UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 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 ~~April 30,~~July 31, 2020 was ~~29,040,827.~~28,976,681.

INDEX

FIRST BANCORP AND SUBSIDIARIES



	Page

Part I. Financial Information

Item 1 - Financial Statements
Consolidated Balance Sheets - ~~March 31,~~June 30, 2020 and December 31, 2019	4
Consolidated Statements of Income - For the Three and Six Months Ended ~~March 31,~~June 30, 2020 and 2019	5
Consolidated Statements of Comprehensive Income - For the Three and Six Months Ended ~~March 31,~~June 30, 2020 and 2019	6
Consolidated Statements of Shareholders’ Equity - For the Three and Six Months Ended ~~March 31,~~June 30, 2020 and 2019	7
Consolidated Statements of Cash Flows - For the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2020 and 2019	89
Notes to Consolidated Financial Statements	910
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition	3641
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	5562
Item 4 – Controls and Procedures	5664

Part II. Other Information

Item 1 – Legal Proceedings	5764
Item 1A – Risk Factors	5764
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	5865
Item 6 – Exhibits	5967
Signatures	6068

Page 2

Index

FORWARD-LOOKING STATEMENTS

Part I of this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Further, forward-looking statements are intended to speak only as of the date made. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning our opinions or judgment about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic ~~conditions.~~conditions, including the impact of the current pandemic. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 2019 Annual Report on Form ~~10-K.~~10-K and Item 1A of Part II of this report.

Page 3

Index

Part I. Financial Information

Item 1 - Financial Statements

First Bancorp and Subsidiaries

Consolidated Balance Sheets


($ in thousands)	March 31, 2020 (unaudited)			December 31, 2019		June 30, 2020 (unaudited)			December 31, 2019
ASSETS
Cash and due from banks, noninterest-bearing	$	93,666		64,519		$	94,684		64,519
Due from banks, interest-bearing	282,683			166,783		584,830			166,783
Total cash and cash equivalents	376,349			231,302		679,514			231,302

Securities available for sale	806,470			821,945		784,832			821,945
Securities held to maturity (fair values of $62,385 and $68,333)	61,303			67,932
Securities held to maturity (fair values of $96,318 and $68,333)						94,924			67,932

Presold mortgages in process of settlement	14,861			19,712		31,015			19,712
SBA Loans held for sale	18,449			—		3,382			—

Loans	4,552,708			4,453,466		4,770,063			4,453,466
Allowance for loan losses	(24,498		)	(21,398	)	(42,342		)	(21,398	)
Net loans	4,528,210			4,432,068		4,727,721			4,432,068

Premises and equipment	113,669			114,859		115,373			114,859
Operating right-of-use lease assets	19,347			19,669		18,833			19,669
Accrued interest receivable	15,767			16,648		19,943			16,648
Goodwill	234,368			234,368		234,368			234,368
Other intangible assets	15,461			17,217		14,472			17,217
Foreclosed properties	3,487			3,873		2,987			3,873
Bank-owned life insurance	105,083			104,441		105,712			104,441
Other assets	63,234			59,605		55,519			59,605
Total assets	$	6,376,058		6,143,639		$	6,888,595		6,143,639

LIABILITIES
Deposits: Noninterest bearing checking accounts	$	1,580,849		1,515,977		$	2,041,778		1,515,977
Interest bearing checking accounts	922,985			912,784		1,112,625			912,784
Money market accounts	1,224,414			1,173,107		1,353,053			1,173,107
Savings accounts	431,377			424,415		474,455			424,415
Time deposits of $100,000 or more	639,762			649,947		610,137			649,947
Other time deposits	245,601			255,125		239,090			255,125
Total deposits	5,044,988			4,931,355		5,831,138			4,931,355
Borrowings	402,185			300,671		112,199			300,671
Accrued interest payable	2,100			2,154		1,525			2,154
Operating lease liabilities	19,578			19,855		19,109			19,855
Other liabilities	45,009			37,203		56,733			37,203
Total liabilities	5,513,860			5,291,238		6,020,704			5,291,238

Commitments and contingencies

SHAREHOLDERS’ EQUITY
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Issued & outstanding: none and none	—			—		—			—
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 29,040,827 and 29,601,264 shares	410,236			429,514
Issued & outstanding: 28,976,681 and 29,601,264 shares						408,699			429,514
Retained earnings	430,709			417,764		441,846			417,764
Stock in rabbi trust assumed in acquisition	(2,602		)	(2,587	)	(2,217		)	(2,587	)
Rabbi trust obligation	2,602			2,587		2,217			2,587
Accumulated other comprehensive income (loss)	21,253			5,123		17,346			5,123
Total shareholders’ equity	862,198			852,401		867,891			852,401
Total liabilities and shareholders’ equity	$	6,376,058		6,143,639		$	6,888,595		6,143,639

See accompanying notes to unaudited consolidated financial statements.

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Index

First Bancorp and Subsidiaries

Consolidated Statements of Income


($ in thousands, except share data-unaudited)	Three Months Ended March 31,			Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019	2020			2019		2020		2019
INTEREST INCOME
Interest and fees on loans	$	55,297	53,960	$	51,964		55,652		107,261		109,612
Interest on investment securities:
Taxable interest income	5,474		4,737	4,771			4,993		10,245		9,730
Tax-exempt interest income	164		337	117			271		281		608
Other, principally overnight investments	1,098		2,701	788			2,106		1,886		4,807
Total interest income	62,033		61,735	57,640			63,022		119,673		124,757

INTEREST EXPENSE
Savings, checking and money market accounts	2,359		2,009	1,333			2,335		3,692		4,344
Time deposits of $100,000 or more	2,924		3,178	2,323			3,522		5,247		6,700
Other time deposits	490		390	418			467		908		857
Borrowings	1,501		2,797	942			2,289		2,443		5,086
Total interest expense	7,274		8,374	5,016			8,613		12,290		16,987

Net interest income	54,759		53,361	52,624			54,409		107,383		107,770
Provision for loan losses	5,590		500	19,298			(308	)	24,888		192
Net interest income after provision for loan losses	49,169		52,861	33,326			54,717		82,495		107,578

NONINTEREST INCOME
Service charges on deposit accounts	3,337		2,945	2,289			3,210		5,626		6,155
Other service charges, commissions and fees	4,069		4,506	4,624			5,050		8,693		9,556
Fees from presold mortgage loans	1,841		545	3,020			857		4,861		1,402
Commissions from sales of insurance and financial products	2,068		2,029	2,090			2,204		4,158		4,233
SBA consulting fees	1,027		1,263	3,739			921		4,766		2,184
SBA loan sale gains	647		2,062	1,965			3,069		2,612		5,131
Bank-owned life insurance income	642		646	629			631		1,271		1,277
Securities gains (losses), net				8,024			—		8,024		—
Other gains (losses), net	74		82	(187		)	(308	)	(113	)	(226	)
Total noninterest income	13,705		14,078	26,193			15,634		39,898		29,712

NONINTEREST EXPENSES
Salaries expense	20,110		18,965	20,606			19,732		40,716		38,697
Employee benefits expense	4,547		4,588	3,847			4,418		8,394		9,006
Total personnel expense	24,657		23,553	24,453			24,150		49,110		47,703
Occupancy expense	2,958		2,754	2,724			2,729		5,682		5,483
Equipment related expenses	1,145		1,369	1,020			1,183		2,165		2,552
Merger and acquisition expenses	—		110	—			103		—		213
Intangibles amortization expense	1,055		1,332	978			1,242		2,033		2,574
Foreclosed property losses, net	159		245	35			381		194		626
Other operating expenses	10,102		9,411	9,691			10,296		19,793		19,707
Total noninterest expenses	40,076		38,774	38,901			40,084		78,977		78,858

Income before income taxes	22,798		28,165	20,618			30,267		43,416		58,432
Income tax expense	4,618		5,880	4,266			6,408		8,884		12,288

Net income	$	18,180	22,285	$	16,352		23,859		34,532		46,144

Earnings per common share:
Basic	$	0.62	0.75	$	0.56		0.80		1.18		1.55
Diluted	0.62		0.75	0.56			0.80		1.18		1.55

Dividends declared per common share	$	0.18	0.12	$	0.18		0.12		0.36		0.24

Weighted average common shares outstanding:
Basic	29,230,788		29,587,217	28,799,828			29,626,931		29,015,308		29,607,074
Diluted	29,399,114		29,743,395	28,969,728			29,796,941		29,184,421		29,808,859

See accompanying notes to unaudited consolidated financial statements.

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Index

First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income


($ in thousands-unaudited)	Three Months Ended March 31,					Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019		2020		2019
Net income	$	18,180		22,285		$	16,352		23,859		34,532		46,144
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, pretax	20,765			5,903		2,772			11,701		23,537		17,604
Tax (expense) benefit	(4,772		)	(1,380	)	(637		)	(2,714	)	(5,409	)	(4,094	)
Reclassification to realized (gains) losses						(8,024		)	—		(8,024	)	—
Tax expense (benefit)						1,844			—		1,844		—
Postretirement Plans:
Amortization of unrecognized net actuarial loss	178			228		180			228		358		456
Tax benefit	(41		)	(54	)	(42		)	(63	)	(83	)	(117	)
Other comprehensive income (loss)	16,130			4,697		(3,907		)	9,152		12,223		13,849
Comprehensive income	$	34,310		26,982		$	12,445		33,011		46,755		59,993

See accompanying notes to unaudited consolidated financial statements.

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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 March 31, 2019						Retained Earnings
Balances, January 1, 2019	29,725		$	434,453		341,738		Stock in Rabbi Trust Assumed in Acquisition	(3,235	)	Rabbi Trust Obligation	3,235			(11,961	Total Shareholders’ Equity	)		764,230
Three Months Ended June 30, 2019																		Three Months Ended June 30, 2019
Balances, April 1, 2019																		29,746		$	434,948		360,455		(3,245	)	3,245		(7,264	)	788,139

Net income						22,285										22,285							23,859								23,859
Cash dividends declared ($0.12 per common share)						(3,568	)									(3,568	)						(3,566	)							(3,566	)
Change in Rabbi Trust Obligation								(10	)		10					—									379		(379	)			—
Equity issued related to acquisition earnout																		78		3,070											3,070
Stock repurchases																		(182	)	(6,524		)									(6,524	)
Stock option exercises																		9		129											129
Stock withheld for payment of taxes	(3	)	(91		)											(91	)	—		—											—
Stock-based compensation	24		586													586		66		910											910
Other comprehensive income (loss)													4,697			4,697													9,152		9,152

Balances, March 31, 2019	29,746		$	434,948		360,455		(3,245	)		3,245		(7,264	)		788,139
Balances, June 30, 2019																		29,717		$	432,533		380,748		(2,866	)	2,866		1,888		815,169


Three Months Ended March 31, 2020
Balances, January 1, 2020	29,601		$	429,514		417,764		(2,587	)		2,587		5,123			852,401
Three Months Ended June 30, 2020																		Three Months Ended June 30, 2020
Balances, April 1, 2020																		29,041		$	410,236		430,709		(2,602	)	2,602		21,253		862,198

Net income						18,180										18,180							16,352								16,352
Cash dividends declared ($0.18 per common share)						(5,235	)									(5,235	)						(5,215	)							(5,215	)
Change in Rabbi Trust Obligation								(15	)		15					—									385		(385	)			—
Stock repurchases	(576	)	(20,000		)											(20,000	)	(104	)	(2,432		)									(2,432	)
Stock-based compensation	16		722													722		40		895											895
Other comprehensive income (loss)													16,130			16,130													(3,907	)	(3,907	)

Balances, March 31, 2020	29,041		$	410,236		430,709		(2,602	)		2,602		21,253			862,198
Balances, June 30, 2020																		28,977		$	408,699		441,846		(2,217	)	2,217		17,346		867,891

See accompanying notes to unaudited consolidated financial statements.

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Index



($ in thousands, except share data - unaudited)	Common Stock					Retained Earnings		Stock in Rabbi Trust Assumed in Acquisition		Rabbi Trust Obligation		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
($ in thousands, except share data - unaudited)	Shares		Amount			Retained Earnings		Stock in Rabbi Trust Assumed in Acquisition		Rabbi Trust Obligation		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Six Months Ended June 30, 2019
Balances, January 1, 2019	29,725		$	434,453		341,738		(3,235	)	3,235		(11,961	)	764,230

Net income						46,144								46,144
Cash dividends declared ($0.24 per common share)						(7,134	)							(7,134	)
Change in Rabbi Trust Obligation								369		(369	)			—
Equity issued related to acquisition earnout	78		3,070											3,070
Stock repurchases	(182	)	(6,524		)									(6,524	)
Stock option exercises	9		129											129
Stock withheld for payment of taxes	(2	)	(91		)									(91	)
Stock-based compensation	89		1,496											1,496
Other comprehensive income (loss)												13,849		13,849

Balances, June 30, 2019	29,717		$	432,533		380,748		(2,866	)	2,866		1,888		815,169


Six Months Ended June 30, 2020
Balances, January 1, 2020	29,601		429,514			417,764		(2,587	)	2,587		5,123		852,401

Net income						34,532								34,532
Cash dividends declared ($0.36 per common share)						(10,450	)							(10,450	)
Change in Rabbi Trust Obligation								370		(370	)			—
Stock repurchases	(680	)	(22,432		)									(22,432	)
Stock-based compensation	56		1,617											1,617
Other comprehensive income (loss)												12,223		12,223

Balances, June 30, 2020	28,977		$	408,699		441,846		(2,217	)	2,217		17,346		867,891

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows


($ in thousands-unaudited)	Three Months Ended March 31,					Six Months Ended June 30,
	2020			2019		2020			2019
Cash Flows From Operating Activities
Net income	$	18,180		22,285		$	34,532		46,144
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses	5,590			500		24,888			192
Net security premium amortization	804			459		1,605			1,104
Loan discount accretion	(1,841		)	(1,419	)	(3,234		)	(3,149	)
Other purchase accounting accretion and amortization, net	14			(13	)	32			(18	)
Foreclosed property losses and write-downs, net	159			245		194			626
Other gains	(74		)	(82	)
Gains on securities available for sale						(8,024		)	—
Other losses						113			226
Decrease (increase) in net deferred loan costs	320			(325	)	8,789			(485	)
Depreciation of premises and equipment	1,563			1,468		2,963			2,886
Amortization of operating lease right-of-use assets	496			475		1,010			911
Repayments of lease obligations	(452		)	(455	)	(920		)	(1,198	)
Stock-based compensation expense	513			403		1,408			1,202
Amortization of intangible assets	1,055			1,332		2,033			2,574
Amortization of SBA servicing assets	918			299		1,416			621
Fees/gains from sale of presold mortgages and SBA loans	(2,488		)	(2,607	)	(7,473		)	(6,533	)
Origination of presold mortgage loans in process of settlement	(48,143		)	(19,025	)	(170,961		)	(53,390	)
Proceeds from sales of presold mortgage loans in process of settlement	54,764			20,506		165,223			52,878
Origination of SBA loans for sale	(36,081		)	(38,329	)	(58,396		)	(91,323	)
Proceeds from sales of SBA loans	16,031			30,678		45,306			73,313
Decrease (increase) in accrued interest receivable	881			(512	)
Increase in other assets	(1,738		)	(4,493	)
Increase in accrued interest receivable						(3,295		)	(905	)
(Increase) decrease in other assets						(8,206		)	80
(Decrease) increase in accrued interest payable	(54		)	365		(629		)	282
Increase in other liabilities	3,255			5,254
Increase (decrease) in other liabilities						16,123			(1,382	)
Net cash provided by operating activities	13,672			17,009		44,497			24,656

Cash Flows From Investing Activities
Purchases of securities available for sale	(9,423		)	(161,892	)	(252,256		)	(256,609	)
Purchases of securities held to maturity	(3,624		)	—		(50,272		)	—
Proceeds from maturities/issuer calls of securities available for sale	45,037			29,313		91,976			82,952
Proceeds from maturities/issuer calls of securities held to maturity	10,075			10,098		22,907			21,725
Purchases of FRB and FHLB stock, net	(4,572		)	(308	)
Proceeds from sales of securities available for sale						219,697			—
Redemptions of FRB and FHLB stock, net						7,754			4,207
Net increase in loans	(95,680		)	(45,018	)	(311,493		)	(67,139	)
Proceeds from sales of foreclosed properties	889			1,513		1,354			3,262
Purchases of premises and equipment	(1,321		)	(1,450	)	(4,428		)	(1,968	)
Proceeds from sales of premises and equipment	189			279		192			240
Net cash used by investing activities	(58,430		)	(167,465	)	(274,569		)	(213,330	)

Cash Flows From Financing Activities
Net increase in deposits	113,664			137,957		899,841			183,823
Net increase (decrease) in short-term borrowings	(48,000		)	—		(98,000		)	(55,000	)
Proceeds from long-term borrowings	150,000			—		150,000			—
Payments on long-term borrowings	(531		)	(529	)	(240,562		)	(50,559	)
Cash dividends paid – common stock	(5,328		)	(2,972	)	(10,563		)	(6,542	)
Repurchases of common stock	(20,000		)	—		(22,432		)	(6,524	)
Proceeds from stock option exercises						—			129
Payment of taxes related to stock withheld	—			(91	)	—			(91	)
Net cash provided by financing activities	189,805			134,365		678,284			65,236

Increase (decrease) in cash and cash equivalents	145,047			(16,091	)	448,212			(123,438	)
Cash and cash equivalents, beginning of period	231,302			462,898		231,302			462,898

Cash and cash equivalents, end of period	$	376,349		446,807		$	679,514		339,460

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest	$	7,328		8,009		$	12,919		16,705
Cash paid during the period for income taxes	20			103		1,110			13,196
Non-cash: Unrealized gain (loss) on securities available for sale, net of taxes	15,993			4,523		18,128			13,510
Non-cash: Foreclosed loans transferred to other real estate	662			708		662			1,555
Non-cash: Initial recognition of operating lease right-of-use assets	—			19,406		—			19,406
Non-cash: Initial recognition of operating lease liabilities	—			19,406		—			19,406
Non-cash: Equity issued related to acquisition earn-out						—			3,070

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements



(unaudited)	For the Period Ended ~~March 31,~~June 30, 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 ~~March 31,~~June 30, 2020, the consolidated results of operations for the three and six months ended ~~March 31,~~June 30, 2020 and 2019, and the consolidated cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019. All such adjustments were of a normal, recurring nature. Reference is made to the 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 ~~March 31,~~June 30, 2020 and 2019 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.

Risks and Uncertainties

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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, which the Company has applied, modifications deemed to be COVID-19-related would not be considered a troubled debt restructuring (“TDR”) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification would not meet the requirements under accounting principles generally accepted in the United States of America to be a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. Under these terms, as of ~~March 31,~~June 30, 2020, the Company ~~had processed~~has payment deferrals for ~~315~~1,483 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~~$774 million. These deferrals ~~were~~are generally no more than 90 days in duration. As the initial 90 day deferrals expire, the Company is approving second deferral requests based on the circumstances of each borrower. Thus a portion of the deferrals at June 30, 2020 represent grants of second deferrals for those borrowers whose initial deferrals were on or prior to April 1, 2020.

Additionally, the Company is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs ~~are~~were new and their effects on the Company’s business ~~are~~remain uncertain. ~~In April and early May~~Through June 30, 2020, the Company approved ~~2,799~~and funded 2,810 PPP loans totaling approximately ~~$249.5~~$244.9 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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Congress.

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

Note 2 – Accounting Policies

Accounting Standards:

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Note 1 to the 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 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 were effective for the Company on January 1, 2020 and the adoption of this amendment did not have a material effect on the Company's financial statements. The Company's policy is to test goodwill for impairment annually on October 31 or on an interim basis if an event triggering impairment may have occurred. During the period ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis. ~~Under~~The results of the ~~new simplified guidance, the Company~~March 31, 2020 determined that none of ~~it's~~the Company's goodwill was impaired as of March 31, 2020. The Company reviewed and updated this analysis as of June 30, 2020 and again determined that there was no impairment of its goodwill. Management will continue to evaluate the economic conditions at future reporting periods 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 the Company on January 1, 2020 and their adoption did not have a material effect on its financial statements.

Accounting Standards Pending Adoption

In June 2016, the FASB issued guidance to change the accounting for credit losses. The guidance requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit 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,

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2019 of approximately $21 million. As noted above, this initial impact will be reflected as a cumulative-effect adjustment to retained earnings.

In August 2018, the FASB amended the 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 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 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.

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 ~~March 31,~~June 30, 2019 and December 31, 2019 may have been reclassified to conform to the presentation for ~~March 31,~~June 30, 2020. ~~These~~Any reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

Note 4 – Stock-Based Compensation

The Company recorded total stock-based compensation expense of ~~$513,000~~$895,000 and ~~$403,000~~$801,000 for the three months ended ~~March 31,~~June 30, 2020 and 2019, ~~respectively.~~respectively, and $1,408,000 and $1,202,000 for the six months ended June 30, 2020 and 2019, respectively, which includes the value of stock grants to directors as discussed below. The Company recognized ~~$118,000~~$206,000 and ~~$93,000~~$184,000 of income tax benefits related to stock-based compensation expense in the income statement for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively, and $324,000 and $246,000 for the six months ended June 30, 2020 and 2019, respectively.

At ~~March 31,~~June 30, 2020, the sole equity-based compensation plan for the Company is the First Bancorp 2014 Equity Plan (the "Equity Plan"), which was approved by shareholders on May 8, 2014. As of ~~March 31,~~June 30, 2020, the Equity Plan had ~~616,757~~576,614 shares remaining available for grant.

The Equity Plan is intended to serve as a means to attract, retain and motivate key employees and directors and to associate the interests of the plans' participants with those of the Company and its shareholders. The Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.

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

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

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

In addition to employee equity awards, the Company's practice is to grant common shares, valued at approximately $32,000 to each non-employee director (currently 11 in total) in June of each year. Compensation expense

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associated with these director awards is recognized on the date of award since there are no vesting conditions. On June 1, 2020, the Company granted 14,146 shares of common stock to non-employee directors (1,286 shares per director), at a fair market value of $24.87 per share, which was the closing price of the Company's common stock on that date, and resulted in $352,000 in expense. 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. 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 ~~three~~six months of 2020 related to the Company’s outstanding restricted stock:


	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, 2020	159,366		$	36.79	159,366		$	36.79
Granted during the period	15,969		36.29		41,966		28.58
Vested during the period	(1,042	)	28.80		(2,790	)	36.26
Forfeited or expired during the period	—		—		—		—

Nonvested at March 31, 2020	174,293		$	36.79
Nonvested at June 30, 2020					198,542		$	35.06

Total unrecognized compensation expense as of ~~March 31,~~June 30, 2020 amounted to ~~$2,957,000~~$3,034,000 with a weighted-average remaining term of 1.9 years. For the nonvested awards that are outstanding at ~~March 31,~~June 30, 2020, the Company expects to record ~~$1,821,000~~$1,853,000 in compensation expense in the next twelve months, ~~$1,440,000~~$1,017,000 of which is expected to be recorded in the remaining quarters of 2020.

Prior to 2010, stock options were the primary form of stock-based compensation utilized by the Company. At ~~March 31,~~June 30, 2020, there were 0 stock options outstanding. During both the three and six months ended ~~March 31,~~June 30, 2020, ~~and 2019,~~ there were 0 stock option exercises. During the three and six months ended June 30, 2019, there were $129,000 in 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 dilutive securities is based on the weighted average number of shares that would have been issuable if the end of the reporting period were the end of the contingency period. If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common stock issuance is disregarded.

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The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings Per Common Share:


	For the Three Months Ended March 31,											For the Three Months Ended June 30,
	2020						2019					2020						2019
($ in thousands except per share amounts)	Per Share Amount			Shares (Denominator)	Per Share Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount		Per Share Amount			Shares (Denominator)	Per Share Amount		Income (Numerator)			Shares (Denominator)	Per Share Amount
Basic EPS:
Net income	$	18,180					$	22,285				$	16,352					$	23,859
Less: income allocated to participating securities	(81		)				—					(96		)				(114		)
Basic EPS per common share	$	18,099		29,230,788	$	0.62	$	22,285	29,587,217	$	0.75	$	16,256		28,799,828	$	0.56	$	23,745		29,626,931	$	0.80

Diluted EPS:
Net income	$	18,180		29,230,788			$	22,285	29,587,217			$	16,352		28,799,828			$	23,859		29,626,931
Effect of Dilutive Securities	—			168,326			—		156,178			—			169,900			—			170,010
Diluted EPS per common share	$	18,180		29,399,114	$	0.62	$	22,285	29,743,395	$	0.75	$	16,352		28,969,728	$	0.56	$	23,859		29,796,941	$	0.80

~~For both the three months ended March 31, 2020 and 2019, there~~



	For the Six Months Ended June 30,
	2020						2019
($ in thousands except per share amounts)	Income (Numerator)			Shares (Denominator)	Per Share Amount		Income (Numerator)			Shares (Denominator)	Per Share Amount
Basic EPS:
Net income	$	34,532					$	46,144
Less: income allocated to participating securities	$	(200	)				$	(227	)
Basic EPS per common share	$	34,332		29,015,308	$	1.18	$	45,917		29,607,074	$	1.55

Diluted EPS:
Net income	$	34,532		29,015,308			$	46,144		29,607,074
Effect of Dilutive Securities	—			169,113			—			201,785
Diluted EPS per common share	$	34,532		29,184,421	$	1.18	$	46,144		29,808,859	$	1.55

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

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Note 6 – Securities

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


($ in thousands)	March 31, 2020						December 31, 2019								June 30, 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	$	5,000	5,032	32	—		20,000		Fair Value	20,009		17		(8	)	$	45,024		45,394			370		—		20,000		20,009			17		(8	)
Mortgage-backed securities	727,261		756,926	29,892	(227	)	758,491		767,285		9,463		(669	)	670,861			694,299			23,913		(475	)	758,491		767,285			9,463		(669	)
Corporate bonds	43,701		44,512	866	(55	)	33,711		34,651		1,025		(85	)	43,691			45,139			1,702		(254	)	33,711		34,651			1,025		(85	)
Total available for sale	$	775,962	806,470	30,790	(282	)	812,202		821,945		10,505		(762	)	$	759,576		784,832			25,985		(729	)	812,202		821,945			10,505		(762	)

Securities held to maturity:
Mortgage-backed securities	$	39,113	39,992	879	—		41,423		41,542		125		(6	)	$	36,387		37,363			976		—		41,423		41,542			125		(6	)
State and local governments	22,190		22,393	209	(6	)	26,509		26,791		285		(3	)	58,537			58,955			418		—		26,509		26,791			285		(3	)
Total held to maturity	$	61,303	62,385	1,088	(6	)	67,932		68,333		410		(9	)	$	94,924		96,318			1,394		—		67,932		68,333			410		(9	)

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

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The following table presents information regarding securities with unrealized losses at ~~March 31,~~June 30, 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	$	—	—	—	—	—	—	$	—	—	—	—	—	—
Mortgage-backed securities	3,389		28	10,570	199	13,959	227	67,514		276	6,772	199	74,286	475
Corporate bonds	3,949		50	995	5	4,944	55	13,866		134	880	120	14,746	254
State and local governments	3,615		6	—	—	3,615	6	—		—	—	—	—	—
Total temporarily impaired securities	$	10,953	84	11,565	204	22,518	288	$	81,380	410	7,652	319	89,032	729

The following table presents information regarding securities with unrealized losses at December 31, 2019:



($ in thousands)	Securities in an Unrealized Loss Position for Less than 12 Months			Securities in an Unrealized Loss Position for More than 12 Months		Total
	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Government-sponsored enterprise securities	$	4,992	8	—	—	4,992	8
Mortgage-backed securities	77,274		293	50,851	382	128,125	675
Corporate bonds	—		—	915	85	915	85
State and local governments	—		—	934	3	934	3
Total temporarily impaired securities	$	82,266	301	52,700	470	134,966	771

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In the above tables, all of the securities that were in an unrealized loss position at ~~March 31,~~June 30, 2020 and December 31, 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,~~June 30, 2020 and December 31, 2019, the Company's security portfolio held 2225 securities and 54 securities, respectively, that were in an unrealized loss position.

The book values and approximate fair values of investment securities at ~~March 31,~~June 30, 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	$	—	—	1,730	1,750	$	—	—	1,501	1,520
Due after one year but within five years	28,701		29,567	11,496	11,639	28,691		30,393	4,856	4,982
Due after five years but within ten years	15,000		15,032	5,342	5,389	59,024		59,260	3,587	3,669
Due after ten years	5,000		4,945	3,622	3,615	1,000		880	48,593	48,784
Mortgage-backed securities	727,261		756,926	39,113	39,992	670,861		694,299	36,387	37,363
Total securities	$	775,962	806,470	61,303	62,385	$	759,576	784,832	94,924	96,318

At ~~March 31,~~June 30, 2020 and December 31, 2019 investment securities with carrying values of ~~$254,486,000~~$370,522,000 and $260,826,000, respectively, were pledged as collateral for public deposits.

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In the second quarter of 2020, the Company received proceeds from sales of securities of $219,697,000 and recorded $8,024,000 in gains from the sales. The Company sold 0 securities in 2019.

Included in “other assets” in the Consolidated Balance Sheets are cost-method investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond (“FRB”) stock totaling ~~$37,952,000~~$25,626,000 and $33,380,000 at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. The FHLB stock had a cost and fair value of ~~$20,329,000~~$8,003,000 and $15,789,000 at ~~March 31,~~June 30, 2020 and December 31, 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 at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively, and is a requirement for FRB member bank qualification. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end.

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

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Index

Note 7 – Loans and Asset Quality Information

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


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

Commercial, financial, and agricultural	$	521,470	12	%	$	504,271	11	%	$	723,053		15	%	$	504,271	11	%
Real estate – construction, land development & other land loans	590,485		13	%	530,866		12	%	648,590			14	%	530,866		12	%
Real estate – mortgage – residential (1-4 family) first mortgages	1,083,022		24	%	1,105,014		25	%	1,076,411			22	%	1,105,014		25	%
Real estate – mortgage – home equity loans / lines of credit	331,170		7	%	337,922		8	%	318,618			7	%	337,922		8	%
Real estate – mortgage – commercial and other	1,970,716		43	%	1,917,280		43	%	1,959,078			41	%	1,917,280		43	%
Consumer loans	54,133		1	%	56,172		1	%	51,161			1	%	56,172		1	%
Subtotal	4,550,996		100	%	4,451,525		100	%	4,776,911			100	%	4,451,525		100	%
Unamortized net deferred loan costs	1,712				1,941
Unamortized net deferred loan costs (fees)									(6,848		)			1,941
Total loans	$	4,552,708			$	4,453,466			$	4,770,063				$	4,453,466

Included in the table above are PPP loans totaling $244.9 million that are in the ~~following~~line item "Commercial, financial and agricultural." PPP loans are fully guaranteed by the SBA. Included in unamortized net deferred loan fees are $8.8 million in unamortized net deferred loan fees associated with PPP loans. These fees are being amortized under the effective interest method over the terms of the loans. Accelerated amortization will be recorded in the periods in which principal amounts are forgiven in accordance with the terms of the program.

Also included in the table above are various non-PPP SBA ~~loans:~~loans, with additional information on these loans presented in the table below.

($ in thousands) March 31,
2020 December 31,
2019
Guaranteed portions of SBA Loans included in table above $ 27,985

54,400
Unguaranteed portions of SBA Loans included in table above 119,857

110,782
Total SBA loans included in the table above $ 147,842

165,182

Sold portions of SBA loans with servicing retained - not included in table above $ 324,231

316,730



($ in thousands)	June 30, 2020		December 31, 2019
Guaranteed portions of non-PPP SBA loans included in table above	$	31,630	54,400
Unguaranteed portions of SBA Loans included in table above	123,125		110,782
Total non-PPP SBA loans included in the table above	$	154,755	165,182

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

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

The Company 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 ~~March 31,~~June 30, 2020 and December 31, 2019, there was a remaining accretable discount of ~~$10.3~~$9.5 million and $11.1 million, respectively, related to purchased non-impaired loans. The discounts are amortized as yield adjustments over the respective lives of the loans, so long as the loans perform.

Page 17

Index

The following table presents changes in the carrying value of PCI loans.


PCI loans	For the Three Months Ended March 31, 2020			For the Three Months Ended March 31, 2019		For the Six Months Ended June 30, 2020			For the Six Months Ended June 30, 2019
Balance at beginning of period	$	12,664		17,393		$	12,664		17,393
Change due to payments received and accretion	(2,841		)	(1,556	)	(2,939		)	(3,273	)
Change due to loan charge-offs	(10		)	(8	)	(10		)	(11	)
Transfers to foreclosed real estate	—			—		—			—
Other	26			38		27			66
Balance at end of period	$	9,839		15,867		$	9,742		14,175

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


Accretable Yield for PCI loans	For the Three Months Ended March 31, 2020			For the Three Months Ended March 31, 2019		For the Six Months Ended June 30, 2020			For the Six Months Ended June 30, 2019
Balance at beginning of period	$	4,149		4,750		$	4,149		4,750
Accretion	(567		)	(392	)	(742		)	(811	)
Reclassification from (to) nonaccretable difference	304			237		366			502
Other, net	(453		)	550		(510		)	(89	)
Balance at end of period	$	3,433		5,145		$	3,263		4,352

During the first ~~three~~six months of 2020, the Company received ~~$408,000~~$414,000 in payments that exceeded the carrying amount of the related PCI loans, of which ~~$336,000~~$341,000 was recognized as loan discount accretion income, ~~$58,000~~$59,000 was recorded as additional loan interest income, and $14,000 was recorded as a recovery. During the first ~~three~~six months of 2019, the Company received ~~$133,000~~$290,000 in payments that exceeded the carrying amount of the related PCI loans, of which ~~$112,000~~$263,000 was recognized as loan discount accretion income and ~~$21,000~~$27,000 was recorded as additional loan interest income.

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


($ in thousands)	March 31, 2020		December 31, 2019	June 30, 2020		December 31, 2019
Nonperforming assets
Nonaccrual loans	$	25,066	24,866	$	34,922	24,866
Restructured loans - accruing	9,747		9,053	9,867		9,053
Accruing loans > 90 days past due	—		—	—		—
Total nonperforming loans	34,813		33,919	44,789		33,919
Foreclosed real estate	3,487		3,873	2,987		3,873
Total nonperforming assets	$	38,300	37,792	$	47,776	37,792

Purchased credit impaired loans not included above (1)	$	9,839	12,664	$	9,742	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 ~~$0.7~~$0.8 million and $0.8 million in PCI loans at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively, that were contractually past due 90 days or more.

At ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had ~~$2.2~~$2.0 million and $0.6 million in residential mortgage loans in process of foreclosure, respectively.

Page 1618

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


($ in thousands)	March 31, 2020		December 31, 2019	June 30, 2020		December 31, 2019
Commercial, financial, and agricultural	$	3,703	5,518	$	8,239	5,518
Real estate – construction, land development & other land loans	958		1,067	1,038		1,067
Real estate – mortgage – residential (1-4 family) first mortgages	8,581		7,552	7,327		7,552
Real estate – mortgage – home equity loans / lines of credit	1,874		1,797	1,903		1,797
Real estate – mortgage – commercial and other	9,837		8,820	16,229		8,820
Consumer loans	113		112	186		112
Total	$	25,066	24,866	$	34,922	24,866

The following table presents an analysis of the payment status of the Company’s loans as of ~~March 31,~~June 30, 2020. Due to the onset of the COVID-19 pandemic not occurring until late in the first quarter of 2020, as well as the Company's COVID-19 deferral program and the SBA's relief program, whereby the SBA is making six months of principal and interest payments on most SBA loans held in the Company's portfolio, the past due amounts below were not negatively impacted by the ~~pandemic.~~pandemic and were likely favorably impacted.


($ in thousands)	Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due	Accruing 90 Days or More Past Due	Nonaccrual Loans	Accruing Current	Total Loans Receivable		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due	Accruing 90 Days or More Past Due	Nonaccrual Loans	Accruing Current	Total Loans Receivable
Commercial, financial, and agricultural	$	2,387	201	—	3,703	514,992	521,283		$	1,133	95	—	8,239	713,401	722,868
Real estate – construction, land development & other land loans	1,333		42	—	958	587,989	590,322		133		751	—	1,038	643,790	645,712
Real estate – mortgage – residential (1-4 family) first mortgages	10,829		30	—	8,581	1,058,281	1,077,721		624		1,279	—	7,327	1,061,983	1,071,213
Real estate – mortgage – home equity loans / lines of credit	1,532		155	—	1,874	327,516	331,077		593		203	—	1,903	315,824	318,523
Real estate – mortgage – commercial and other	4,850		7,164	—	9,837	1,944,844	1,966,695		1,055		278	—	16,229	1,940,194	1,957,756
Consumer loans	129		67	—	113	53,750	54,059		136		35	—	186	50,740	51,097
Purchased credit impaired	625		15	746	—	8,453	9,839		11		13	800	—	8,918	9,742
Total	$	21,685	7,674	746	25,066	4,495,825	4,550,996		$	3,685	2,654	800	34,922	4,734,850	4,776,911
Unamortized net deferred loan costs							1,712
Unamortized net deferred loan costs (fees)															(6,848		)
Total loans							$	4,552,708							$	4,770,063

Page 19

Index

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



($ in thousands)	Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due	Accruing 90 Days or More Past Due	Nonaccrual Loans	Accruing Current	Total Loans Receivable
Commercial, financial, and agricultural	$	752	—	—	5,518	497,788	504,058
Real estate – construction, land development & other land loans	37		152	—	1,067	529,444	530,700
Real estate – mortgage – residential (1-4 family) first mortgages	10,858		5,056	—	7,552	1,076,205	1,099,671
Real estate – mortgage – home equity loans / lines of credit	770		300	—	1,797	334,832	337,699
Real estate – mortgage – commercial and other	4,257		—	—	8,820	1,897,573	1,910,650
Consumer loans	344		137	—	112	55,490	56,083
Purchased credit impaired	218		38	762	—	11,646	12,664
Total	$	17,236	5,683	762	24,866	4,402,978	4,451,525
Unamortized net deferred loan costs							1,941
Total loans							$	4,453,466

Page 1720

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The following table presents the activity in the allowance for loan losses for all loans for the three and six months ended ~~March 31,~~June 30, 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			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
As of and for the three months ended June 30, 2020																		As of and for the three months ended June 30, 2020

Beginning balance	$	4,553		1,976		3,832		1,127		8,938		972		—	21,398			$	4,204		2,599		4,373		1,394		10,913		1,015		—	24,498
Charge-offs	(2,460		)	(40	)	(195	)	(68	)	(263	)	(287	)	—	(3,313		)	(1,471		)	(5	)	(279	)	(313	)	(282	)	(110	)	—	(2,460		)
Recoveries	217			290		91		83		47		95		—	823			260			353		224		83		55		31		—	1,006
Provisions	1,894			373		645		252		2,191		235		—	5,590			2,996			2,730		4,021		1,195		8,069		287		—	19,298
Ending balance	$	4,204		2,599		4,373		1,394		10,913		1,015		—	24,498			$	5,989		5,677		8,339		2,359		18,755		1,223		—	42,342

Ending balance as of March 31, 2020: Allowance for loan losses
As of and for the six months ended June 30, 2020																		As of and for the six months ended June 30, 2020

Beginning balance																		$	4,553		1,976		3,832		1,127		8,938		972		—	21,398
Charge-offs																		(3,931		)	(45	)	(474	)	(381	)	(545	)	(397	)	—	(5,773		)
Recoveries																		477			643		315		166		102		126		—	1,829
Provisions																		4,890			3,103		4,666		1,447		10,260		522		—	24,888
Ending balance																		$	5,989		5,677		8,339		2,359		18,755		1,223		—	42,342

Ending balance as of June 30, 2020: Allowance for loan losses																		Ending balance as of June 30, 2020: Allowance for loan losses
Individually evaluated for impairment	$	1,093		73		739		90		1,233		—		—	3,228			$	830		67		817		—		1,052		—		—	2,766
Collectively evaluated for impairment	$	3,069		2,526		3,528		1,304		9,680		1,006		—	21,113			$	5,117		5,610		7,412		2,359		17,699		1,215		—	39,412
Purchased credit impaired	$	42		—		106		—		—		9		—	157			$	42		—		110		—		4		8		—	164

Loans receivable as of March 31, 2020
Loans receivable as of June 30, 2020																		Loans receivable as of June 30, 2020
Ending balance – total	$	521,470		590,485		1,083,022		331,170		1,970,716		54,133		—	4,550,996			$	723,053		648,590		1,076,411		318,618		1,959,078		51,161		—	4,776,911
Unamortized net deferred loan costs															1,712
Unamortized net deferred loan fees																																(6,848		)
Total loans															$	4,552,708																$	4,770,063

Ending balances as of March 31, 2020: Loans
Ending balances as of June 30, 2020: Loans																		Ending balances as of June 30, 2020: Loans
Individually evaluated for impairment	$	3,050		756		9,915		433		11,862		—		—	26,016			$	6,736		965		9,743		325		17,697		—		—	35,466
Collectively evaluated for impairment	$	518,233		589,566		1,067,805		330,644		1,954,834		54,059		—	4,515,141			$	716,132		644,747		1,061,470		318,198		1,940,059		51,097		—	4,731,703
Purchased credit impaired	$	187		163		5,302		93		4,020		74		—	9,839			$	185		2,878		5,198		95		1,322		64		—	9,742

Page 1821

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 1922

Index

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

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

Beginning balance $ 2,889
2,243
5,197
1,665
7,983
952
110
21,039
Charge-offs (246 ) (264 ) (30 ) (80 ) (836 ) (281 ) —
(1,737 )
Recoveries 414
287
160
128
271
33
—
1,293
Provisions 652
18
(817 ) (339 ) 702
302
(18 ) 500
Ending balance $ 3,709
2,284
4,510
1,374
8,120
1,006
92
21,095

Ending balances as of March 31, 2019: Allowance for loan losses
Individually evaluated for impairment $ 857
28
858
—
312
—
—
2,055
Collectively evaluated for impairment $ 2,852
2,256
3,596
1,362
7,723
990
92
18,871
Purchased credit impaired $ —
—
56
12
85
16
—
169

Loans receivable as of March 31, 2019
Ending balance – total $ 468,388
553,760
1,061,049
354,669
1,794,794
69,503
—
4,302,163
Unamortized net deferred loan fees 1,624
Total loans 4,303,787

Ending balances as of March 31, 2019: Loans
Individually evaluated for impairment $ 1,044
797
10,891
21
8,396
—
—
21,149
Collectively evaluated for impairment $ 467,139
552,788
1,044,104
354,316
1,777,481
69,319
—
4,265,147
Purchased credit impaired $ 205
175
6,054
332
8,917
184
—
15,867



($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development & Other Land Loans		Real Estate – Residential (1-4 Family) First Mortgages		Real Estate – Mortgage – Home Equity Lines of Credit		Real Estate – Mortgage – Commercial and Other		Consumer Loans		Unallocated	Total
As of and for the three months ended June 30, 2019

Beginning balance	$	3,709		2,284		4,510		1,374		8,120		1,006		92	21,095
Charge-offs	(690		)	(29	)	(155	)	(66	)	(2	)	(155	)	—	(1,097		)
Recoveries	191			202		222		327		103		54		—	1,099
Provisions	8			(642	)	(454	)	(364	)	631		306		207	(308		)
Ending balance	$	3,218		1,815		4,123		1,271		8,852		1,211		299	20,789

As of and for the six months ended June 30, 2019

Beginning balance	$	2,889		2,243		5,197		1,665		7,983		952		110	21,039
Charge-offs	(936		)	(293	)	(185	)	(146	)	(838	)	(436	)	—	(2,834		)
Recoveries	605			489		382		455		374		87		—	2,392
Provisions	660			(624	)	(1,271	)	(703	)	1,333		608		189	192
Ending balance	$	3,218		1,815		4,123		1,271		8,852		1,211		299	20,789

Ending balance as of June 30, 2019: Allowance for loan losses
Individually evaluated for impairment	$	435		44		770		—		783		—		—	2,032
Collectively evaluated for impairment	$	2,776		1,771		3,289		1,271		8,013		1,195		299	18,614
Purchased credit impaired	$	7		—		64		—		56		16		—	143

Loans receivable as of June 30, 2019
Ending balance – total	$	471,188		456,781		1,090,601		349,355		1,900,188		69,600		—	4,337,713
Unamortized net deferred loan costs															1,784
Total loans															$	4,339,497

Ending balances as of June 30, 2019: Loans
Individually evaluated for impairment	$	992		1,020		10,334		21		7,451		—		—	19,818
Collectively evaluated for impairment	$	469,932		455,589		1,074,325		349,124		1,885,294		69,456		—	4,303,720
Purchased credit impaired	$	264		172		5,942		210		7,443		144		—	14,175

Page 2023

Index

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of ~~March 31,~~June 30, 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	$	19	51	—	18	$	13	17	—	16
Real estate – mortgage – construction, land development & other land loans	116		168	—	169	331		500	—	223
Real estate – mortgage – residential (1-4 family) first mortgages	4,901		5,160	—	4,601	4,584		4,874	—	4,595
Real estate – mortgage –home equity loans / lines of credit	330		358	—	332	325		357	—	329
Real estate – mortgage –commercial and other	5,471		7,035	—	4,057	14,293		16,311	—	7,469
Consumer loans	—		—	—	—	—		—	—	—
Total impaired loans with no allowance	$	10,837	12,772	—	9,177	$	19,546	22,059	—	12,632

Impaired loans with an allowance recorded:

Commercial, financial, and agricultural	$	3,031	3,063	1,093	3,986	$	6,723	7,533	830	4,898
Real estate – mortgage – construction, land development & other land loans	640		649	73	608	634		643	67	616
Real estate – mortgage – residential (1-4 family) first mortgages	5,014		5,244	739	5,130	5,159		5,383	817	5,140
Real estate – mortgage –home equity loans / lines of credit	103		103	90	52	—		—	—	34
Real estate – mortgage –commercial and other	6,391		6,821	1,233	6,659	3,404		3,427	1,052	5,574
Consumer loans	—		—	—	—	—		—	—	—
Total impaired loans with allowance	$	15,179	15,880	3,228	16,435	$	15,920	16,986	2,766	16,262

Interest income recorded on impaired loans during the ~~three~~six months ended ~~March 31,~~June 30, 2020 was ~~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.~~insignificant.

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



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

Commercial, financial, and agricultural	$	16	19	—	74
Real estate – mortgage – construction, land development & other land loans	221		263	—	366
Real estate – mortgage – residential (1-4 family) first mortgages	4,300		4,539	—	4,415
Real estate – mortgage –home equity loans / lines of credit	333		357	—	147
Real estate – mortgage –commercial and other	2,643		3,328	—	3,240
Consumer loans	—		—	—	—
Total impaired loans with no allowance	$	7,513	8,506	—	8,242

Impaired loans with an allowance recorded:

Commercial, financial, and agricultural	$	4,941	4,995	1,791	1,681
Real estate – mortgage – construction, land development & other land loans	575		575	50	586
Real estate – mortgage – residential (1-4 family) first mortgages	5,246		5,469	750	6,206
Real estate – mortgage –home equity loans / lines of credit	—		—	—	55
Real estate – mortgage –commercial and other	6,927		7,914	983	5,136
Consumer loans	—		—	—	—
Total impaired loans with allowance	$	17,689	18,953	3,574	13,664

Interest income recorded on impaired loans during the year ended December 31, 2019 was $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.

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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 ~~March 31,~~June 30, 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	$	504,858	7,736	4,986	3,703	521,283	$	708,073	5,910	646	8,239	722,868
Real estate – construction, land development & other land loans	583,176		4,743	1,445	958	590,322	638,421		4,722	1,531	1,038	645,712
Real estate – mortgage – residential (1-4 family) first mortgages	1,046,994		8,427	13,719	8,581	1,077,721	1,042,495		8,132	13,259	7,327	1,071,213
Real estate – mortgage – home equity loans / lines of credit	322,000		1,217	5,986	1,874	331,077	309,614		1,183	5,823	1,903	318,523
Real estate – mortgage – commercial and other	1,920,923		28,557	7,378	9,837	1,966,695	1,915,982		21,647	3,898	16,229	1,957,756
Consumer loans	53,532		207	207	113	54,059	50,504		209	198	186	51,097
Purchased credit impaired	8,022		87	1,730	—	9,839	7,933		86	1,723	—	9,742
Total	$	4,439,505	50,974	35,451	25,066	4,550,996	$	4,673,022	41,889	27,078	34,922	4,776,911
Unamortized net deferred loan costs						1,712						(6,848	)
Total loans						4,552,708						4,770,063

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



($ in thousands)	Pass		Special Mention Loans	Classified Accruing Loans	Classified Nonaccrual Loans	Total
Commercial, financial, and agricultural	$	486,081	7,998	4,461	5,518	504,058
Real estate – construction, land development & other land loans	522,767		4,075	2,791	1,067	530,700
Real estate – mortgage – residential (1-4 family) first mortgages	1,063,735		13,187	15,197	7,552	1,099,671
Real estate – mortgage – home equity loans / lines of credit	328,903		1,258	5,741	1,797	337,699
Real estate – mortgage – commercial and other	1,873,594		20,800	7,436	8,820	1,910,650
Consumer loans	55,203		413	355	112	56,083
Purchased credit impaired	8,098		2,590	1,976	—	12,664
Total	$	4,338,381	50,321	37,957	24,866	4,451,525
Unamortized net deferred loan costs						1,941
Total loans						4,453,466

Troubled Debt Restructurings

The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, 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,~~June 30, 2020, the Company had processed payment deferrals for ~~315~~1,483 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~~$774 million. These deferrals were generally no more than 90 days in duration and are not included in the troubled debt restructurings disclosed in this report. As the initial 90 day deferrals expire, the Company is approving second deferral requests based on the circumstances of each borrower. Thus a portion of the deferrals at June 30, 2020 represent grants of second deferrals for those borrowers whose initial deferrals were on or prior to April 1, 2020. The Company continues to accrue interest on these loans during the deferral period.

The vast majority of the Company’s troubled debt restructurings modified during the periods ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019 related to interest rate reductions combined with extension of terms. The Company does not generally grant principal forgiveness.

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

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


($ in thousands)	For the three months ended March 31, 2020					For the three months ended March 31, 2019					For the three months ended June 30, 2020					For the three months ended June 30, 2019
	Number of Contracts	Pre- Modification Restructured Balances		Post- Modification Restructured Balances		Number of Contracts	Pre- Modification Restructured Balances		Post- Modification Restructured Balances		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	—	$	—	$	—	—	$	—	$	—	1	$	143	$	143
Real estate – construction, land development & other land loans	—	—		—		—	—		—		1	67		67		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	—	—		—		2	254		258		2	75		78		1	136		136
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—		—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—		—	—		—		1	965		965
Consumer loans	—	—		—		—	—		—		—	—		—		—	—		—
TDRs – Nonaccrual
Commercial, financial, and agricultural	—	—		—		—	—		—		—	—		—		—	—		—
Real estate – construction, land development & other land loans	—	—		—		—	—		—		—	—		—		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	—	—		—		—	—		—		—	—		—		—	—		—
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—		—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—		—	—		—		—	—		—
Consumer loans	—	—		—		—	—		—		—	—		—		—	—		—
Total TDRs arising during period	2	$	143	$	143	2	$	254	$	258	3	$	142	$	145	3	$	1,244	$	1,244

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The following table presents information related to loans modified in a troubled debt restructuring during the six months ended June 30, 2020 and 2019.



($ in thousands)	For the six months ended June 30, 2020					For the six months ended June 30, 2019
	Number of Contracts	Pre- Modification Restructured Balances		Post- Modification Restructured Balances		Number of Contracts	Pre- Modification Restructured Balances		Post- Modification Restructured Balances
TDRs – Accruing
Commercial, financial, and agricultural	2	$	143	$	143	1	$	143	$	143
Real estate – construction, land development & other land loans	1	67		67		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	2	75		78		3	390		394
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		1	965		965
Consumer loans	—	—		—		—	—		—
TDRs – Nonaccrual
Commercial, financial, and agricultural	—	—		—		—	—		—
Real estate – construction, land development & other land loans	—	—		—		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	—	—		—		—	—		—
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—
Consumer loans	—	—		—		—	—		—
Total TDRs arising during period	5	$	285	$	288	5	$	1,498	$	1,502

Accruing restructured loans that were modified in the previous 12twelve months and that defaulted during the three months ended ~~March 31,~~June 30, 2020 and 2019 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate.


($ in thousands)	For the Three Months Ended March 31, 2020			For the Three Months Ended March 31, 2019			For the Three Months Ended June 30, 2020			For the Three Months Ended June 30, 2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		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	$	93
Real estate – mortgage – commercial and other	—	—		—	—		1	274		—	—
Total accruing TDRs that subsequently defaulted	—	$	—	1	$	93	1	$	274	1	$	93

Accruing restructured loans that were modified in the previous twelve months and that defaulted during the six months ended June 30, 2020 and 2019 are presented in the table below.

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

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 ~~March 31,~~June 30, 2020 and December 31, 2019, and the carrying amount of unamortized intangible assets as of those same dates.


	March 31, 2020			December 31, 2019		June 30, 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	2,316	6,013	2,185	$	6,013	2,445	6,013	2,185
Core deposit intangibles	28,440		21,510	28,440	20,610	28,440		22,337	28,440	20,610
SBA servicing asset	7,993		3,311	7,776	2,393	8,480		3,809	7,776	2,393
Other	1,303		1,151	1,303	1,127	1,303		1,173	1,303	1,127
Total	$	43,749	28,288	43,532	26,315	$	44,236	29,764	43,532	26,315

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

~~Servicing~~SBA servicing assets are recorded for SBA 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 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,~~June 30, 2020 with a remaining book value of ~~$4,682,000.~~$4,671,000. The Company recorded ~~$217,000~~$704,000 and ~~$600,000~~$1,484,000 in servicing assets associated with the guaranteed portion of SBA loans ~~originated and~~ sold during the first ~~three~~six months of 2020 and 2019, respectively. During the first ~~three~~six months of 2020 and 2019, the Company recorded ~~$918,000~~$1,416,000 and ~~$299,000,~~$621,000, respectively, in related amortization expense. Included in the amortization expense for the first ~~three~~six months of 2020 is ana first quarter of 2020 impairment charge of approximately $500,000 due to a decrease in the fair value of the asset resulting from deteriorations in market conditions asat the end of ~~March 31,~~the first quarter of 2020.

Amortization expense of all other intangible assets totaled ~~$1,055,000~~$978,000 and ~~$1,332,000~~$1,242,000 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively. Amortization expense of all other intangible assets totaled $2,033,000 and $2,574,000 for the six months ended June 30, 2020 and 2019, respectively.

During the period ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim step-one goodwill impairment quantitative analysis. ~~In this~~The results of the March 31, 2020 analysis ~~the Company~~ determined that none of ~~it's~~the Company's goodwill was impaired as of March 31, 2020. As a result of the continued economic turmoil and market volatility during the period ended June 30, 2020, the Company qualitatively reviewed the factors and assumptions used in the March 31, 2020 analysis, including financial projections, discount rates, and market premiums, in light of the triggering event existing as of June 30, 2020 and based on that analysis, the Company concluded there was no impairment of its goodwill at June 30, 2020. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

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The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets. These amounts will be recorded as "Intangibles amortization expense" within the noninterest expense section of the Consolidated Statements of Income. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets. income within the line item "Other service charges, commissions and fees" of the Consolidated Statements of Income.


($ in thousands)	Estimated Amortization Expense		Estimated Amortization Expense
April 1 to December 31, 2020	$	2,786
July 1 to December 31, 2020			$	1,808
2021	2,927		2,927
2022	2,022		2,022
2023	1,041		1,041
2024	404		404
Thereafter	1,599		1,599
Total	$	10,779	$	9,801

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 ~~$216,000~~$215,000 and $244,000 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively, and $431,000 and $488,000 for the six months ended June 30, 2020 and 2019, respectively. The following table contains the components of the pension cost.


	For the Three Months Ended March 31,												For the Three Months Ended June 30,
($ in thousands)	2020 Pension Plan			2019 Pension Plan		2020 SERP		2019 SERP	2020 Total Both Plans		2019 Total Both Plans		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		305			372		55		41	360		413
Expected return on plan assets	(325		)	(397	)	—		—	(325	)	(397	)	(325		)	(397	)	—		—	(325	)	(397	)
Amortization of net (gain)/loss	219			223		(41	)	5	178		228		221			223		(41	)	5	180		228
Net periodic pension cost	$	202		198		14		46	216		244		$	201		198		14		46	215		244



	Six Months Ended June 30, 2020
($ in thousands)	2020 Pension Plan			2019 Pension Plan		2020 SERP		2019 SERP	2020 Total Both Plans		2019 Total Both Plans
Service cost	$	—		—		—		—	—		—
Interest cost	613			744		110		82	723		826
Expected return on plan assets	(650		)	(794	)	—		—	(650	)	(794	)
Amortization of net (gain)/loss	440			446		(82	)	10	358		456
Net periodic pension cost	$	403		396		28		92	431		488

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 ~~three~~six months of 2020 and does 0t expect to contribute to the Pension Plan in the remainder of 2020.

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

~~Page 27~~

~~Index~~

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)	March 31, 2020			December 31, 2019		June 30, 2020			December 31, 2019
Unrealized gain (loss) on securities available for sale	$	30,508		9,743		$	25,256		9,743
Deferred tax asset (liability)	(7,011		)	(2,239	)	(5,804		)	(2,239	)
Net unrealized gain (loss) on securities available for sale	23,497			7,504		19,452			7,504

Postretirement plans asset (liability)	(2,913		)	(3,092	)	(2,734		)	(3,092	)
Deferred tax asset (liability)	669			711		628			711
Net postretirement plans asset (liability)	(2,244		)	(2,381	)	(2,106		)	(2,381	)

Total accumulated other comprehensive income (loss)	$	21,253		5,123		$	17,346		5,123

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


($ in thousands)	Unrealized Gain (Loss) on Securities Available for Sale		Postretirement Plans Asset (Liability)		Total	Unrealized Gain (Loss) on Securities Available for Sale			Postretirement Plans Asset (Liability)		Total
Beginning balance at January 1, 2020	$	7,504	(2,381	)	5,123	$	7,504		(2,381	)	5,123
Other comprehensive income (loss) before reclassifications	15,993		—		15,993	18,128			—		18,128
Amounts reclassified from accumulated other comprehensive income	—		137		137	(6,180		)	275		(5,905	)
Net current-period other comprehensive income (loss)	15,993		137		16,130	11,948			275		12,223

Ending balance at March 31, 2020	$	23,497	(2,244	)	21,253
Ending balance at June 30, 2020						$	19,452		(2,106	)	17,346

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


($ in thousands)	Unrealized Gain (Loss) on Securities Available for Sale			Postretirement Plans 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	)	$	(9,494	)	(2,467	)	(11,961	)
Other comprehensive income (loss) before reclassifications	4,523			—		4,523		13,510			—		13,510
Amounts reclassified from accumulated other comprehensive income	—			174		174		—			339		339
Net current-period other comprehensive income (loss)	4,523			174		4,697		13,510			339		13,849

Ending balance at March 31, 2019	$	(4,971	)	(2,293	)	(7,264	)
Ending balance at June 30, 2019								$	4,016		(2,128	)	1,888

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

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Note 11 – Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

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

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

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

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

											($ in thousands)
Description of Financial Instruments	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)	Fair Value at June 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Recurring
Securities available for sale:
Government-sponsored enterprise securities	$	5,032	—	5,032	—	$	45,394	—	45,394	—
Mortgage-backed securities	756,927		—	756,927	—	694,299		—	694,299	—
Corporate bonds	44,511		—	44,511	—	45,139		—	45,139	—
Total available for sale securities	$	806,470	—	806,470	—	$	784,832	—	784,832	—

Presold mortgages in process of settlement	$	14,861	14,861	—	—	$	31,015	31,015	—	—

Nonrecurring
Impaired loans	$	14,979	—	—	14,979	$	16,783	—	—	16,783
Foreclosed real estate	1,681		—	—	1,681	1,151		—	—	1,151

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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, 2019.



($ in thousands)
Description of Financial Instruments	Fair Value at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Recurring
Securities available for sale:
Government-sponsored enterprise securities	$	20,009	—	20,009	—
Mortgage-backed securities	767,285		—	767,285	—
Corporate bonds	34,651		—	34,651	—
Total available for sale securities	$	821,945	—	821,945	—

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

Nonrecurring
Impaired loans	$	16,215	—	—	16,215
Foreclosed real estate	1,830		—	—	1,830

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

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

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

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 ~~March 31,~~June 30, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

($ in thousands)

Description

Fair Value at
March 31, 2020

Valuation

Technique

Significant Unobservable

Inputs

Range (Weighted Average)

Fair Value at
June 30, 2020

Valuation

Technique

Significant Unobservable

Inputs

Range (Weighted Average)

Impaired loans - valued at collateral value

9,649

Appraised value

Discounts applied for estimated costs to sell

10%

11,150

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%)

5,633

PV of expected cash flows

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

4-11% (6.26%)

Foreclosed real estate

1,681

Appraised value

Discounts for estimated costs to sell

10%

1,151

Appraised value

Discounts for estimated costs to sell

10%

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



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

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


		March 31, 2020			December 31, 2019			June 30, 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	$	93,666	93,666	64,519	64,519	Level 1	$	94,684	94,684	64,519	64,519
Due from banks, interest-bearing	Level 1	282,683		282,683	166,783	166,783	Level 1	584,830		584,830	166,783	166,783
Securities held to maturity	Level 2	61,303		62,385	67,932	68,333	Level 2	94,924		96,318	67,932	68,333
SBA loans held for sale	Level 2	18,449		19,332	—	—	Level 2	3,382		3,734	—	—
Total loans, net of allowance	Level 3	4,528,210		4,428,870	4,432,068	4,407,610	Level 3	4,727,721		4,720,772	4,432,068	4,407,610
Accrued interest receivable	Level 1	15,767		15,767	16,648	16,648	Level 1	19,943		19,943	16,648	16,648
Bank-owned life insurance	Level 1	105,083		105,083	104,441	104,441	Level 1	105,712		105,712	104,441	104,441
SBA Servicing Asset	Level 3	4,682		4,906	5,383	5,649	Level 3	4,671		4,973	5,383	5,649

Deposits	Level 2	5,044,988		5,045,800	4,931,355	4,930,751	Level 2	5,831,138		5,833,990	4,931,355	4,930,751
Borrowings	Level 2	402,185		393,542	300,671	295,399	Level 2	112,199		103,001	300,671	295,399
Accrued interest payable	Level 2	2,100		2,100	2,154	2,154	Level 2	1,525		1,525	2,154	2,154

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

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 (“ASC 606”) are recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three and six months ended ~~March 31,~~June 30, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.


	For the Three Months Ended			For the Three Months Ended			For the SIx Months Ended
$ in thousands	March 31, 2020		March 31, 2019	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Noninterest Income
In-scope of ASC 606:
Service charges on deposit accounts:	$	3,337	2,945	$	2,289	3,210	5,626	6,155
Other service charges, commissions, and fees:
Interchange income	2,887		2,809	3,086		3,492	5,972	6,301
Other service charges and fees	1,182		1,697	1,538		1,558	2,721	3,255
Commissions from sales of insurance and financial products:
Insurance income	1,198		1,368	1,363		1,304	2,561	2,672
Wealth management income	870		661	727		900	1,597	1,561
SBA consulting fees	1,027		1,263	3,739		921	4,766	2,184
Noninterest income (in-scope of ASC 606)	10,501		10,743	12,742		11,385	23,243	22,128
Noninterest income (out-of-scope of ASC 606)	3,204		3,335	13,451		4,249	16,655	7,584
Total noninterest income	$	13,705	14,078	$	26,193	15,634	39,898	29,712

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

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Overdraft fees are recognized at the 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, for which the performance obligation has been satisfied.

SBA Consulting fees: The Company earns fees for its consulting services related to the origination of SBA loans. Fees are based on a percentage of the dollar amount of the originated loans and are recorded when the performance obligation has been satisfied. During the three months ended June 30, 2020, the Company's SBA subsidiary assisted its third-party clients in the origination of PPP loans and charged and received fees for doing so. For several clients, the forgiveness piece of the PPP process, which will occur at a future time, was included in the fees charged. Accordingly, the Company recorded deferred revenue for approximately one-half of the fees received, which amounted to $1.6 million at June 30, 2020. These fees will be recorded as income in the period in which the services associated with the forgiveness process are rendered.

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

Note 13 – Leases

The Company enters into leases in the normal course of business. As of ~~March 31,~~June 30, 2020, the Company leased 8 branch offices for which the land and buildings are leased and 9 branch offices for which the land is leased but the building is owned. The Company also leases office space for several operational departments. All of the Company’s leases are operating leases under applicable accounting standards and the lease agreements have maturity dates ranging from January 2021 through May 2076, some of which include options for multiple five- and ten-year ~~extensions.~~extensions. The weighted average remaining life of the lease term for these leases was ~~20.3~~20.4 years as of ~~March 31,~~June 30, 2020. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. As permitted by applicable accounting standards, the Company has elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company's Consolidated Balance Sheets.

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

The Company uses its incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments when the rate implicit in the lease is not known. The weighted average discount rate for leases was ~~3.26%~~3.27% as of ~~March 31,~~June 30, 2020.

Total operating lease expense was ~~$0.7~~$1.4 million and ~~$0.6~~$1.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively. The right-of-use assets and lease liabilities were ~~$19.3~~$18.8 million and ~~$19.6~~$19.1 million as of ~~March 31,~~June 30, 2020, respectively.

Future undiscounted lease payments for operating leases with initial terms of one year or more as of ~~March 31,~~June 30, 2020 are as follows.

($ in thousands)
April 1 to December 31, 2020 $ 1,853
2021 2,257
2022 1,898
2023 1,776
2024 1,574
Thereafter 19,564
Total undiscounted lease payments 28,922
Less effect of discounting (9,344 )
Present value of estimated lease payments (lease liability) $ 19,578

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Index



($ in thousands)
July 1 to December 31, 2020	$	1,224
2021	2,257
2022	1,898
2023	1,776
2024	1,574
Thereafter	19,564
Total undiscounted lease payments	28,293
Less effect of discounting	(9,184		)
Present value of estimated lease payments (lease liability)	$	19,109

Page 3439

Index

Note 14 - Shareholders' Equity

Stock Repurchases

During the first ~~three~~six months months of 2020, the Company repurchased approximately ~~576,406~~680,695 shares of the Company's common stock at an average stock price of ~~$34.70~~$32.96 per share, which totaled ~~$20~~$22 million, under a $40 million repurchase authorization publicly announced in November 2019. The Company has ~~$20~~$17.6 million remaining of the $40 million repurchase authorization. ~~The Company suspended repurchases in March 2020 for the foreseeable future.~~

Note 15 - Borrowings

The following tables present information regarding the Company’s outstanding borrowings at ~~March, 31,~~June 30, 2020 and December 31, 2019 - dollars are in thousands:

Description

Due date

Call Feature

March 31, 2020

Interest Rate

Due date

Call Feature

June 30, 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

8/6/2020

None

50,000

0.20% fixed

FHLB Principal Reducing Credit

7/24/2023

None

158

1.00% fixed

7/24/2023

None

146

1.00% fixed

FHLB Principal Reducing Credit

12/22/2023

None

1,020

1.25% fixed

12/22/2023

None

1,010

1.25% fixed

FHLB Principal Reducing Credit

1/15/2026

None

6,000

1.98% fixed

1/15/2026

None

6,000

1.98% fixed

FHLB Principal Reducing Credit

6/26/2028

None

242

0.25% fixed

6/26/2028

None

240

0.25% fixed

FHLB Principal Reducing Credit

7/17/2028

None

0.00% fixed

7/17/2028

None

0.00% fixed

FHLB Principal Reducing Credit

8/18/2028

None

179

1.00% fixed

8/18/2028

None

178

1.00% fixed

FHLB Principal Reducing Credit

8/22/2028

None

179

1.00% fixed

8/22/2028

None

178

1.00% fixed

FHLB Principal Reducing Credit

12/20/2028

None

364

0.50% fixed

12/20/2028

None

361

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%

1/23/2034

Quarterly by Company
beginning 1/23/2009

20,620

3.46% at 6/30/2020
adjustable rate
3 month LIBOR + 2.70%

Trust Preferred Securities

6/15/2036

Quarterly by Company
beginning 6/15/2011

25,774

2.13% at 3/31/2020
adjustable rate
3 month LIBOR + 1.39%

6/15/2036

Quarterly by Company
beginning 6/15/2011

25,774

1.70% at 6/30/2020
adjustable rate
3 month LIBOR + 1.39%

Trust Preferred Securities

1/7/2035

Quarterly by Company
beginning 1/7/2010

10,310

3.28% at 3/31/2020
adjustable rate
3 month LIBOR + 2.00%

1/7/2035

Quarterly by Company
beginning 1/7/2010

10,310

3.22% at 6/30/2020
adjustable rate
3 month LIBOR + 2.00%

Total borrowings/ weighted average rate as of

March 31, 2020

404,900

1.16%

Total borrowings/ weighted average rate as of

June 30, 2020

114,869

1.54%

Unamortized discount on acquired borrowings

(2,715

)

Unamortized discount on acquired borrowings

(2,670

)

Total borrowings

402,185

112,199

Page 3540

Index



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

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Index

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~~six months of 2020 is based on the limited information available and the conditions that existed at ~~March 31,~~June 30, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses and the remaining discussion below is based on that methodology. Upon the adoption of CECL, the Company expects its allowance for credit losses related to all financial assets will increase to approximately $40-$44 million as of January 1, 2020 compared to its allowance for loan losses at December 31, 2019 of approximately $21 million. As previously discussed, this initial impact will be reflected as a cumulative-effect adjustment to retained earnings.

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

The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans (“general reserve loans”). General reserve loans are segregated into pools by loan type and risk grade and estimated loss percentages are assigned to each loan pool based on historical losses. The historical loss percentages are then adjusted for any environmental factors used to reflect changes in the collectability of the portfolio not captured by historical ~~data.~~data such. In 2020, we have included environmental factors related to the COVID-19 pandemic. See additional discussion the "Summary of Loan Loss Experience."

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

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

Page 3742

Index

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

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

Although we use the best information available to make evaluations, future material adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on the examiners’ judgment about information available to them at the time of their examinations.

For further discussion, see “Nonperforming Assets” and ~~“Summary of Loan Loss Experience” below.~~

~~See "Allowance~~“Allowance for Loan Losses and Provision for Loan ~~Loss Experience" for additional discussion.~~Losses” below.

Intangible Assets

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

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

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

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

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

Fair Value and Discount Accretion of Acquired Loans

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

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

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

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

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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 1,2, Accounting Policies, to the Company's consolidated financial statements included elsewhere in this report. Additionally, in a related action to the CARES Act, the joint federal bank regulatory agencies issued an interim final rule effective March 31, 2020, that allows banking organizations that implement CECL this year to elect to mitigate the effects of the CECL accounting standard on their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. Upon such point of adoption of CECL during 2020, the Company will likely elect to defer the regulatory capital effects of CECL in accordance with the interim final rule.

The CARES Act also includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Under these terms, as of ~~March 31,~~June 30, 2020, the Company had processed payment deferrals for ~~315~~1,483 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~~$774 million. These deferrals were generally no more than 90 days in duration. As the initial 90 day deferrals expire, the Company is approving second deferral requests based on the circumstances of each borrower. Thus a portion of the deferrals at June 30, 2020 represent grants of second deferrals for those borrowers whose initial deferrals were on or prior to April 1, 2020.

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

Employees, Customers and Communities

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

~~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"),~~SBA's PPP program, a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic

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and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. ~~In April and~~

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~~early May~~As of June 30, 2020, the Company ~~approved 2,799~~holds 2,810 PPP loans totaling approximately ~~$249.5~~$244.9 million under the allocation approved by Congress.

~~The~~As previously discussed, the Company has implemented a short-term deferral modification program that complies with federal banking regulator's interagency guidance and is working with borrowers effected by COVID-19 on a case by case basis. Under these terms, as of ~~March 31,~~June 30, 2020, the Company had processed payment deferrals for ~~315~~1,483 loans with an aggregate loan balance of ~~$120~~$774 million. ~~Through April~~As the initial 90 day deferrals expire, the Company is approving second deferral requests based on the circumstances of each borrower. Thus a portion of the deferrals at June 30, 2020 ~~the number~~represent grants of second deferrals ~~increased to 1,269 with an aggregate loan balance of $647 million. These~~for those borrowers whose initial deferrals were ~~generally no more than 90 days in duration.~~on or prior to April 1, 2020.

Capital, Liquidity & Credit

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

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

Asset quality remains solid, with nonperforming assets to total assets amounting to ~~0.60%~~0.69% at ~~March 31,~~June 30, 2020 compared to 0.62% at December 31, 2019.

In determining the appropriate level of allowance for loan losses at June 30, 2020, we reviewed industry types and deferral percentages within our loan portfolio in light of the pandemic. Based on that analysis, we assigned loan loss reserves for certain of those loan types that were consistent with probable loss rates incurred in a stressed economic scenario. The Company 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 asalso recorded supplemental qualitative reserves for all ~~credit cards.~~other loans in deferral status. As a result the analysis, ~~the Company recorded an~~ approximately ~~$4.3~~$16.7 million of COVID-19 related ~~provision~~qualitative reserves are included in the Company's June 30, 2020 allowance for loan ~~losses, which brought the total provision for loan losses to $5.6~~loss amount of $42.3 million ~~for the three months ended March 31,~~at June 30, 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 ~~$18.2~~$16.4 million, or ~~$0.62~~$0.56 per diluted common share, for the three months ended ~~March 31,~~June 30, 2020 ~~a decrease of 17.3% in earnings per share from the $22.3~~compared to $23.9 million, or ~~$0.75~~$0.80 per diluted common share, recorded in the ~~first~~second quarter of 2019. For the six months ended June 30, 2020, net income amounted to $34.5 million, or $1.18 per diluted common share compared to $46.1 million, or $1.55 per diluted common share, for the six months ended June 30, 2019.

The decrease in earnings for both periods in 2020 was primarily due to ~~an increase~~increases in the ~~provision~~provisions for loan losses recorded, which ~~amounted to $5.6 million in the first quarter of 2020 compared to $0.5 million in the first quarter of 2019. The 2020 amount reflects approximately $4.3 million in provision~~were largely related to ~~COVID-19. As permitted by~~estimated losses arising from the ~~CARES Act, the Company elected to defer the implementation~~economic impact of the Current Expected Credit Loss (CECL) methodology. Accordingly, our 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, ~~and calculated under the pre-CECL incurred loss methodology for determining loan losses. See further~~see additional discussion below.

Net Interest Income and Net Interest Margin

Net interest income for the ~~first~~second quarter of 2020 was ~~$54.8~~$52.6 million, a ~~2.6% increase~~3.3% decrease from the ~~$53.4~~$54.4 million recorded in the ~~first~~second quarter of 2019. Net interest income for the first six months of 2020 was $107.4 million, a 0.4% decrease from the $107.8 million recorded in the comparable period of 2019. The ~~increase~~decreases in net interest income ~~was~~were primarily due to ~~growth in interest-earning assets, which have increased by approximately 4% over the past year, but was partially offset by a~~ lower net interest ~~margin.~~margins.

Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) for the ~~first~~second quarter of 2020 was ~~3.96%~~3.49%, which was 1057 basis points lower than the 4.06% realized in the ~~first~~second quarter of 2019. For the six months ended June 30, 2020, our net interest margin was 3.71% compared to 4.06% for the same period in 2019. The lower ~~margin was~~margins were primarily due to the impact of ~~lower~~the interest ~~rates. Since August 2019,~~rate cuts initiated by the Federal Reserve ~~Board has decreased interest rates by 225 basis points, which resulted in asset yields declining by 20 basis points from the first quarter of 2019, while our cost of funds declined by 10 basis points.~~

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Bank since August 2019.

Provision for Loan Losses and Asset Quality

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

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on our estimate of probable losses that have been incurred at the end of each reporting period, including losses arising from the impact of COVID-19, in accordance with the pre-CECL methodology for determining loan losses.

We recorded a provision for loan losses of ~~$5.6~~$19.3 million in the ~~first~~second quarter of 2020 compared to a negative provision for loan losses (reduction of ~~$0.5~~the allowance for loan losses) of $0.3 million in the ~~first~~second quarter of 2019. For the six months ended June 30, 2020 and 2019, we recorded provisions for loan losses of $24.9 million and $0.2 million, respectively. The increases in 2020 ~~amount reflects approximately $4.3 million in provision~~are primarily related to ~~COVID-19 and was based~~estimated probable losses arising from the economic impact of COVID-19. Since the onset of the pandemic in March 2020, we have worked with many of our borrowers, including the option of loan payment deferrals, with total loans on deferral status amounting to $774 million at June 30, 2020, or 16% of the ~~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.~~portfolio.

Total net charge-offs for the ~~first~~second quarter of 2020 amounted to ~~$2.5~~$1.5 million, or ~~0.22%~~0.12% of average loans on an annualized basis, compared to no net charge-offs ~~of $0.4 million, or 0.04% of average loans,~~ in the ~~first~~second quarter of 2019. ~~Approximately $1.7~~For the six months ended June 30, 2020 and 2019, total net charge-offs were $3.9 million ~~of the first quarter charge-offs had been previously specifically reserved for at December 31, 2019. Total nonperforming assets~~and $0.4 million, respectively, which on an annualized basis amounted to ~~$38.3 million at March 31, 2020 compared to $37.8 million at December 31, 2019.~~0.17% and 0.02%, respectively.

Noninterest Income

Total noninterest income was ~~$13.7~~$26.2 million and ~~$14.1~~$15.6 million for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively.

For the six months ended June 30, 2020 and 2019, total noninterest income was $39.9 million and $29.7 million, respectively. The line item "Other service charges, commissions, and fees" includes $0.5 million of impairment of our SBA servicing asset due to the lower fair value of that asset resulting from market conditions at March 31, 2020. Fees from presold mortgages amounted to $1.8 million for the first quarter ofincreases in noninterest income in 2020 ~~compared to $0.5 million in the first quarter of 2019, with the increase being~~are primarily due to ~~lower interest rates that resulted in increases in~~fees earned as a result of high mortgage loan ~~volume.~~

activity, SBA ~~loan sale gains amounted~~consulting fees related to ~~$0.6~~client assistance with PPP originations, and an $8.0 million ~~for~~gain realized from securities sales in the ~~first~~second quarter of 2020 compared to $2.1 million in the first quarter of 2019. We had intended to sell an additional $18.4 million of SBA loans in the first quarter of 2020, however sales scheduled to occur in late March did not occur due to market conditions. Accordingly, we have reflected those loans as "held for sale" in the accompanying Balance Sheet.2020.

Noninterest Expenses

Noninterest expenses amounted to ~~$40.1~~$38.9 million in the ~~first~~second quarter of 2020 compared to ~~$38.8~~$40.1 million recorded in the ~~first~~second quarter of 2019, a decrease of 3.0%. For the six months ended June 30, 2020, noninterest expenses amounted to $79.0 million, an increase of ~~3.4%.~~0.2% from the $78.9 million recorded in the comparable period of 2019. Noninterest expenses in the second quarter of 2020 trended lower due primarily to the generally lower economic activity resulting from the pandemic.

Income Taxes

Our effective tax rate was ~~20.3%~~20.7% and 20.5% for the ~~first quarter of~~three and six months ended June 30, 2020, respectively, compared to ~~20.9% in~~21.2% and 21.0% for the ~~first quarter of 2019.~~three and six months ended June 30, 2019, respectively.

Balance Sheet and Capital

Total assets at ~~March 31,~~June 30, 2020 amounted to ~~$6.4 billion.~~ $6.9 billion, a 12.1% increase from December 31, 2019.

Loan growth for the ~~three~~six months ended ~~March 31,~~June 30, 2020 amounted to ~~$99.2~~$316.6 million, including the origination of $244.9 million in PPP loans. Loan growth for the first six months of 2020, excluding PPP loans, was $71.7 million, or ~~9.0% annualized,~~3.2% annualized. Deposit growth for the first six months of 2020 amounted to $899.8 million and was primarily concentrated in transaction based accounts. In addition to deposits arising from PPP loans, this high deposit growth ~~amounted~~is believed to ~~$113.6~~be due to a combination of stimulus funds and changes in customer behaviors during the pandemic, as well as our ongoing deposit growth initiatives.

With the excess liquidity resulting from the high deposit growth we experienced, we reduced our outstanding borrowings from $300.7 million ~~or 9.3% annualized.~~at December 31, 2019 to $112.2 million at June 30, 2020, a decline of 62.7%.

We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at ~~March 31,~~June 30, 2020 of ~~14.51%.~~15.13%, an increase from the 14.89% reported at December 31, 2019.

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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 March 31, 2020 amounted to $54.8 million, an increase of $1.4 million, or 2.6%, from the $53.4 million recorded in the first quarter of 2019. Net interest income on a tax-equivalent basis for the three month period ended March 31, 2020 amounted to $55.1 million, an increase of $1.3 million, or 2.4%, from the $53.8 million recorded in the first quarter of 2019. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows

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a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.

Net interest income for the three month period ended June 30, 2020 amounted to $52.6 million, a decrease of $1.7 million, or 3.3%, from the $54.4 million recorded in the second quarter of 2019. Net interest income on a tax-equivalent basis for the three month period ended June 30, 2020 amounted to $53.0 million, a decrease of $1.9 million, or 3.4%, from the $54.8 million recorded in the second quarter of 2019.

Net interest income for the six month period ended June 30, 2020 amounted to $107.4 million, a decrease of $0.4 million, or 0.4%, from the $107.8 million recorded in the first six months of 2019. Net interest income on a tax-equivalent basis for the six month period ended June 30, 2020 amounted to $108.0 million, a decrease of $0.6 million, or 0.5%, from the $108.6 million recorded in the first six months of 2019.


($ in thousands)				Three Months Ended June 30,
				2020		2019
Net interest income, as reported				$	52,624	54,409
Tax-equivalent adjustment				330		423
Net interest income, tax-equivalent				$	52,954	54,832

				Six Months Ended June 30,
	Three Months Ended March 31,			2020		2019
($ in thousands)	2020		2019
Net interest income, as reported	$	54,759	53,361	$	107,383	107,770
Tax-equivalent adjustment	334		424	664		847
Net interest income, tax-equivalent	$	55,093	53,785	$	108,047	108,617

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 six months ended ~~March 31,~~June 30, 2020, the ~~higher~~lower net interest income compared to the same ~~period~~periods of 2019 was primarily due to ~~growth in interest-earning assets.~~lower net interest margins.

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The following table presents an analysis of net interest income.


	For the Three Months Ended March 31,												For the Three Months Ended June 30,
	2020						2019						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)	$	4,512,893	4.93	%	$	55,297	$	4,280,272	5.11	%	$	53,960	$	4,738,702	4.41	%	$	51,964	$	4,329,866	5.16	%	$	55,652
Taxable securities	834,528		2.64	%	5,474		651,878		2.95	%	4,737		770,441		2.49	%	4,771		715,848		2.80	%	4,993
Non-taxable securities	21,719		3.04	%	164		45,752		2.99	%	337		17,795		2.64	%	117		34,604		3.14	%	271
Short-term investments, primarily overnight funds	226,797		1.95	%	1,098		394,864		2.77	%	2,701
Short-term investments, primarily interest-bearing cash													575,074		0.55	%	788		336,966		2.51	%	2,106
Total interest-earning assets	5,595,937		4.46	%	62,033		5,372,766		4.66	%	61,735		6,102,012		3.80	%	57,640		5,417,284		4.67	%	63,022

Cash and due from banks	63,218						55,899						88,727						53,853
Premises and equipment	114,323						118,911						114,911						136,813
Other assets	409,620						397,473						422,112						386,645
Total assets	$	6,183,098					$	5,945,049					$	6,727,762					$	5,994,595

Liabilities
Interest bearing checking	$	899,004	0.18	%	$	408	908,039		0.15	%	$	327	$	972,580	0.11	%	$	267	$	892,615	0.14	%	$	301
Money market deposits	1,203,129		0.56	%	1,683		1,056,931		0.54	%	1,395		1,294,462		0.29	%	920		1,099,531		0.63	%	1,725
Savings deposits	426,225		0.25	%	269		426,843		0.27	%	287		454,791		0.13	%	147		414,095		0.30	%	309
Time deposits >$100,000	644,113		1.83	%	2,924		712,540		1.81	%	3,178		632,319		1.48	%	2,324		723,218		1.95	%	3,522
Other time deposits	250,860		0.78	%	489		263,171		0.60	%	390		242,754		0.69	%	416		262,537		0.71	%	467
Total interest-bearing deposits	3,423,331		0.68	%	5,773		3,367,524		0.67	%	5,577		3,596,906		0.46	%	4,074		3,391,996		0.75	%	6,324
Borrowings	316,136		1.91	%	1,501		406,190		2.79	%	2,797		288,997		1.31	%	942		324,096		2.83	%	2,289
Total interest-bearing liabilities	3,739,467		0.78	%	7,274		3,773,714		0.90	%	8,374		3,885,903		0.52	%	5,016		3,716,092		0.93	%	8,613

Noninterest bearing checking	1,526,868						1,336,707						1,905,449						1,418,033
Other liabilities	58,171						59,569						64,915						58,339
Shareholders’ equity	858,592						775,059						871,495						802,131
Total liabilities and shareholders’ equity	$	6,183,098					$	5,945,049					$	6,727,762					$	5,994,595

Net yield on interest-earning assets and net interest income			3.94	%	$	54,759			4.03	%	$	53,361			3.47	%	$	52,624			4.03	%	$	54,409
Net yield on interest-earning assets and net interest income – tax-equivalent (2)			3.96	%	$	55,093			4.06	%	$	53,785			3.49	%	$	52,954			4.06	%	$	54,832

Interest rate spread			3.68	%					3.76	%					3.28	%					3.74	%

Average prime rate			4.42	%					5.50	%					3.25	%					5.50	%

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

(2) Includes tax-equivalent adjustments of ~~$334,000~~$330,000 and ~~$424,000~~$423,000 in 2020 and 2019, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

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	For the Six Months Ended June 30,
	2020						2019
($ in thousands)	Average Volume		Average Rate		Interest Earned or Paid		Average Volume		Average Rate		Interest Earned or Paid
Assets
Loans (1)	$	4,625,798	4.66	%	$	164,754	$	4,305,069	5.13	%	$	109,612
Taxable securities	802,485		2.57	%	14,859		685,589		2.86	%	9,730
Non-taxable securities	19,756		2.86	%	820		38,452		3.19	%	608
Short-term investments, primarily interest-bearing cash	400,935		0.95	%	6,705		365,915		2.65	%	4,807
Total interest-earning assets	5,848,974		4.11	%	$	187,138	5,395,025		4.66	%	124,757

Cash and due from banks	75,984						54,876
Premises and equipment	114,624						136,918
Other assets	416,009						383,003
Total assets	$	6,455,591					$	5,969,822

Liabilities
Interest bearing checking	$	935,792	0.14	%	$	966	$	900,327	0.14	%	$	628
Money market deposits	1,248,796		0.42	%	5,036		1,078,231		0.58	%	3,120
Savings deposits	440,508		0.19	%	903		420,469		0.29	%	596
Time deposits >$100,000	638,216		1.65	%	10,221		717,879		1.88	%	6,700
Other time deposits	246,807		0.74	%	1,372		262,854		0.66	%	857
Total interest-bearing deposits	3,510,119		0.56	%	18,498		3,379,760		0.71	%	11,901
Borrowings	302,566		1.62	%	7,092		365,143		2.81	%	5,086
Total interest-bearing liabilities	3,812,685		0.65	%	25,590		3,744,903		0.91	%	16,987

Noninterest bearing checking	1,716,212						1,377,370
Other liabilities	61,570						58,954
Shareholders’ equity	865,124						788,595
Total liabilities and shareholders’ equity	$	6,455,591					$	5,969,822

Net yield on interest-earning assets and net interest income			3.69	%	$	161,548			4.03	%	$	107,770
Net yield on interest-earning assets and net interest income – tax-equivalent (2)			3.71	%	$	162,808			4.06	%	$	108,617

Interest rate spread			3.46	%					3.75	%

Average prime rate			3.84	%					5.50	%

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

(2) Includes tax-equivalent adjustments of $664,000 and $847,000 in 2020 and 2019, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

Average loans outstanding for the ~~first~~second quarter of 2020 were ~~$4.513~~$4.739 billion, which was ~~$233~~$409 million, or ~~5.4%~~9.4%, higher than the average loans outstanding for the ~~first~~second quarter of 2019 ($~~4.280~~4.330 billion). Average loans for the six months ended June 30, 2020 were $4.626 billion, which was $321 million, or 7.5%, higher than the average loans outstanding for the comparable period of 2019 ($4.305 billion). The higher amount of average loans outstanding in 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. Also significantly impacting our growth in loans in 2020 was the origination of $245 million in PPP loans during the second quarter of 2020. Excluding PPP loan balances, average loans outstanding were approximately 5.3% higher for the both the three and six months ended June 30, 2020 compared to the prior respective periods.

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In late 2018 and early 2019, in order to reduce exposure to the possibility of lower interest rates, we invested a portion of our 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 ~~$183~~$117 million, or ~~28.0%~~17.1% when comparing the first ~~quarter~~six months of 2020 to the first ~~quarter~~six months of 2019.

~~The increases in loans and securities were partially funded from the banks overnight funds, which declined~~Average short-term investments, primarily interest-bearing cash, for the ~~periods~~second quarter of 2020 amounted to $575 million, which was $238 million, or 70.5%, higher than for the second quarter of 2019 ($337 million). Average short-term investments, primarily interest-bearing cash, outstanding increased $35 million, or 9.6%, when comparing the first six months of 2020 to the same period of 2019. Interest-bearing cash balances increased significantly in 2020 ~~compared~~due to ~~2019, as shown in the tables above. However the larger source of funding arose from~~high deposit growth ~~in our deposit balances,~~experienced, as discussed in the following paragraph.

Average total deposits outstanding for the ~~first~~second quarter of 2020 were ~~$4.950~~$5.502 billion, which was ~~$246~~$692 million, or ~~5.2%~~14.4%, higher than the average deposits outstanding for the ~~first~~second quarter of 2019 ($~~4.704~~4.810 billion). ~~We continue to implement strategies to grow~~Average total deposits ~~which we believe to be the principal reason~~outstanding for the ~~increases~~first six months of 2020 were $469 million, or 9.9%, higher than the comparable period of 2019. The majority of the growth has occurred in our ~~deposit balances. Average~~ transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) ~~increased~~. We believe the high deposit growth was due to a combination of factors including: 1) the deposit of PPP funds into customer checking accounts, 2) the government’s stimulus payments, 3) consumer savings habits, and 4) positive results from ~~$3.729 billion during~~our deposit account growth initiatives.

We utilized funds provided by our high deposit growth to pay down a substantial portion of our borrowings in 2020. Total borrowings at June 30, 2020 amounted to $112 million, a decline of $188 million, or 62.7% from December 31, 2019, while average borrowings decreased $34 million, or 10.5%, when comparing the second quarter of 2020 to the second quarter of 2019. Average borrowings decreased $63 million, or 17.1%, when comparing the first ~~three months of 2019 to $4.055 billion during the first three~~six months of 2020 ~~representing growth~~to the first six months of ~~$327 million, or 8.8%.~~2019.

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

Our net interest margin ~~(tax-equivalent~~(a non-GAAP measure calculated by dividing tax-equivalent net interest income ~~divided~~ by average earning assets) for the ~~first~~second quarter of 2020 was ~~3.96%~~3.49%, which was 1057 basis points lower than the 4.06% realized in the ~~first~~second quarter of 2019. For the six months ended June 30, 2020, our net interest margin was 3.71% compared to 4.06% for the same period in 2019. The lower ~~margin was~~margins were primarily due to the impact of lower interest ~~rates, which were partially offset by higher loan discount accretion.~~

We recorded loan discount accretion of $1.8 million in the first quarter of 2020, compared to $1.4 million in the first quarter of 2019. The higher loan discount accretion was attributable loan payoffs and higher accretion on SBA loans.rates.

As derived from the table above, in comparing 2020 to 2019, interest-earning asset yields decreased 2087 basis points in the ~~first~~second quarter of 2020 compared to the ~~first~~second quarter of 2019, while interest-bearing liability costs decreased by 12only 41 basis points over that same period. In comparing the year-to-date periods, interest-earning asset yields decreased 55 basis points, while interest-bearing liability costs decreased by only 26 basis points. Since August 2019, the Federal Reserve Board has decreased interest rates by 225 basis points, which resulted in significant declines in our asset yields. Most significantly, approximately one-third of our loan portfolio is comprised of adjustable rate loans, most of which repriced down following the interest rate cuts. We have been able to reduce our deposit costs, but not to the same level as the reduction experienced in our asset yields. Our net interest margin was also negatively impacted by high levels of overnight funds that resulted from the strong deposit growth during the second quarter of 2020.

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

We recorded loan discount accretion of $1.4 million in the second quarter of 2020, compared to $1.7 million in the second quarter of 2019. The lower loan discount accretion in 2020 was attributable to lower loan payoffs. For the six months ended June 30, 2020 and 2019, we recorded loan discount accretion of $3.2 million and $3.1 million, respectively. The higher loan discount accretion was attributable to higher accretion on SBA loans due to growth in that portfolio.

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

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We recorded a provision for loan losses of ~~$5.6~~$19.3 million in the ~~first~~second quarter of 2020 compared to a negative provision for loan losses (reduction of ~~$0.5~~the allowance for loan losses) of $0.3 million in the ~~first~~second quarter of 2019. ~~As previously discussed, our provision~~For the six months ended June 30, 2020 and 2019, we recorded provisions for loan losses of $24.9 million and $0.2 million, respectively. The increases in 2020 ~~reflects approximately $4.3 million in provision~~are primarily related to ~~COVID-19 and was based~~estimated probable losses arising from the economic impact of COVID-19. Since the onset of the pandemic in March 2020, we have worked with many of our borrowers, including the option of loan payment deferrals, with total loans on ~~the limited information available and the conditions that existed at March 31, 2020 related~~deferral status amounting to ~~COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses.~~

~~Nonperforming assets amounted to $38.3~~$774 million at ~~March 31,~~June 30, 2020, ~~compared to $37.8 million at December 31, 2019. Our nonperforming assets to total assets ratio was 0.60% at March 31, 2020 compared to 0.62% at December 31, 2019. The ratio~~or 16% of ~~annualized net charge-offs to average loans~~the loan portfolio. See the section entitled "Allowance for ~~the three months ended March 31, 2020 was 0.22%, compared to 0.04%~~Loan Losses and Provision for ~~the same period of 2019.~~Loan Losses" below for additional information.

Total noninterest income was ~~$13.7~~$26.2 million and ~~$14.1~~$15.6 million for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, total noninterest income was $39.9 million and $29.7 million, respectively.

Service charges on deposit accounts ~~increased from $2.9~~amounted to $2.3 million for the second quarter of 2020 compared to $3.2 million in the ~~first~~second quarter of ~~2019 to $3.3 million in~~2019. For the first ~~quarter~~six months of 2020 ~~an increase~~and 2019, service charges on deposit accounts amounted to $5.6 million and $6.2 million, respectively. The decreases are primarily due to fewer instances of overdraft fees that we believe is ~~due to promotion~~likely associated with the generally higher levels of ~~new deposit products.~~deposits maintained by our customers during 2020.

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

Fees from presold mortgages ~~increased significantly from $0.5~~amounted to $3.0 million for the second quarter of 2020 compared to $0.9 million in the ~~first~~second quarter of ~~2019 to $1.8 million in~~2019. For the first ~~quarter~~six months of ~~2020.~~2020 and 2019, fees from presold mortgages amounted to $4.9 million and $1.4 million, respectively. The ~~higher fees~~increases in 2020 are primarily due to ~~hiring additional originators, as well a increased volumes in the~~higher mortgage ~~industry due to declining~~loan origination volume arising from historically low mortgage loan 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 $2.1 million and ~~$2.0~~$2.2 million for the ~~first~~second quarters of 2020 and 2019, ~~respectively.~~respectively, and $4.2 million for both the six months ended June 30, 2020 and 2019.

~~Both SBA consulting fees and SBA loans sale gains were lower in 2020 compared to 2019.~~

For the ~~three months ended March 31,~~second quarters of 2020 and 2019, SBA consulting fees amounted to ~~$1.0~~$3.7 million ~~compared~~and $0.9 million, respectively. For the first six months of 2020 and 2019, SBA consulting fees amounted to ~~$1.3~~$4.8 million and $2.2 million, respectively. The increases in 2020 are due to fees earned in the second quarter by the Company's SBA subsidiary, SBA Complete, related to assisting its third-party client banks with the PPP, which amounted to approximately $3.0 million. Included in the $3.0 million of PPP fees are $0.5 million in servicing fees related to those loans. Based on June 30, 2020 balances, PPP servicing fees are estimated at $230,000 per month, which will be reduced upon the ~~first~~payback and/or forgiveness of the PPP loans. In addition to the PPP fees recorded in the second quarter of ~~2019. As it relates to~~ 2020, SBA Complete deferred $1.6 million of revenue that will be recorded as income upon the forgiveness portion of the PPP loans.

SBA loan sale gains ~~we recorded $0.6~~amounted to $2.0 million and $2.6 million for the ~~first~~three and six months ended June 30, 2020, respectively, compared to $3.1 million and $5.1 million for the three and six months ended June 30, 2019, respectively. Origination of SBA loans have generally declined due to the economic impact of COVID-19.

During the second quarter of 2020, ~~compared~~we sold approximately $220 million in mortgage-backed and commercial mortgage-backed securities at a gain of $8.0 million. The securities sold were believed to ~~$2.1 million for~~be favorably impacted by historically low interest rates and Federal Reserve stimulus measures. No securities gains were recorded in the first ~~quarter~~half of 2019. The declines in both of these SBA items was due to lower origination activity. Additionally, we had $18.4 million in SBA loans that we intended to sell in March 2020, but the sales scheduled to occur in late March did not occur due to market conditions. Accordingly, we reflect those loans as "held for sale" in our Consolidated Balance Sheets.

Noninterest expenses amounted to ~~$40.1~~$38.9 million in the ~~first~~second quarter of 2020 ~~a 3.4% increase from the $38.8~~compared to $40.1 million recorded in the ~~first~~second quarter of 2019, a decrease of 3.0%. For the six months ended June 30, 2020, noninterest expenses amounted to $79.0 million, an increase of 0.2% from the $78.9 million recorded in the comparable period of 2019. Noninterest expenses in 2020 were impacted by generally lower economic activity resulting from the pandemic.

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Personnel ~~expense~~expense increased ~~4.7%~~1.3% to ~~$24.7~~$24.5 million in the ~~first~~second quarter of 2020 from ~~$23.6~~$24.2 million in the ~~first~~second quarter of 2019. For the six months ended June 30, 2020 and 2019, personnel expense amounted to $49.1 million and $47.7 million, an increase of 2.9%. The increase in 2020 was primarily due to an increase in commissions earned by the Company's ~~growth initiatives.~~mortgage loan originators that is associated with the high volume of originations in 2020. In the second quarter of 2020, the Company deferred approximately $500,000 in personnel costs associated with PPP loan originations (FAS 91).

The combined amount of occupancy and equipment expense did not vary significantly among the periods presented, amounting ~~$4.1~~to $3.7 million and $3.9 million for ~~both~~ three month ~~periods.~~periods ending June 30, 2020 and 2019, respectively, and $7.8 million and $8.0 million for the six month periods ending June 30, 2020 and 2019, respectively.

Intangibles amortization expense decreased from ~~$1.3~~$1.2 million in the second quarter of 2019 to $1.0 million in the second quarter of 2020, and decreased from $2.6 million in the first ~~quarter~~six months of 2019 to ~~$1.1~~$2.0 million in the first ~~quarter~~six months of 2020. The ~~decline was~~declines were primarily a result of the amortization of intangible assets associated with acquisitions that typically have amortization schedules that decline over time.

Foreclosed property losses decreased among the 2020 periods presented due primarily to lower levels of foreclosed properties that the Bank holds.

Other operating expenses amounted to ~~$10.1~~$9.7 million for the ~~first~~second quarter of 2020 compared to ~~$9.4~~$10.3 million in the ~~first~~second quarter of 2019, ~~an increase~~a decrease of ~~7.3%~~5.9%. The ~~increase~~decrease was primarily a result of a general decline in various activity-based expenses due to ~~increased software~~the pandemic. For the six months ended June 30, 2020 and ~~supplies costs in 2020.~~2019, other operating expenses did not vary significantly, amounting to $19.8 million and $19.7 million, respectively.

For the three months ended ~~March 31,~~June 30, 2020 and 2019, the provision for income taxes was ~~$4.6~~$4.3 million, an effective tax rate of ~~20.3%~~20.7%, and ~~$5.9~~$6.4 million, an effective tax rate of ~~20.9%~~21.2%, respectively. For the six months ended June 30, 2020 and 2019, the provision for income taxes was $8.9 million, an effective tax rate of 20.5%, and $12.3 million, an effective tax rate of 21.0%, respectively.

The consolidated statements of comprehensive income reflect other comprehensive ~~income~~loss of ~~$16.1~~$3.9 million during the ~~first~~second quarter of 2020 compared to other comprehensive income of ~~$4.7~~$9.2 million during the ~~first~~second quarter of 2019. For the first six months of 2020 and 2019, the consolidated statements of comprehensive income reflect other comprehensive income of $12.2 million and $13.8 million, respectively. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains of our available for sale securities resulting from declines in interest rates. The other comprehensive loss in the second quarter of 2020 was due to the realization of $8.0 million ($6.2 million, net of taxes) in gains from sales of approximately $220 million of available for sale securities, which offset $2.8 million ($2.1 million, net of taxes) of unrealized holding gains. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.

FINANCIAL CONDITION

Total assets at ~~March 31,~~June 30, 2020 amounted to ~~$6.4~~$6.9 billion, a ~~3.8%~~12.1% increase from December 31, 2019. Total loans at ~~March 31,~~June 30, 2020 amounted to ~~$4.6~~$4.8 billion, a ~~2.2%~~7.1% increase from December 31, 2019, and total deposits amounted to ~~$5.0~~$5.8 billion, ~~a 2.3%~~an 18.2% increase from December 31, 2019.

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

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$ 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
January 1, 2020 to June 30, 2020								Balance at beginning of period		Internal Growth, net		Balance at end of period	Total percentage growth
Total loans	$	4,453,466	99,242		4,552,708	2.2	%	$	4,453,466	316,597		4,770,063	7.1	%

Deposits – Noninterest bearing checking	1,515,977		64,872		1,580,849	4.3	%	1,515,977		525,801		2,041,778	34.7	%
Deposits – Interest bearing checking	912,784		10,201		922,985	1.1	%	912,784		199,841		1,112,625	21.9	%
Deposits – Money market	1,173,107		51,307		1,224,414	4.4	%	1,173,107		179,946		1,353,053	15.3	%
Deposits – Savings	424,415		6,962		431,377	1.6	%	424,415		50,040		474,455	11.8	%
Deposits – Brokered	86,141		(499	)	85,642	(0.6	)%	86,141		(22,072	)	64,069	(25.6	)%
Deposits – Internet time	698		—		698	—	%	698		—		698	—	%
Deposits – Time>$100,000	563,108		(9,686	)	553,422	(1.7	)%	563,108		(17,738	)	545,370	(3.2	)%
Deposits – Time<$100,000	255,125		(9,524	)	245,601	(3.7	)%	255,125		(16,035	)	239,090	(6.3	)%
Total deposits	$	4,931,355	113,633		5,044,988	2.3	%	$	4,931,355	899,783		5,831,138	18.2	%

As derived from the table above, for the first ~~three~~six months of 2020, loan growth was ~~$99.2~~$316.6 million, or ~~2.2% (9.0% on an annualized basis)~~7.1%. Loan growth for the period was primarily driven by the origination of $244.9 million in PPP loans. Loan growth for the period, excluding PPP loans, was $71.7 million, or 3.2% annualized. Loan growth was organic and driven by our continued expansion into high-growth markets, our hiring of experienced bankers and our emphasis on SBA lending. WeExclusive of PPP balances, we expect ~~continued~~ growth in our loan portfolio for the remainder of ~~2020. In April and early May~~ 2020, however likely at lower levels than we would normally expect as a result of the ~~Company approved approximately $249.5 million in PPP loans under~~impact of the ~~allocation approved by Congress.~~pandemic.

The mix of our loan portfolio remains substantially the same at ~~March 31,~~June 30, 2020 compared to December 31, ~~2019.~~2019, with PPP loans increasing the percentage of commercial and industrial loans at June 30, 2020 - see note 4 to the consolidated financial statements for additional information. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Note 7 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

For the ~~three~~six month period ended ~~March 31,~~June 30, 2020, we experienced strong internal growth in our core deposit accounts (checking, money market and savings). In addition to deposits arising from PPP loans, this high deposit growth is believed to be due to a combination of stimulus funds and changes in customer behaviors during the pandemic, as well as our ongoing deposit growth initiatives. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.

Our liquidity levels have increased over the past year. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 21.4% at December 31, 2019 to ~~22.8%~~26.2% at ~~March 31,~~June 30, 2020.

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Nonperforming Assets

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

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ASSET QUALITY DATA ($ in thousands)	As of/for the quarter ended March 31, 2020			As of/for the quarter ended December 31, 2019		As of/for the quarter ended June 30, 2020			As of/for the quarter ended December 31, 2019
Nonperforming assets
Nonaccrual loans	$	25,066		24,866		$	34,922		24,866
Restructured loans – accruing	9,747			9,053		9,867			9,053
Accruing loans >90 days past due	—			—		—			—
Total nonperforming loans	34,813			33,919		44,789			33,919
Foreclosed real estate	3,487			3,873		2,987			3,873
Total nonperforming assets	$	38,300		37,792		$	47,776		37,792

Purchased credit impaired loans not included above (1)	$	9,839		12,664		$	9,742		12,664

Asset Quality Ratios – All Assets
Net charge-offs to average loans - annualized	0.22		%	0.09	%	0.12		%	0.09	%
Nonperforming loans to total loans	0.76		%	0.76	%	0.94		%	0.76	%
Nonperforming assets to total assets	0.60		%	0.62	%	0.69		%	0.62	%
Allowance for loan losses to total loans	0.54		%	0.48	%	0.89		%	0.48	%
Allowance for loan losses to nonperforming loans	70.37		%	63.09	%	94.54		%	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 ~~$0.7~~$0.8 million and $0.8 million in PCI loans at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively, that were contractually past due 90 days or more.

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

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

~~As noted in the table above, at March 31,~~At June 30, 2020, total nonaccrual loans amounted to ~~$25.1~~$34.9 million, compared to $24.9 million at December 31, 2019. ~~The~~As noted above, the increase was primarily driven by four loans. One of those four loans, with a balance of approximately $4 million, has a 75% SBA ~~loans that were placed on nonaccrual status in 2020.~~guarantee.

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 ~~March 31,~~June 30, 2020, total accruing TDRs amounted to ~~$9.7~~$9.9 million, compared to $9.1 million at December 31, 2019. As previously discussed, COVID-19 related deferrals, which amounted to ~~$120~~$774 million at ~~March 31,~~June 30, 2020 are excluded from TDR consideration at ~~March 31,~~June 30, 2020.

Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to ~~$3.5~~$3.0 million at ~~March 31,~~June 30, 2020 and $3.9 million at December 31, 2019. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and ~~the improvement in our~~favorable 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.


($ in thousands)	At March 31, 2020		At December 31, 2019	At June 30, 2020		At December 31, 2019
Commercial, financial, and agricultural	$	3,703	5,518	$	8,239	5,518
Real estate – construction, land development, and other land loans	958		1,067	1,038		1,067
Real estate – mortgage – residential (1-4 family) first mortgages	8,581		7,552	7,327		7,552
Real estate – mortgage – home equity loans/lines of credit	1,874		1,797	1,903		1,797
Real estate – mortgage – commercial and other	9,837		8,820	16,229		8,820
Consumer loans	113		112	186		112
Total nonaccrual loans	$	25,066	24,866	$	34,922	24,866

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


($ in thousands)	At March 31, 2020		At December 31, 2019	At June 30, 2020		At December 31, 2019
Vacant land and farmland	$	1,707	1,752	$	1,536	1,752
1-4 family residential properties	876		974	565		974
Commercial real estate	904		1,147	886		1,147
Total foreclosed real estate	$	3,487	3,873	$	2,987	3,873

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


	As of March 31, 2020							As of June 30, 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)	$	5,457	1,013,000	0.54	%	$	517	$	5,516	1,013,830	0.54	%	$	517
Triangle Region (NC)	7,004		978,000	0.72	%	1,049		6,637		990,905	0.67	%	782
Triad Region (NC)	6,058		891,000	0.68	%	229		9,520		868,933	1.10	%	111
Charlotte Region (NC)	1,750		359,000	0.49	%	—		1,854		366,518	0.51	%	—
Southern Piedmont Region (NC)	3,272		275,000	1.19	%	201		3,282		269,430	1.22	%	200
Western Region (NC)	1,039		660,000	0.16	%	411		3,345		641,741	0.52	%	410
South Carolina Region	964		189,000	0.51	%	459		1,318		190,150	0.69	%	424
Former Virginia Region	83		1,000	8.30	%	351		82		527	15.56	%	273
Other	9,186		187,000	4.91	%	270		13,235		428,029	3.09	%	270
Total	$	34,813	4,553,000	0.76	%	$	3,487	$	44,789	4,770,063	0.94	%	$	2,987


(1)	The counties comprising each region are as follows:

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

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

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

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

Southern Piedmont North Carolina Region - 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~~Allowance for Loan ~~Loss Experience~~Losses and Provision for Loan Losses

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developing a reliable forecast of losses that may result from the unprecedented COVID-19 pandemic. Accordingly, the Company's provision for loan losses for the first ~~quarter~~six months of 2020 is based on the ~~limited~~ information available and the conditions that existed at ~~March 31,~~June 30, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses. See further discussion below.

The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses” for the period in which the charge is taken). Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. 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.

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($ in thousands)	Three Months Ended March 31, 2020			Twelve Months Ended December 31, 2019		Three Months Ended March 31, 2019		Six Months Ended June 30, 2020			Twelve Months Ended December 31, 2019		Six Months Ended June 30, 2019
Loans outstanding at end of period	$	4,552,708		4,453,466		4,303,787		$	4,770,063		4,453,466		4,339,467
Average amount of loans outstanding	$	4,512,893		4,346,331		4,280,272		$	4,625,798		4,346,331		4,305,069

Allowance for loan losses, at beginning of year	$	21,398		21,039		21,039		$	21,398		21,039		21,039
Provision for loan losses	5,590			2,263		500		24,888			2,263		192
	26,988			23,302		21,539		46,286			23,302		21,231

Loans charged off:
Commercial, financial, and agricultural	(2,460		)	(2,473	)	(246	)	(3,931		)	(2,473	)	(936	)
Real estate – construction, land development & other land loans	(40		)	(553	)	(264	)	(45		)	(553	)	(293	)
Real estate – mortgage – residential (1-4 family) first mortgages	(195		)	(657	)	(30	)	(474		)	(657	)	(185	)
Real estate – mortgage – home equity loans / lines of credit	(68		)	(307	)	(80	)	(381		)	(307	)	(146	)
Real estate – mortgage – commercial and other	(263		)	(1,556	)	(836	)	(545		)	(1,556	)	(838	)
Consumer loans	(287		)	(757	)	(281	)	(397		)	(757	)	(436	)
Total charge-offs	(3,313		)	(6,303	)	(1,737	)	(5,773		)	(6,303	)	(2,834	)
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural	217			980		414		477			980		605
Real estate – construction, land development & other land loans	290			1,275		287		643			1,275		489
Real estate – mortgage – residential (1-4 family) first mortgages	91			705		160		315			705		382
Real estate – mortgage – home equity loans / lines of credit	83			629		128		166			629		455
Real estate – mortgage – commercial and other	47			575		271		102			575		374
Consumer loans	95			235		33		126			235		87
Total recoveries	823			4,399		1,293		1,829			4,399		2,392
Net (charge-offs) recoveries	(2,490		)	(1,904	)	(444	)	(3,944		)	(1,904	)	(442	)
Allowance for loan losses, at end of period	$	24,498		21,398		21,095		$	42,342		21,398		20,789

Ratios:
Net charge-offs (recoveries) as a percent of average loans (annualized)	0.22		%	0.09	%	0.04	%	0.17		%	0.09	%	0.02	%
Allowance for loan losses as a percent of loans at end of period	0.54		%	0.48	%	0.49	%	0.89		%	0.48	%	0.48	%

We recorded a provision for loan losses of ~~$5.6~~$19.3 million in the ~~first three months~~second quarter of 2020 compared to a negative provision for loan losses (reduction of ~~$0.5~~the allowance for loan losses) of $0.3 million in the ~~first three months~~second quarter of 2019. ~~The increase was primarily due to a provision~~For the six months ended June 30, 2020 and 2019, we recorded related to the economic impacts of the COVID-19 pandemic, as discussed 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, 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 allowanceprovisions for loan losses ~~that is necessary. Thus, older years (and parts thereof) systematically age out~~of $24.9 million and $0.2 million, respectively. The increases in 2020 are ~~excluded~~primarily related to estimated probable losses arising from the ~~analysis~~economic impact of COVID-19, as time goes on. In recent years, the new periods have had generally lower net charge-offs (and net recoveries in some periods) than the older periods rolling out of the 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 generally lower provisions for loan losses.discussed below.

In March 2020, the COVID-19 pandemic began to impact our nation. The subsequent closures of many businesses and job losses are leading to widespread negative economic impacts. The U.S. Government has taken steps to lessen the negative impacts. In determining the appropriate level of allowance for loan losses at June 30, 2020, we reviewed industry types and deferral percentages within our loan portfolio in light of the pandemic. Based on that analysis, we assigned loan loss reserves for certain of those loan types that were consistent with probable loss rates incurred in a stressed economic scenario. The Company also recorded supplemental qualitative reserves for all other loans in deferral status. As a result the analysis, approximately $16.7 million of COVID-19 related ~~provision,~~qualitative reserves are included in the Company's June 30, 2020 allowance for loan loss amount of $42.3 million at June 30, 2020.

As of June 30, 2020, we ~~reviewed current data related to~~have granted approximately $774 million in loan deferrals under the CARES act provisions, as detailed below.

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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.



COVID-19 Loan Deferral Information at June 30, 2020
	Deferrals		Total Loans	Percentage Deferred
Construction Loans	$	38,658	648,590	6	%
Farmland and Agriculture	1,432		36,361	3.9	%
Home equity loans	2,511		318,618	0.8	%
Residential first lien loans	85,536		1,072,945	8	%
Multifamily loans	31,220		182,255	17.1	%
Owner-Occupied Commercial Real Estate	186,098		742,204	25.1	%
Non-Owner-Occupied Commercial Real Estate	369,112		999,679	36.9	%
Commercial & Industrial Loans	57,735		552,881	10.4	%
Loans to Municipalities	—		147,187	—	%
Consumer Loans	1,241		51,161	2.4	%
Other Loans	678		18,182	3.7	%
	$	774,221	4,770,063	16.2	%

The ratio of our allowance to total loans was ~~0.54%~~0.89% and 0.48% at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. The increase in this ratio was a result of the factors discussed above that impacted our increased level of provision for loan losses in 2020.

Our ratio of allowance to total loans is significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank in 2017, which had over $1 billion in total loans. Applicable accounting guidance 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 ~~$11.5~~$10.6 million and $12.7 million at ~~March 31,~~June 30, 2020 and December 31, 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 ~~March 31,~~June 30, 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, 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~~account balances leading to higher cash levels.

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In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately ~~$1.023~~$1.095 billion line of credit with the FHLB (of which ~~$348~~$58 million and $247 million were outstanding at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively), 2) a $35 million federal funds line with a correspondent bank (of which none was outstanding at ~~March 31,~~June 30, 2020 or December 31, 2019), and 3) an approximately ~~$123~~$121 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at ~~March 31,~~June 30, 2020 or December 31, 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 ~~March 31,~~June 30, 2020 and December 31, 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 ~~$814 million~~$1.0 billion at ~~March 31,~~June 30, 2020 compared to ~~$744~~$775 million at December 31, 2019.

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Our overall liquidity has increased since December 31, 2019 due primarily to the strong deposit growth which has exceeded loan growth. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 21.4% at December 31, 2019 to ~~22.8%~~26.2% at ~~March 31,~~June 30, 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, 2019, detail of which is presented in Table 18 on page 66 of our 2019 Annual Report on Form 10-K.

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

Off-Balance Sheet Arrangements and Derivative Financial Instruments

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

Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through ~~March 31,~~June 30, 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 (“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.

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 qualifying depository 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 and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules. March 31, 2020 was the earliest date that the Company could have elected to

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adopt the Community Bank Leverage Ratio. However, the Company did not opt-in to that alternative framework and instead continues to use the Basel III standards.

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

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

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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 FRB and FDIC regulations.

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

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

At ~~March 31,~~June 30, 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.


	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Risk-based capital ratios:
Common equity Tier 1 to Tier 1 risk weighted assets	12.86	%	13.28	%	13.10	%	13.28	%
Minimum required Common equity Tier 1 capital	7.00	%	7.00	%	7.00	%	7.00	%

Tier I capital to Tier 1 risk weighted assets	13.98	%	14.41	%	14.21	%	14.41	%
Minimum required Tier 1 capital	8.50	%	8.50	%	8.50	%	8.50	%

Total risk-based capital to Tier II risk weighted assets	14.51	%	14.89	%	15.13	%	14.89	%
Minimum required total risk-based capital	10.50	%	10.50	%	10.50	%	10.50	%

Leverage capital ratios:
Tier 1 capital to quarterly average total assets	11.05	%	11.19	%	10.29	%	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 ~~March 31,~~June 30, 2020, First Bank significantly exceeded the minimum ratios established by the regulatory authorities. The ~~decrease~~90 basis point reduction in ~~capital ratios from December 31, 2019 to March 31, 2020~~our leverage ratio reflected in the table below was ~~primarily~~ due to the ~~Company's stock repurchases of approximately $20 million during 2020 and strong~~significant balance sheet ~~growth.~~growth experienced in 2020, resulting primarily from a strong increase in deposits.

BUSINESS DEVELOPMENT AND OTHER SHAREHOLDER MATTERS

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

On ~~March 13,~~July 1, 2020, the Company reported that Forbes had recognized First Bank as one of America's best banks in its 2020 Best-in-State Banks list for the second year in a row. This year, First Bank was ranked the number one bank in North Carolina, based on an independent survey of more than 25,000 U.S. consumers regarding their overall satisfaction in five service areas.

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On June 12, 2020, the Company announced a quarterly cash dividend of $0.18 per share payable on ~~April~~July 24, 2020 to shareholders of record on ~~March 31,~~June 30, 2020. This dividend rate represents a 50% increase over the dividend rate declared in the ~~first~~second quarter of 2019.

SHARE REPURCHASES

WeFor the three months ended June 30, 2020, we repurchased ~~576,406~~104,289 shares of our common stock ~~during the first three months of 2020~~ at an average price of ~~$34.70~~$23.32 per share, which totaled ~~$20.0~~$2.4 million. For the six months ended June 30, 2020, we repurchased 680,695 shares of our common stock at an average price of $32.96 per share, which totaled $22.4 million. At ~~March 31,~~June 30, 2020, we had authority from our Board of Directors to repurchase up to an additional ~~$20~~$17.6 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 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 4.00% (realized in 2019) to a high of 4.13% (realized in 2015). As discussed below, we experienced a significant decline in our net interest margin in the second quarter of 2020. The historical consistency of the net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At ~~March 31,~~June 30, 2020, approximately 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.

Using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call), at ~~March 31,~~June 30, 2020, we had ~~$1.8~~$1.6 billion more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only measures the magnitude of the timing differences and does not address earnings, market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of “when” various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities subject to interest rate changes within one year at ~~March 31,~~June 30, 2020 are deposits totaling ~~$2.6~~$2.9 billion comprised of checking, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced with, or in the same proportion, as general market indicators.

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

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longer horizon, the impact of having a higher level of interest-sensitive liabilities generally lessens the short-term effects of changes in interest rates.

The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-term interest rates are substantially the same as long-term interest rates. Due to actions taken by the Federal Reserve related to short-term interest rates and the impact of the global economy on longer-term interest rates, we are currently in a very low and flat interest rate curve environment. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the Bank, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge, the profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin.

While there have been periods in the last few years that the yield curve has steepened slightly, it currently remains ~~flat, with some points of inversion along the curve from time to time.~~very flat. This ~~flat/inverted~~flat yield curve and the intense competition for high-quality loans in our market areas have ~~limited our ability to charge higher~~resulted in lower interest rates on ~~loans, and thus we continue to experience challenges in increasing our loan yields and net interest margin.~~

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loans.

In an effort to address concerns about the national and global economy the Federal Reserve cut interest rates by 75 basis points in the second half of 2019. And in March 2020, the Federal Reserve cut interest rates by an additional 150 basis points in response to the COVID-19 pandemic. Our interest-bearing cash balances and most of our variable rate loans, which comprise approximately one-third of our loan portfolio, generally reset to lower rates soon after interest rate cuts. As the March 2020 interest rate cuts 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 most deposit products insince March 2020 and our borrowing costs ~~are~~have also ~~trending~~been lowered by lower ~~due to~~rates and repaying a significant portion of our outstanding borrowings. Overall however, the interest rate ~~cuts. However,~~cuts negatively impacted our earnings, with loan yields declining from 4.93% in the first quarter of 2020 to 4.41% in the second quarter of 2020, a decline of 52 basis points, while the cost of interest-bearing liability only declined by 26 basis points, from 0.78% in the first quarter of 2020 to 0.52% in the second quarter of 2020. The larger decline in loan yields, as well as the high level of cash balances we ~~believe that our lower funding costs will only partially offset~~held during the ~~declines we expect~~quarter arising from the strong deposit growth, resulted in ~~asset yields. Accordingly, we expect that~~a decline in our net interest margin ~~will decline moderately~~for the second quarter of 2020 to 3.49% compared to 3.94% in the ~~remainder~~first quarter of 2020. While the effects of the March 2020 interest rate cuts fully impacted our second quarter net interest margin, we expect continued pressure on our net interest margin (excluding the impact of PPP - see below) as a result of pricing pressures on maturing loans and investments. However we expect any downward pressure on the net interest margin will be less than that experienced in the second quarter of 2020.

In April and early May 2020, we approved approximately ~~$249.5~~$245 million in PPP loans. These loans all have an interest rate of 1.00%. In addition to the interest rate, the SBA ~~is compensating~~compensated us with an origination fee for each loan of between 1% to 5% of the loan amount, depending on the size of each loan. ~~The Company expects to receive~~We received approximately $10.6 million in these fees related to ~~the PPP~~these loans, ~~that have been approved,~~ which ~~will be~~were netted against the cost to originate each loan of approximately $0.5 million and ~~will~~are initially bebeing amortized over the two year maturities of the ~~loans.~~loans using the effective interest method of recognition. Early repayments, including the loan forgiveness provisions contained in the PPP, will result in accelerated amortization. In the second quarter of 2020, we amortized $1.3 million of the PPP loan fees. Remaining deferred fees at June 30, 2020 amounted to $8.8 million. Because of the uncertainties associated with the timing of PPP repayments, the anticipated impact of these loans has not been incorporated into the discussion above.

As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by certain purchase accounting adjustments related to the acquired banks. The purchase accounting adjustments related to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the loan discount on acquired loans amounted to ~~$1.2~~$1.4 million and ~~$1.1~~$1.7 million for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively, and $3.1 million and $3.2 million for the six months ended June 30, 2020 and 2019, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that 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 ~~$10.3~~$10.6 million at ~~March 31,~~June 30, 2020 compared to $12.7 million at December 31, 2019.

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

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

Item 4 – Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports with the 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, 2019, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Forward-Looking Statements” set forth in the forepart of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q and in our other filings with the SEC. There are no material changes from the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, except as described below.

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

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

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

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

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

The majority of state and local jurisdictions have imposed, and others in the future may impose, variations of “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. In late March and early April 2020, the ~~governors~~Governors of North Carolina and South Carolina, respectively, signed stay-at-home orders with only certain exceptions for essential activities and prohibited gatherings of more than 10 people. Theses orders have had a negative impact on our local and national economies and are expected to continue to negatively impact these economies and our financial results. On May 1, 2020, the Governor of South Carolina ended the state's stay-at-home order effective May 4, 2020, but provided restrictions on the operating activities of certain businesses. In light of the spread of COVID-19 in May and June, the Governor of South Carolina increased various restrictions again on July 11, 2020. The State of North Carolina’s stay-at-home order was set to expire on April 30, 2020. The Governor of North Carolina extended the stay-at-home order through May 8, 2020. On May 5,22, 2020, the Governor of North Carolina ~~extended~~executed the ~~stay-at-home~~"safer-at-home" order, ~~through May 22, 2020, but~~which increased the number of reasons people are allowed to leave and allows most retail businesses that can comply with specific requirements to open at 50 percent capacity. North Carolina is still under the "safer-at-home" order until at least August 7, 2020.

The COVID-19 pandemic and the institution of social distancing and ~~sheltering in place~~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~~has influenced and may continue to influence the recognition of credit losses in our loan

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

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

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

													Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased (2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (1)		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)
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
April 1, 2020 to April 30, 2020							—	$	—	—	$	20,000,000
May 1, 2020 to May 31, 2020							—	—		—	$	20,000,000
June 1, 2020 to June 30, 2020							104,289	23.32		104,289	$	17,567,520
Total	576,406	34.70		576,406	$	20,000,000	104,289	23.32		104,289	$	17,567,520

Footnotes to the Above Table

(1)

All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. As of ~~March 31,~~June 30, 2020, the Company had the remaining authorization to repurchase up to ~~$20~~$17.6 million of the Company's stock, which was authorized and announced on November 19, 2019. The repurchase authorization has an expiration date of December 31, 2020. ~~Given the COVID-19 outbreak and its effects on the markets, share repurchases have been suspended.~~

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(2)	The table above does not include shares that were used by option holders to satisfy the exercise price of the options issued by the Company to its employees and directors pursuant to the Company’s stock option plans. There were no such transactions during the three months ended ~~March 31,~~June 30, 2020.

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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~~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 ~~March 31,~~June 30, 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

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SIGNATURES

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



	FIRST BANCORP

~~May 8,~~August 10, 2020	BY:/s/ Richard H. Moore
	Richard H. Moore Chief Executive Officer (Principal Executive Officer), and Director


~~May 8,~~August 10, 2020	BY:/s/ Eric P. Credle
	Eric P. Credle Executive Vice President and Chief Financial Officer

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($ in thousands)
April 1 to December 31, 2020	$	1,853
2021	2,257
2022	1,898
2023	1,776
2024	1,574
Thereafter	19,564
Total undiscounted lease payments	28,922
Less effect of discounting	(9,344		)
Present value of estimated lease payments (lease liability)	$	19,578