), was enacted and which amended certain aspects of the regulatory framework for small depository institutions with assets less than $10 billion and for large banks with assets of more than $50 billion. The Economic Growth Act, among other matters, provided for an alternative capital rule for financial institutions and their holding companies with total consolidated assets of less than $10 billion. The Economic Growth Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10%, which was proposed to be 9% by the federal regulators. The Community Bank Leverage Ratio provides for a simpler calculation of a bank’s capital ratio than the Basel III provisions that have been in place. Any qualifyingdepository institution or its holding company that elects to adopt the Community Bank Leverage Ratio and exceeds the ratio set by the banking regulators is considered to have met generally applicable leverage and risk-based regulatory capital requirements ~~established by~~and any qualifying depository institution that exceeds the ~~Federal Reserve. Failure~~new ratio will be considered to ~~meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators~~be “well capitalized” under the prompt corrective action rules. March 31, 2020 was the earliest date that ~~if undertaken,~~the Company could have ~~a direct material effect on our financial statements.~~ elected to adopt the Community Bank Leverage Ratio. However, the Company did not opt-in to that alternative framework and instead continues to use the Basel III standards.

Under Basel III standards and capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The capital standards require us to maintain minimum ratios of “Common Equity Tier 1” capital to total risk-weighted assets, “Tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and

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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~~FRB and FDIC regulations.

The capital conservation buffer requirement began to be phased in on January 1, 2016, at 0.625% of risk weighted assets, and increased each year until fully implemented at 2.5% on January 1, 2019.

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

At ~~September 30, 2019,~~March 31, 2020, our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.

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	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Risk-based capital ratios:
Common equity Tier 1 to Tier 1 risk weighted assets	13.27	%	12.28	%	12.86	%	13.28	%
Minimum required Common equity Tier 1 capital	7.00	%	6.375	%	7.00	%	7.00	%

Tier I capital to Tier 1 risk weighted assets	14.44	%	13.48	%	13.98	%	14.41	%
Minimum required Tier 1 capital	8.50	%	7.875	%	8.50	%	8.50	%

Total risk-based capital to Tier II risk weighted assets	14.88	%	13.97	%	14.51	%	14.89	%
Minimum required total risk-based capital	10.50	%	9.875	%	10.50	%	10.50	%

Leverage capital ratios:
Tier 1 capital to quarterly average total assets	11.17	%	10.47	%	11.05	%	11.19	%
Minimum required Tier 1 leverage capital	4.00	%	4.00	%	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 ~~September 30, 2019,~~March 31, 2020, First Bank significantly exceeded the minimum ratios established by the regulatory authorities. The decrease in capital ratios from December 31, 2019 to March 31, 2020 was primarily due to the Company's stock repurchases of approximately $20 million during 2020 and strong balance sheet growth.

BUSINESS DEVELOPMENT AND OTHER SHAREHOLDER MATTERS

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

On ~~September~~March 13, ~~2019,~~2020, the Company announced a quarterly cash dividend of ~~$0.12~~$0.18 per share payable on ~~October 25, 2019~~April 24, 2020 to shareholders of record on ~~September 30, 2019. The~~March 31, 2020. This dividend rate represents a ~~20%~~50% increase over the ~~previous~~ dividend rate ~~of $0.10 the Company~~ declared in the ~~third~~first quarter of ~~2018.~~2019.

SHARE REPURCHASES

We repurchased ~~282,000~~576,406 shares of our common stock during the first ~~nine~~three months of ~~2019~~2020 at an average price of ~~$35.48~~$34.70 per share, which totaled ~~$10.0~~$20.0 million. At ~~September 30, 2019,~~March 31, 2020, we had authority from our ~~board~~Board of ~~directors~~Directors to repurchase up to an additional ~~$15~~$20 million in shares of the Company’s common stock. We suspended share repurchases in March 2020 for the foreseeable future in response to the potential impact of COVID-19. We may repurchase ~~these~~ shares of our stock in open market and privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations. See also Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

Net interest income is our most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, our level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to our various categories of earning assets and interest-bearing liabilities. It is our policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. Our exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of “shock” interest rates. Over the years, we have been able to maintain a fairly consistent yield on average earning assets (and net interest margin). Over the past five calendar years, our net interest margin has ranged from a low of ~~4.03%~~4.00% (realized in ~~2016)~~2019) to a high of ~~4.58%~~4.13% (realized in ~~2014)~~2015). ~~Our consistent~~The consistency of the net interest margin ~~has been~~is aided by athe relatively low level of long-term interest rate exposure that we maintain. At ~~September 30, 2019,~~March 31, 2020, approximately ~~76%~~72% of our interest-earning assets were subject to repricing within five years (because they are either adjustable rate assets or they are fixed rate assets that mature) and substantially all of our interest-bearing liabilities reprice within five years.

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Using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call)~~. At September 30, 2019,~~, at March 31, 2020, we had ~~$1.5~~$1.8 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 ~~September 30, 2019~~March 31, 2020 are deposits totaling ~~$2.4~~$2.6 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~~twelve months), this generally results in us being asset-sensitive, meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates. However, in the twelve-month and longer 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,~~Due to actions taken by the Federal Reserve ~~took steps~~related to ~~suppress long-term~~short-term interest rates ~~in an effort to boost~~and the ~~housing market, increase employment, and stimulate~~impact of the global economy ~~which resulted~~on longer-term interest rates, we are currently in a flat interest rate curve ~~that remains in effect.~~environment. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the ~~Company,~~Bank, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge, the profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin.

While there have been periods in the last few years that the yield curve has steepened slightly, it currently remains flat, with some points of inversion along the curve from time to time. This flat/inverted 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, after cutting interest rates to historic lows in 2008 in an effort to stimulate the economy, the Federal Reserve made no changes to the short term interest rates it sets directly until mid-December 2015. During that period, we were able to reprice substantially all of our deposits to low levels. As a result of the nine interest rate increases initiated by the Federal Reserve from 2015 through 2018 and significant competitive pressures in our market area, our deposits costs began to rise. Deposit pricing competition began to intensify in the second half of 2018, which continued into 2019. In the first nine months of 2019, our deposit costs rose at a higher rate than the increase in asset yields, which negatively impacted our net interest margin.

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In ~~the third quarter of 2019, in~~ an effort to address concerns about the national and global economy the Federal Reserve cut ~~short term~~ interest rates ~~twice~~ by ~~a total of 50~~75 basis points ~~which resulted~~ in the ~~prime rate~~second half of ~~interest declining to 5.00%~~2019. And in ~~late October 2019,~~March 2020, the Federal Reserve cut interest rates by an additional 25150 basis ~~points.~~points in response to the COVID-19 pandemic. Our interest-bearing cash balances and most of our variable rate loans, which comprise approximately one-third of our loan portfolio, generally reset to lower rates soon after ~~those~~interest rate cuts. As the March 2020 interest rate cuts ~~and~~occurred late in the quarter, the 2019 interest rate cuts were primarily responsible for the yields of our interest-earning assets declining by 20 basis points in comparing the first quarter of 2020 to the first quarter of 2019. We expect asset yields to again decline in the second quarter of 2020 due to the full-quarter impact of the March 2020 interest rate cuts. We reduced our offering rates on ~~new loan originations~~most deposit products in March 2020 and our borrowing costs are also ~~declined. Due~~trending lower due to ~~competitive pressures,~~the interest rate cuts. However, we ~~were unable to~~believe that our lower ~~our deposit~~funding costs towill only partially offset the ~~impact of the lower~~declines we expect in asset yields. ~~Due largely to those reasons,~~Accordingly, we expect that our net interest margin ~~decreased~~will decline moderately in the ~~third quarter~~remainder of ~~2019 by 11 basis points from~~2020.

In April and early May 2020, we approved approximately $249.5 million in PPP loans. These loans all have an interest rate of 1.00%. In addition to the ~~preceding quarter. While we believe our deposit costs~~interest rate, the SBA is compensating us with an origination fee for each loan of between 1% to 5% of the loan amount, depending on the size of each loan. The Company expects to receive approximately $10.6 million in these fees related to the PPP loans that have been approved, which will ~~begin~~be netted against the cost to ~~decline~~originate each loan and will initially be amortized over the two year maturities of the loans. Early repayments, including the loan forgiveness provisions contained in the ~~near future, we believe that~~PPP, will result in accelerated amortization. Because of the ~~recent rate cuts will to continue to negatively~~uncertainties associated with the timing of PPP repayments, the anticipated impact ~~our net interest margin for~~of these loans has not been incorporated into the ~~reasons discussed~~discussion above.

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As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by certain purchase accounting adjustments related to the acquired banks. The purchase accounting adjustments related to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the loan discount on acquired loans amounted to ~~$4.5~~$1.2 million and ~~$6.0~~$1.1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that are initially recorded and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and susceptible to volatility. The remaining loan discount on acquired loans amounted to ~~$13.8~~$10.3 million at ~~September 30, 2019~~March 31, 2020 compared to ~~$17.3~~$12.7 million at December 31, ~~2018.~~2019.

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

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

Item 4 – Controls and Procedures

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

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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, ~~2018,~~2019, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Forward-Looking Statements” set forth in the forepart of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q and in our other filings with the SEC. There are no material changes from the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, except as described below.

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

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

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

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

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

The majority of state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. In late March and early April 2020, the governors of North Carolina and South Carolina, respectively, signed stay-at-home orders with only certain exceptions for essential activities and prohibited gatherings of more than 10 people. Theses orders have had a negative impact on our local and national economies and are expected to continue to negatively impact these economies and our financial results. On May 1, 2020, the Governor of South Carolina ended the state's stay-at-home order effective May 4, 2020, but provided restrictions on the operating activities of certain businesses. The State of North Carolina’s stay-at-home order was set to expire on April 30, 2020. The Governor of North Carolina extended the stay-at-home order through May 8, 2020. On May 5, 2020, the Governor of North Carolina extended the stay-at-home order through May 22, 2020, but increased the number of reasons people are allowed to leave and allows most retail businesses that can comply with specific requirements to open at 50 percent capacity.

The COVID-19 pandemic and the institution of social distancing and sheltering in place requirements resulted in temporary closures of many businesses. As a result, the demand for our products and services may be significantly impacted. Furthermore, the COVID-19 pandemic could influence the recognition of credit losses in our loan

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portfolios and increase our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Our operations may also be disrupted if significant portions of our workforce are unable to work effectively, including due to illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic.

In response to the COVID-19 pandemic, we have suspended residential property foreclosure sales and are offering fee waivers, payment deferrals or forbearances, and other expanded assistance for mortgages and home equity loans and lines, commercial, small business and personal lending customers. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

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

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														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)		Total Number of Shares Purchased (2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2019 to July 31, 2019	—	$	—	$	—	$	18,475,917
August 1, 2019 to August 31, 2019	99,625	34.89		3,475,797		$	15,000,120
September 1, 2019 to September 30, 2019	—	—		—		$	15,000,120
January 1, 2020 to January 31, 2020								109,000	$	35.98	109,000	$	36,077,714
February 1, 2020 to February 29, 2020								339,758	36.11		339,758	$	23,807,579
March 1, 2020 to March 31, 2020								127,648	29.83		127,648	$	20,000,000
Total	99,625	34.89		3,475,797		$	15,000,120	576,406	34.70		576,406	$	20,000,000

Footnotes to the Above Table

(1)

All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. ~~On February 5, 2019,~~As of March 31, 2020, the Company ~~announced that its board of directors~~ had ~~approved~~ the remaining authorization to repurchase of up to ~~$25,000,000 in shares~~$20 million of the ~~Company’s common stock.~~Company's stock, which was authorized and announced on November 19, 2019. The repurchase authorization ~~expires on~~has an expiration date of December 31, ~~2019.~~2020. Given the COVID-19 outbreak and its effects on the markets, share repurchases have been suspended.


(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~~transactions during the three months ended ~~September 30, 2019.~~March 31, 2020.

~~During the three months ended September 30, 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. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and are incorporated herein by reference.

3.b	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 ~~September 30, 2019,~~March 31, 2020, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

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

Page 6059

Index

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

~~November~~May 8, ~~2019~~2020	BY:/s/ Richard H. Moore
	Richard H. Moore Chief Executive Officer (Principal Executive Officer), and Director


~~November~~May 8, ~~2019~~2020	BY:/s/ Eric P. Credle
	Eric P. Credle Executive Vice President and Chief Financial Officer

Page 6160



	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 September 30, 2019	—		$	—	0	$	—

Exercisable at September 30, 2019	—		$	—	0	$	—



	For the Nine Months Ended September
	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	$	71,163					$	65,394
Less: income allocated to participating securities	(329		)				—
Basic EPS per common share	$	70,834		29,585,383	$	2.39	$	65,394	29,536,273	$	2.21

Diluted EPS:
Net income	$	71,163		29,585,383			$	65,394	29,536,273
Effect of Dilutive Securities	—			174,076			—		102,853
Diluted EPS per common share	$	71,163		29,759,459	$	2.39	$	65,394	29,639,126	$	2.21



($ in thousands)	For the three months ended September 30, 2019					For the three months ended September 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 agricultural	—	$	—	$	—	—	$	—	$	—
Real estate – construction, land development & other land loans	—	—		—		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	1	133		133		—	—		—
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—
Installment loans to individuals	—	—		—		—	—		—
TDRs – Nonaccrual
Commercial, financial, and agricultural	—	—		—		—	—		—
Real estate – construction, land development & other land loans	—	—		—		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	—	—		—		—	—		—
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—
Installment loans to individuals	—	—		—		—	—		—
Total TDRs arising during period	1	$	133	$	133	—	$	—	$	—



($ in thousands)	For the nine months ended September 30, 2019					For the nine months ended September 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 agricultural	1	$	143	$	143	—	$	—	$	—
Real estate – construction, land development & other land loans	—	—		—		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	3	387		391		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 period	4	$	530	$	534	4	$	333	$	343



	For the Nine Months Ended September 30,
($ in thousands)	2019 Pension Plan			2018 Pension Plan		2019 SERP		2018 SERP		2019 Total Both Plans		2018 Total Both Plans
Service cost	$	—		—		—		94		—		94
Interest cost	1,111			984		164		150		1,275		1,134
Expected return on plan assets	(1,154		)	(836	)	—		—		(1,154	)	(836	)
Amortization of net (gain)/loss	733			26		(122	)	(10	)	611		16
Net periodic pension cost	$	690		174		42		234		732		408



($ in thousands)	Future obligations for minimum rentals under noncancelable operating leases
2019	$	2,268
2020	1,973
2021	1,344
2022	869
2023	768
Thereafter	4,082
Total estimated lease payments	$	11,304



	Three Months Ended September 30,
($ in thousands)	2019		2018
Net interest income, as reported	$	53,778	51,845
Tax-equivalent adjustment	413		428
Net interest income, tax-equivalent	$	54,191	52,273