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,September 30, 2019

Commission File Number 0-15572

FIRST BANCORP

(Exact Name of Registrant as Specified in its Charter)

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered:
Common Stock, No Par ValueFBNCThe Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.xYESoNO

☒Yes☐ No

Indicate by check mark whether the registrant has submitted electronically 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).xYESoNO

☒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)

xLarge Accelerated FileroAccelerated Filer
oNon-Accelerated FileroSmaller Reporting Company
 oLarge Accelerated Filer☒Accelerated Filer☐
Non-Accelerated Filer☐Smaller Reporting Company☐
Emerging growth company☐

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

☐

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

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

Title of each classTrading SymbolName of each exchange on which registered:
Common Stock, No Par ValueFBNCThe Nasdaq Global Select Market

☐ Yes ☒ No

The number of shares of the registrant's Common Stock outstanding on April 30,October 31, 2019 was 29,746,455.

29,604,830.



INDEX

FIRST BANCORP AND SUBSIDIARIES

 Page
  
Part I.  Financial Information
 
  
Item 1 - Financial Statements
 
Consolidated Balance Sheets - March 31,September 30, 2019 and MarchDecember 31, 2018 (With Comparative Amounts at December 31, 2018)
4
Consolidated Statements of Income - For the PeriodsThree and Nine Months Ended March 31,September 30, 2019 and 2018
5
Consolidated Statements of Comprehensive Income - For the PeriodsThree and Nine Months Ended March 31,September 30, 2019 and 2018
6
Consolidated Statements of Shareholders’ Equity - For the PeriodsThree and Nine Months Ended March 31,September 30, 2019 and 2018
7
Consolidated Statements of Cash Flows - For the PeriodsNine Months Ended March 31,September 30, 2019 and 2018
8
9
Notes to Consolidated Financial Statements
9
10
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition
33
39
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
47
56
Item 4 – Controls and Procedures
58
  
Item 4 – Controls and Procedures
49
Part II.  Other Information 
  
Item 1 – Legal Proceedings
49
58
Item 1A – Risk Factors
49
58
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
50
58
Item 6 – Exhibits
50
60
Signatures
Signatures61
52



Page 2

Index


FORWARD-LOOKING STATEMENTS

Part I of this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Further, forward-looking statements are intended to speak only as of the date made. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning our opinions or judgment about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 2018 Annual Report on Form 10-K.



Page 3

Index


Part I. Financial Information

Item 1 - Financial Statements


First Bancorp and Subsidiaries

Consolidated Balance Sheets

($ in thousands) March 31,
2019 (unaudited)		  December 31,
2018		  March 31,
2018 (unaudited)		 
ASSETS            
Cash and due from banks, noninterest-bearing $80,620   56,050   78,217 
Due from banks, interest-bearing  366,187   406,848   448,515 
     Total cash and cash equivalents  446,807   462,898   526,732 
             
Securities available for sale  639,609   501,351   341,001 
Securities held to maturity (fair values of $90,280, $99,906, and $111,201)  90,903   101,237   112,058 
             
Presold mortgages in process of settlement  3,318   4,279   6,029 
             
Loans  4,303,787   4,249,064   4,113,785 
Allowance for loan losses  (21,095)  (21,039)  (23,298)
   Net loans  4,282,692   4,228,025   4,090,487 
             
Premises and equipment  137,725   119,000   115,542 
Accrued interest receivable  16,516   16,004   13,270 
Goodwill  234,368   234,368   231,681 
Other intangible assets  20,081   21,112   24,079 
Foreclosed real estate  6,390   7,440   11,307 
Bank-owned life insurance  102,524   101,878   99,786 
Other assets  69,315   66,524   69,555 
        Total assets $6,050,248   5,864,116   5,641,527 
             
LIABILITIES            
Deposits:   Noninterest bearing checking accounts $1,390,516   1,320,131   1,227,608 
Interest bearing checking accounts  922,254   916,374   896,189 
Money market accounts  1,079,002   1,035,523   1,035,261 
Savings accounts  417,812   432,389   445,405 
Time deposits of $100,000 or more  726,192   690,922   606,313 
Other time deposits  261,462   264,000   284,932 
     Total deposits  4,797,238   4,659,339   4,495,708 
Borrowings  406,125   406,609   407,059 
Accrued interest payable  2,341   1,976   1,306 
Other liabilities  56,405   31,962   31,804 
     Total liabilities  5,262,109   5,099,886   4,935,877 
             
Commitments and contingencies            
             
SHAREHOLDERS’ EQUITY            
Preferred stock, no par value per share.  Authorized: 5,000,000 shares            
     Issued & outstanding:  none, none, and none  —   —   — 
Common stock, no par value per share.  Authorized: 40,000,000 shares            
     Issued & outstanding:  29,746,455, 29,724,874, and 29,660,990 shares  434,948   434,453   433,305 
Retained earnings  360,455   341,738   282,038 
Stock in rabbi trust assumed in acquisition  (3,245)  (3,235)  (3,588)
Rabbi trust obligation  3,245   3,235   3,588 
Accumulated other comprehensive income (loss)  (7,264)  (11,961)  (9,693)
     Total shareholders’ equity  788,139   764,230   705,650 
          Total liabilities and shareholders’ equity $6,050,248   5,864,116   5,641,527 

($ in thousands)September 30,
2019 (unaudited)		 December 31,
2018
ASSETS 
  
Cash and due from banks, noninterest-bearing$52,621
 56,050
Due from banks, interest-bearing264,840
 406,848
Total cash and cash equivalents317,461
 462,898
    
Securities available for sale705,224
 501,351
Securities held to maturity (fair values of $74,465 and $99,906)74,265
 101,237
    
Presold mortgages in process of settlement16,269
 4,279
    
Loans4,396,544
 4,249,064
Allowance for loan losses(19,260) (21,039)
Net loans4,377,284
 4,228,025
    
Premises and equipment136,668
 119,000
Accrued interest receivable16,297
 16,004
Goodwill234,368
 234,368
Other intangible assets18,456
 21,112
Foreclosed properties4,589
 7,440
Bank-owned life insurance103,806
 101,878
Other assets64,224
 66,524
Total assets$6,068,911
 5,864,116
    
LIABILITIES   
Deposits:      Noninterest bearing checking accounts$1,491,494
 1,320,131
Interest bearing checking accounts894,777
 916,374
Money market accounts1,124,614
 1,035,523
Savings accounts418,043
 432,389
Time deposits of $100,000 or more686,554
 690,922
Other time deposits259,900
 264,000
Total deposits4,875,382
 4,659,339
Borrowings300,656
 406,609
Accrued interest payable2,169
 1,976
Other liabilities55,722
 31,962
Total liabilities5,233,929
 5,099,886
    
Commitments and contingencies


 


    
SHAREHOLDERS’ EQUITY   
Preferred stock, no par value per share.  Authorized: 5,000,000 shares   
Issued & outstanding:  none and none—
 —
Common stock, no par value per share.  Authorized: 40,000,000 shares   
Issued & outstanding:  29,604,830 and 29,724,874 shares429,136
 434,453
Retained earnings402,212
 341,738
Stock in rabbi trust assumed in acquisition(2,577) (3,235)
Rabbi trust obligation2,577
 3,235
Accumulated other comprehensive income (loss)3,634
 (11,961)
Total shareholders’ equity834,982
 764,230
Total liabilities and shareholders’ equity$6,068,911
 5,864,116
See accompanying notes to unaudited consolidated financial statements.



Page 4

Index


First Bancorp and Subsidiaries

Consolidated Statements of Income

($ in thousands, except share data-unaudited) Three Months Ended
March 31,		 
  2019  2018 
INTEREST INCOME        
Interest and fees on loans $53,960   50,170 
Interest on investment securities:        
     Taxable interest income  4,737   2,586 
     Tax-exempt interest income  337   380 
Other, principally overnight investments  2,701   1,925 
     Total interest income  61,735   55,061 
         
INTEREST EXPENSE        
Savings, checking and money market accounts  2,009   979 
Time deposits of $100,000 or more  3,178   1,411 
Other time deposits  390   283 
Borrowings  2,797   1,881 
     Total interest expense  8,374   4,554 
         
Net interest income  53,361   50,507 
Provision (reversal) for loan losses  500   (3,659)
Net interest income after provision for loan losses  52,861   54,166 
         
NONINTEREST INCOME        
Service charges on deposit accounts  2,945   3,263 
Other service charges, commissions and fees  5,248   4,485 
Fees from presold mortgage loans  545   859 
Commissions from sales of insurance and financial products  2,029   1,940 
SBA consulting fees  1,263   1,141 
SBA loan sale gains  2,062   3,802 
Bank-owned life insurance income  646   623 
Foreclosed property gains (losses), net  (245)  (288)
Other gains (losses), net  82   4 
     Total noninterest income  14,575   15,829 
         
NONINTEREST EXPENSES        
Salaries expense  18,965   19,398 
Employee benefits expense  4,588   4,607 
   Total personnel expense  23,553   24,005 
Occupancy expense  2,754   2,802 
Equipment related expenses  1,369   1,252 
Merger and acquisition expenses  110   2,761 
Intangibles amortization expense  1,332   1,560 
Other operating expenses  10,153   11,106 
     Total noninterest expenses  39,271   43,486 
         
Income before income taxes  28,165   26,509 
Income tax expense  5,880   5,836 
         
Net income available to common shareholders $22,285   20,673 
         
Earnings per common share:        
     Basic $0.75   0.70 
     Diluted  0.75   0.70 
         
Dividends declared per common share $0.12   0.10 
         
Weighted average common shares outstanding:        
     Basic  29,587,217   29,533,869 
     Diluted  29,743,395   29,624,150 

($ in thousands, except share data-unaudited)Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
INTEREST INCOME       
Interest and fees on loans$55,142
 52,407
 164,754
 154,028
Interest on investment securities:    

 

Taxable interest income5,130
 2,501
 14,859
 7,552
Tax-exempt interest income212
 367
 820
 1,115
Other, principally overnight investments1,898
 2,944
 6,705
 7,320
Total interest income62,382
 58,219
 187,138
 170,015
        
INTEREST EXPENSE       
Savings, checking and money market accounts2,560
 1,334
 6,904
 3,445
Time deposits of $100,000 or more3,519
 2,302
 10,219
 5,627
Other time deposits518
 270
 1,375
 740
Borrowings2,007
 2,468
 7,092
 6,619
Total interest expense8,604
 6,374
 25,590
 16,431
        
Net interest income53,778
 51,845
 161,548
 153,584
Provision (reversal) for loan losses(1,105) 87
 (913) (4,282)
Net interest income after provision for loan losses54,883
 51,758
 162,461
 157,866
        
NONINTEREST INCOME       
Service charges on deposit accounts3,388
 3,221
 9,543
 9,606
Other service charges, commissions and fees5,814
 4,942
 16,848
 14,101
Fees from presold mortgage loans1,275
 576
 2,677
 2,231
Commissions from sales of insurance and financial products2,203
 2,425
 6,436
 6,484
SBA consulting fees663
 1,287
 2,847
 3,554
SBA loan sale gains1,917
 2,373
 7,048
 8,773
Bank-owned life insurance income651
 641
 1,928
 1,892
Securities gains (losses), net97
 —
 97
 —
Foreclosed property gains (losses), net(273) (192) (899) (579)
Other gains (losses), net(105) (101) (331) 811
Total noninterest income15,630
 15,172
 46,194
 46,873
        
NONINTEREST EXPENSES       
Salaries expense19,833
 18,771
 58,530
 56,615
Employee benefits expense4,144
 4,061
 13,150
 12,752
Total personnel expense23,977
 22,832
 71,680
 69,367
Occupancy expense2,786
 2,742
 8,269
 8,087
Equipment related expenses1,231
 1,438
 3,783
 3,931
Merger and acquisition expenses—
 167
 213
 3,568
Intangibles amortization expense1,163
 1,452
 3,737
 4,518
Other operating expenses9,763
 10,403
 30,948
 31,683
Total noninterest expenses38,920
 39,034
 118,630
 121,154
        
Income before income taxes31,593
 27,896
 90,025
 83,585
Income tax expense6,574
 5,905
 18,862
 18,191
        
Net income$25,019
 21,991
 71,163
 65,394
        
Earnings per common share:       
Basic$0.84
 0.74
 2.39
 2.21
Diluted0.84
 0.74
 2.39
 2.21
        
Dividends declared per common share$0.12
 0.10
 0.36
 0.30
        
Weighted average common shares outstanding:       
Basic29,542,001
 29,530,203
 29,585,383
 29,536,273
Diluted29,684,105
 29,621,130
 29,759,459
 29,639,126
See accompanying notes to unaudited consolidated financial statements.



Page 5

Index


First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

  Three Months Ended
March 31,		 
($ in thousands-unaudited) 2019  2018 
       
Net income $22,285   20,673 
Other comprehensive income (loss):        
   Unrealized gains (losses) on securities available for sale:        
Unrealized holding gains (losses) arising during the period, pretax  5,903   (7,290)
      Tax (expense) benefit  (1,380)  1,703 
Postretirement Plans:        
Amortization of unrecognized net actuarial loss  228   52 
       Tax benefit  (54)  (12)
Other comprehensive income (loss)  4,697   (5,547)
         
Comprehensive income $26,982   15,126 

($ in thousands-unaudited)Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
Net income$25,019
 21,991
 71,163
 65,394
Other comprehensive income (loss):       
Unrealized gains (losses) on securities available for sale:       
Unrealized holding gains (losses) arising during the period, pretax2,210
 (927) 19,814
 (10,229)
Tax (expense) benefit(508) 216
 (4,602) 2,390
      Reclassification to realized (gains) losses(97) —
 (97) —
Tax expense (benefit)22
 —
 22
 —
Postretirement Plans:       
Amortization of unrecognized net actuarial loss155
 (87) 611
 16
Tax benefit(36) 20
 (153) (4)
Other comprehensive income (loss)1,746
 (778) 15,595
 (7,827)
Comprehensive income$26,765
 21,213
 86,758
 57,567
See accompanying notes to unaudited consolidated financial statements.



Page 6

Index


First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity

 

($ in thousands, except per share - unaudited)

 Common Stock  Retained  Stock in
Rabbi
Trust
Assumed
in
Acquisi-		  Rabbi
Trust		  Accumulated
Other
Compre-
hensive
Income		  Total
Share-
holders’		 
  Shares  Amount  Earnings  tion  Obligation  (Loss)  Equity 
                      
Balances, January 1, 2018  29,639  $432,794   264,331   (3,581)  3,581   (4,146)  692,979 
                             
Net income          20,673               20,673 
Cash dividends declared ($0.10 per common share)          (2,966)              (2,966)
Change in Rabbi Trust Obligation              (7)  7       — 
Stock option exercises  8   108                   108 
Stock-based compensation  14   403                   403 
Other comprehensive income (loss)                      (5,547)  (5,547)
                             
Balances, March 31, 2018  29,661  $433,305   282,038   (3,588)  3,588   (9,693)  705,650 
                             
                             
Balances, January 1, 2019  29,725  $434,453   341,738   (3,235)  3,235   (11,961)  764,230 
                             
Net income          22,285               22,285 
Cash dividends declared ($0.12 per common share)          (3,568)              (3,568)
Change in Rabbi Trust Obligation              (10)  10       — 
Stock-based compensation  24   586                   586 
Stock withheld for payment of taxes  (3)  (91)                  (91)
Other comprehensive income (loss)                      4,697   4,697 
                             
Balances, March 31, 2019  29,746  $434,948   360,455   (3,245)  3,245   (7,264)  788,139 


($ in thousands, except share data - unaudited)Common Stock Retained
Earnings		 Stock in
Rabbi
Trust
Assumed
in
Acquisition		 Rabbi
Trust
Obligation		 Accumulated
Other
Comprehensive
Income
(Loss)		 Total
Shareholders’
Equity
Shares Amount     
Three Months Ended September 30, 2018          
Balances, July 1, 201829,703
 $434,117
 301,800
 (3,214) 3,214
 (11,195) 724,722
              
Net income    21,991
       21,991
Cash dividends declared ($0.10 per common share)    (2,969)       (2,969)
Change in Rabbi Trust Obligation      (10) 10
   —
Stock option exercises—
 —
         —
Stock withheld for payment of taxes(3) (264)         (264)
Stock-based compensation29
 374
         374
Other comprehensive income (loss)          (778) (778)
              
Balances, September 30, 201829,729
 $434,227
 320,822
 (3,224) 3,224
 (11,973) 743,076
              
              
Three Months Ended September 30, 2019          
Balances, July 1, 201929,717
 432,533
 380,748
 (2,866) 2,866
 1,888
 815,169
              
Net income  

 25,019
 

 

 

 25,019
Cash dividends declared ($0.12 per common share)  

 (3,555) 

 

 

 (3,555)
Change in Rabbi Trust Obligation  

 

 289
 (289) 

 —
Equity issued related to acquisition earn-out—
 —
         —
Stock repurchases(100) (3,476)         (3,476)
Stock option exercises—
 —
         —
Stock withheld for payment of taxes(12) (467)         (467)
Stock-based compensation—
 546
         546
Other comprehensive income (loss)          1,746
 1,746
              
Balances, September 30, 201929,605
 $429,136
 402,212
 (2,577) 2,577
 3,634
 834,982

See accompanying notes to unaudited consolidated financial statements.













Page 7

Index
Index






First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity (continued)
($ in thousands, except share data - unaudited)Common Stock Retained
Earnings		 Stock in
Rabbi
Trust
Assumed
in
Acquisition		 Rabbi
Trust
Obligation		 Accumulated
Other
Comprehensive
Income
(Loss)		 Total
Shareholders’
Equity
Shares Amount     
Nine Months Ended September 30, 2018          
Balances, January 1, 201829,639
 $432,794
 264,331
 (3,581) 3,581
 (4,146) 692,979
              
Net income    65,394
       65,394
Cash dividends declared ($0.30 per common share)    (8,903)       (8,903)
Change in Rabbi Trust Obligation      357
 (357)   —
Stock option exercises25
 324
         324
Stock withheld for payment of taxes(7) (264)         (264)
Stock-based compensation72
 1,373
         1,373
Other comprehensive income (loss)          (7,827) (7,827)
              
September 30, 201829,729
 $434,227
 320,822
 (3,224) 3,224
 (11,973) 743,076
              
              
Nine Months Ended September 30, 2019          
Balances, January 1, 201929,725
 434,453
 341,738
 (3,235) 3,235
 (11,961) 764,230
              
Net income  

 71,163
 

 

 

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

 (10,689) 

 

 

 (10,689)
Change in Rabbi Trust Obligation  

 

 658
 (658) 

 —
Equity issued related to acquisition earn-out78
 3,070
         3,070
Stock repurchases(282) (10,000)         (10,000)
Stock option exercises9
 129
         129
Stock withheld for payment of taxes(15) (558)         (558)
Stock-based compensation90
 2,042
         2,042
Other comprehensive income (loss)          15,595
 15,595
              
Balances, September 30, 201929,605
 $429,136
 402,212
 (2,577) 2,577
 3,634
 834,982
See accompanying notes to unaudited consolidated financial statements.


Page 8
Index

First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows

  Three Months Ended
March 31,		 
($ in thousands-unaudited) 2019  2018 
Cash Flows From Operating Activities        
Net income $22,285   20,673 
Reconciliation of net income  to net cash provided by operating activities:        
     Provision (reversal) for loan losses  500   (3,659)
     Net security premium amortization  459   685 
     Loan discount accretion  (1,419)  (2,111)
     Other purchase accounting accretion and amortization, net  (13)  (71)
     Foreclosed property (gains) losses and write-downs, net  245   288 
     Other losses (gains)  (82)  (4)
     Increase in net deferred loan costs  (325)  (786)
     Depreciation of premises and equipment  1,468   1,445 
     Amortization of operating lease right-of-use assets  475   — 
     Repayments of lease obligations  (455)  — 
     Stock-based compensation expense  403   231 
     Amortization of intangible assets  1,332   1,560 
     Fees/gains from sale of presold mortgages and SBA loans  (2,607)  (4,661)
     Origination of presold mortgage loans in process of settlement  (19,025)  (33,834)
     Proceeds from sales of presold mortgage loans in process of settlement  20,506   40,945 
     Origination of SBA loans for sale  (38,329)  (63,040)
     Proceeds from sales of SBA loans  30,678   50,996 
     (Increase) decrease in accrued interest receivable  (512)  824 
     (Increase) decrease in other assets  (4,194)  2,142 
     Increase in accrued interest payable  365   71 
     Increase (decrease) in other liabilities  5,254   (6,279)
          Net cash provided by operating activities  17,009   5,415 
         
Cash Flows From Investing Activities        
     Purchases of securities available for sale  (161,892)  (13,182)
     Proceeds from maturities/issuer calls of securities available for sale  29,313   7,764 
     Proceeds from maturities/issuer calls of securities held to maturity  10,098   6,159 
     Purchases of Federal Reserve and Federal Home Loan Bank stock, net  (308)  (6,099)
     Net increase in loans  (45,018)  (49,662)
     Proceeds from sales of foreclosed real estate  1,513   1,455 
     Purchases of premises and equipment  (1,450)  (1,224)
     Proceeds from sales of premises and equipment  279   540 
          Net cash used by investing activities  (167,465)  (54,249)
         
Cash Flows From Financing Activities        
     Net increase in deposits  137,957   88,869 
     Net decrease in borrowings  (529)  (529)
     Cash dividends paid – common stock  (2,972)  (2,372)
     Proceeds from stock option exercises  —   108 
     Stock withheld for payment of taxes  (91)  — 
          Net cash provided by financing activities  134,365   86,076 
         
(Decrease) increase in cash and cash equivalents  (16,091)  37,242 
Cash and cash equivalents, beginning of period  462,898   489,490 
         
Cash and cash equivalents, end of period $446,807   526,732 
         
Supplemental Disclosures of Cash Flow Information:        
Cash paid (received) during the period for:        
     Interest $8,009   4,483 
     Income taxes  103   (181)
Non-cash transactions:        
     Unrealized gain (loss) on securities available for sale, net of taxes  4,523   (5,587)
     Foreclosed loans transferred to other real estate  708   648 
     Initial recognition of operating lease right-of-use assets  19,459   — 
     Initial recognition of operating lease liabilities  19,459   — 

($ in thousands-unaudited)Nine Months Ended
September 30,
 2019 2018
Cash Flows From Operating Activities   
Net income$71,163
 65,394
Reconciliation of net income to net cash provided by operating activities:   
Provision (reversal) for loan losses(913) (4,282)
Net security premium amortization1,827
 2,184
Loan discount accretion(4,473) (5,982)
Other purchase accounting accretion and amortization, net(16) (165)
Foreclosed property (gains) losses and write-downs, net899
 579
Gains on securities available for sale(97) —
Other losses (gains)331
 (811)
Increase in net deferred loan costs(261) (1,475)
Depreciation of premises and equipment4,326
 4,420
Amortization of operating lease right-of-use assets1,372
 —
Repayments of lease obligations(1,250) —
Stock-based compensation expense1,748
 1,201
Amortization of intangible assets3,737
 4,518
Amortization of SBA servicing assets975
 555
Fees/gains from sale of presold mortgages and SBA loans(9,725) (11,004)
Origination of presold mortgage loans in process of settlement(108,723) (97,081)
Proceeds from sales of presold mortgage loans in process of settlement99,606
 105,506
Origination of SBA loans for sale(125,982) (162,782)
Proceeds from sales of SBA loans101,349
 130,460
Increase in accrued interest receivable(293) (888)
Increase in other assets(4,061) (893)
Increase in accrued interest payable193
 681
Increase (decrease) in other liabilities1,690
 (6,448)
Net cash provided by operating activities33,422
 23,687
    
Cash Flows From Investing Activities   
Purchases of securities available for sale(339,030) (48,975)
Proceeds from maturities/issuer calls of securities available for sale114,003
 27,609
Proceeds from maturities/issuer calls of securities held to maturity26,316
 12,841
Proceeds from sales of securities available for sale39,797
 —
Redemptions (purchases) of FRB and FHLB stock, net4,088
 (6,129)
Net increase in loans(116,664) (103,091)
Proceeds from sales of foreclosed properties4,628
 6,829
Purchases of premises and equipment(2,714) (6,656)
Proceeds from sales of premises and equipment1,148
 2,739
Net cash used by investing activities(268,428) (114,833)
    
Cash Flows From Financing Activities   
Net increase in deposits216,195
 121,719
Net decrease in borrowings(106,089) (1,086)
Cash dividends paid – common stock(10,108) (8,308)
Repurchases of common stock(10,000) —
Proceeds from stock option exercises129
 324
Stock withheld for payment of taxes(558) (264)
Net cash provided by financing activities89,569
 112,385
    
(Decrease) increase in cash and cash equivalents(145,437) 21,239
Cash and cash equivalents, beginning of period462,898
 489,490
    
Cash and cash equivalents, end of period$317,461
 510,729
    
Supplemental Disclosures of Cash Flow Information:   
Cash paid during the period for interest$25,397
 15,750
Cash paid during the period for income taxes20,106
 17,333
Non-cash transactions:   
Unrealized gain (loss) on securities available for sale, net of taxes15,137
 (7,839)
Foreclosed loans transferred to other real estate2,676
 2,159
Initial recognition of operating lease right-of-use assets19,459
 —
Initial recognition of operating lease liabilities19,459
 —
See accompanying notes to consolidated financial statements.



Page 8 

9
Index


First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)For the PeriodsPeriod Ended March 31,September 30, 2019 and 2018 

Note 1 - Basis of Presentation

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of March 31,September 30, 2019, the consolidated results of operations or the three and nine months ended September 30, 2019 and 2018, and the consolidated results of operations and consolidated cash flows for the periodsnine months ended March 31,September 30, 2019 and 2018. All such adjustments were of a normal, recurring nature. Reference is made to the 2018 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,September 30, 2019 and 2018 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.

Note 2 – Accounting Policies

Note 1 to the 2018 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and a discussion of recent accounting pronouncements. The following paragraphs update that information as necessary.

Accounting Standards Adopted in 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on accounting for leases, which generally requires all leases to be recognized in the statement of financial position by recording an asset representing its right to use the underlying asset and recording a liability, which represents the Company’s obligation to make lease payments. The new standard was adopted by the Company on January 1, 2019. The guidance provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption.  The Company elected to apply the guidance as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. Adoption of the guidance resulted in the recognition of lease liabilities and the recognition of right-of-use assets totaling $19.4 million as of the date of adoption. Lease liabilities and right-of-use assets are reflected in other liabilities and premises and equipment, respectively. The initial balance sheet gross-up upon adoption was related to operating leases of certain real estate properties. The Company has no finance leases or material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. Adoption of this guidance did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 13 – Leases for additional disclosures related to leases.

In March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs topic of the Accounting Standards Codification related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments were effective for the Company on January 1, 2019 and adoption did not have a material effect on its financial statements.

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

Accounting Standards Pending Adoption

In June 2016, the FASB issued guidance to change the accounting for credit losses. The guidance requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the


Page 10
Index

financial asset, presents the net amount expected to be collected on the financial asset.  The CECL model is expected to result in earlier recognition of credit losses.  The guidance also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The Company will apply the guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, the Company did not elect that option. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. Also, in May 2019, the FASB issued additional guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of the CECL model, but the Company does not expect to elect this option. The Company continues its ongoing analysis on the impact of this guidance on its consolidated financial statements. In that regard, a cross-functional working group has been formed, under the direction of the Company's Chief Financial Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. Implementation efforts continue with model development, ongoing system requirements evaluation and the identification of data and resource needs, among other things. The Company has also engaged a third-party vendor solution to assist in the application of the new guidance. The Company has provided core data to the vendor and continues to validate and enhance the data. The Company is currently running models under both the current methodologyImplementation efforts continue with model development and the CECL methodology.validation. While the Company is currently unable to reasonably estimate the impact of adopting the guidance, the Company expects the adoption of this guidance to significantly increase its allowance for loan losses. The impact of adoption is expected to be significantly influenced by the composition, characteristics and quality of the Company's loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

Page 9 

Index

In January 2017, the FASB amended the Goodwill and Other Intangibles topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. The amount of goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect this amendment to have a material effect on its financial statements.

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

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

In 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 will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

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




Page 11
Index


Note 3 – Reclassifications

Certain amounts reported in the periodperiods ended MarchSeptember 30, 2018 and December 31, 2018 may have been reclassified to conform to the presentation for March 31,September 30, 2019. These reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

Note 4 – Stock-Based Compensation Plans

The Company recorded total stock-based compensation expense of $403,000$546,000 and $231,000$374,000 for the three months ended March 31,September 30, 2019 and 2018, respectively, and $1,748,000 and $1,201,000 for the nine months ended September 30, 2019 and 2018, respectively. Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company’s consolidated statement of cash flows. The Company recognized

Page 10 

Index

$94,000 and $54,000 of income tax benefits related to stock basedStock-based compensation expense in its consolidated income statement for the three months ended March 31, 2019Company relates to equity awards granted to employees and 2018, respectively.

directors.

At March 31,September 30, 2019, the Company had the following stock-based compensation plans: the First Bancorp 2014 Equity Plan and the First Bancorp 2007 Equity Plan. The Company’s shareholders approved each plan. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of March 31,September 30, 2019, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants, and there were 727,934675,319 shares remaining available for grant.

The First Bancorp 2014 Equity Plan is intended to serve as a means to attract, retain and motivate key employees and directors and to associate the interests of the Plan’s participants with those of the Company and its shareholders. The First Bancorp 2014 Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.

Recent equity 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 stock awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company recognizes compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for each incremental award. Compensation expense is based on the estimated number of stock options and awards that will ultimately vest. Over the past five years, there have only been minimal amounts of forfeitures, and therefore the Company assumes that all awards granted with service conditions only will vest. The Company issues new shares of common stock when options are exercised.

As it relates

In addition to directoremployee equity awards, the Company grantsCompany's practice is to grant common shares, valued at approximately $32,000, to each non-employee director (currently 11 in total) in June of each year. Compensation expense associated with these director awards is recognized on the date of award since there are no vesting conditions.

On June 1, 2019, the Company granted 9,030 shares of common stock to non-employee directors (903 shares per director), at a fair market value of $35.41 per share, which was the closing price of the Company's common stock on that date, and resulted in $320,000 in expense. On June 1, 2018, the Company granted 8,393 shares of common stock to non-employee directors (763 shares per director), at a fair market value of $41.93 per share, which was the closing price of the Company's common stock on that date, and resulted in $352,000 in expense. The expense associated with director grants is classified as "other operating expense" in the Consolidated Statements of Income.

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

  Long-Term Restricted Stock 
  Number of Units  Weighted-Average
Grant-Date Fair Value		 
       
Nonvested at January 1, 2019 129,251  $32.39 
         
Granted during the period  25,104   37.73 
Vested during the period  (5,266)  19.00 
Forfeited or expired during the period  —   — 
         
Nonvested at March 31, 2019  149,089  $33.76 



Page 12
Index

  Long-Term Restricted Stock
 Number of Units 
Weighted-Average
Grant-Date Fair Value
Nonvested at January 1, 2019 129,251
 $32.39
Granted during the period 82,826
 36.36
Vested during the period (37,961) 21.69
Forfeited or expired during the period (954) 41.93
     
Nonvested at September 30, 2019 173,162
 $36.58

Total unrecognized compensation expense as of March 31,September 30, 2019 amounted to $2,737,000$3,608,000 with a weighted-average remaining term of 2.2 years. The Company expects to record $379,000$1,872,000 in compensation expense during eachin the next twelve months, $516,000 of which will be recorded in the remaining quarter of 2019.

Page 11 

Index

Prior to 2010, stock options were the primary form of equity basedstock-based compensation utilized by the Company. The stock options had a term of ten years.

At March 31,September 30, 2019, there were 9,0000 stock options outstanding each having an exercise price of $14.35 and an expiration date of June 1, 2019.

outstanding. The following table presents information regarding the activity for the first threenine months of 2019 related to the Company’s outstanding stock options:

  Options Outstanding 
  Number of
Shares		  Weighted-
Average
Exercise
Price		  Weighted-
Average
Remaining
Contractual Term
(years)		  Aggregate
Intrinsic
Value		 
             
Balance at January 1, 2019  9,000  $14.35         
                 
   Granted  —   —         
   Exercised  —   —         
   Forfeited  —   —         
   Expired  —   —         
                 
Outstanding at March 31, 2019  9,000  $14.35   0.17  $183,690 
                 
Exercisable at March 31, 2019  9,000  $14.35   0.17  $183,690 

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

During both the three months ended March 31,September 30, 2019 and 2018, there were 0 stock option exercises. During the nine months ended September 30, 2019 and 2018, the Company received $0$129,000 and $108,000,$324,000, respectively, as a result of stock option exercises.

Note 5 – Earnings Per Common Share

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

plans, as well as contingently issuable shares.

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


Page 13
Index

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

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

Page 12 

Index

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

  For the Three Months Ended March 31, 
  2019  2018 

 

($ in thousands except per

share amounts)

 Income
(Numer-
ator)		  Shares
(Denom-
inator)		  Per Share
Amount		  Income
(Numer-
ator)		  Shares
(Denom-
inator)		  Per Share
Amount		 
                   
Basic EPS                        
Net income available to common shareholders $22,285   29,587,217  $0.75  $20,673   29,533,869  $0.70 
                         
Effect of Dilutive Securities  —   156,178       —   90,281     
                         
Diluted EPS per common share $22,285   29,743,395  $0.75  $20,673   29,624,150  $0.70 


  For the Three Months Ended September 30,
  2019 2018
($ in thousands except per
share amounts)
 Per Share
Amount		 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
Basic EPS:            
Net income $25,019
     $21,991
    
Less: income allocated to participating securities (119)     —
    
Basic EPS per common share $24,900
 29,542,001
 $0.84
 $21,991
 29,530,203
 $0.74
             
Diluted EPS:            
Net income $25,019
 29,542,001
   $21,991
 29,530,203
  
Effect of Dilutive Securities —
 142,104
   —
 90,927
  
Diluted EPS per common share $25,019
 29,684,105
 $0.84
 $21,991
 29,621,130
 $0.74

  For the Nine Months Ended September
  2019 2018
($ in thousands except per
share amounts)
 Per Share
Amount		 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
Basic EPS:            
Net income $71,163
     $65,394
    
Less: income allocated to participating securities (329)     —
    
Basic EPS per common share $70,834
 29,585,383
 $2.39
 $65,394
 29,536,273
 $2.21
             
Diluted EPS:            
Net income $71,163
 29,585,383
   $65,394
 29,536,273
  
Effect of Dilutive Securities —
 174,076
   —
 102,853
  
Diluted EPS per common share $71,163
 29,759,459
 $2.39
 $65,394
 29,639,126
 $2.21

For both the three and nine months ended March 31,September 30, 2019 and 2018, there were no0 options that were antidilutive.







Page 14
Index

Note 6 – Securities

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

  March 31, 2019  December 31, 2018 
  Amortized  Fair  Unrealized  Amortized  Fair  Unrealized 
($ in thousands) Cost  Value  Gains  (Losses)  Cost  Value  Gains  (Losses) 
                         
Securities available for sale:                                
  Government-sponsored enterprise securities $78,995   78,887   84   (192)  82,995   82,662   63   (396)
  Mortgage-backed securities  533,360   526,948   1,089   (7,501)  396,995   385,551   39   (11,483)
  Corporate bonds  33,741   33,774   203   (170)  33,751   33,138   76   (689)
Total available for sale $646,096   639,609   1,376   (7,863)  513,741   501,351   178   (12,568)
                                 
Securities held to maturity:                                
  Mortgage-backed securities $49,361   48,291   —   (1,070)  52,048   50,241   —   (1,807)
  State and local governments  41,542   41,989   465   (18)  49,189   49,665   525   (49)
Total held to maturity $90,903   90,280   465   (1,088)  101,237   99,906   525   (1,856)

($ in thousands)September 30, 2019 December 31, 2018
Amortized
Cost
 
Fair
Value
 Unrealized 
Amortized
Cost
 
Fair
Value
 Unrealized
  Gains (Losses)   Gains (Losses)
Securities available for sale:               
Government-sponsored enterprise securities$30,000
 30,053
 55
 (2) 82,995
 82,662
 63
 (396)
Mortgage-backed securities634,176
 640,488
 7,794
 (1,482) 396,995
 385,551
 39
 (11,483)
Corporate bonds33,721
 34,683
 1,052
 (90) 33,751
 33,138
 76
 (689)
Total available for sale$697,897
 705,224
 8,901
 (1,574) 513,741
 501,351
 178
 (12,568)
                
Securities held to maturity:               
Mortgage-backed securities$43,968
 43,801
 —
 (167) 52,048
 50,241
 —
 (1,807)
State and local governments30,297
 30,664
 369
 (2) 49,189
 49,665
 525
 (49)
Total held to maturity$74,265
 74,465
 369
 (169) 101,237
 99,906
 525
 (1,856)

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 as of March 31,September 30, 2019 and December 31, 2018.

The following table presents information regarding securities with unrealized losses at March 31,September 30, 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 $—   —   18,808   192   18,808   192 
Mortgage-backed securities  70,478   346   298,133   8,225   368,611   8,571 
Corporate bonds  2,480   60   9,049   110   11,529   170 
State and local governments  —   —   5,823   18   5,823   18 
      Total temporarily impaired securities $72,958   406   331,813   8,545   404,771   8,951 

Page 13 

Index

($ 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$4,998
 2
 —
 —
 4,998
 2
Mortgage-backed securities123,726
 625
 118,579
 1,024
 242,305
 1,649
Corporate bonds—
 —
 910
 90
 910
 90
State and local governments—
 —
 940
 2
 940
 2
Total temporarily impaired securities$128,724
 627
 120,429
 1,116
 249,153
 1,743
The following table presents information regarding securities with unrealized losses at December 31, 2018:

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




Page 15
Index

In the above tables, all of the securities that were in an unrealized loss position at March 31,September 30, 2019 and December 31, 2018 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 no0 other-than-temporary impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.

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

  Securities Available for Sale  Securities Held to Maturity 
  Amortized  Fair  Amortized  Fair 
($ in thousands) Cost  Value  Cost  Value 
             
Securities                
Due within one year $—   —   865   868 
Due after one year but within five years  105,196   105,195   26,571   26,860 
Due after five years but within ten years  2,540   2,480   12,427   12,559 
Due after ten years  5,000   4,986   1,679   1,702 
Mortgage-backed securities  533,360   526,948   49,361   48,291 
Total securities $646,096   639,609   90,903   90,280 

 Securities Available for Sale Securities Held to Maturity
($ in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Securities       
Due within one year$—
 —
 1,165
 1,168
Due after one year but within five years58,721
 59,661
 21,645
 21,925
Due after five years but within ten years—
 —
 6,673
 6,718
Due after ten years5,000
 5,075
 814
 853
Mortgage-backed securities634,176
 640,488
 43,968
 43,801
Total securities$697,897
 705,224
 74,265
 74,465

At March 31,September 30, 2019 and December 31, 2018 investment securities with carrying values of $245,711,000$287,418,000 and $284,382,000,$234,382,000, respectively, were pledged as collateral for public deposits.


In the three and nine months ended September 2019, the Company received proceeds from sales of securities of $39,797,000 and recorded gains of $97,000 from the sales. There were 0 securities sales in the first nine months of 2018.
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 $37,776,000$33,380,000 and $37,468,000 at March 31,September 30, 2019 and December 31, 2018, respectively. The FHLB stock had a cost of $20,322,000$15,789,000 and $20,036,000 at March 31,September 30, 2019 and December 31, 2018, respectively, and serves as part of the collateral for the Company’s line of credit with the FHLB and is also a requirement for membership in the FHLB system. The FRB stock had a cost of $17,454,000$17,591,000 and $17,432,000 at March 31,September 30, 2019 and December 31, 2018, respectively, and is a requirement for FRB member bank qualification. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end.

The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain litigation against Visa. The Class B shares have transfer restrictions, and the conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at March 31,September 30, 2019 was approximately 1.63,1.62, which means the Company would receive approximately 20,14020,051 Class A shares if the stock had converted on that date. This stock does not have a readily determinable fair value and is therefore carried at its cost basis of zero. If a readily determinable fair value becomes available for the Class B shares, or upon the conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a credit to earnings.

Page 14 








Page 16
Index




Note 7 – Loans and Asset Quality Information

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

($ in thousands) March 31, 2019  December 31, 2018  March 31, 2018 
  Amount  Percentage  Amount  Percentage  Amount  Percentage 
All  loans:                        
                         
Commercial, financial, and agricultural $468,388   11%  $457,037   11%  $411,662   10% 
Real estate – construction, land development & other land loans  553,760   13%   518,976   12%   542,960   13% 
Real estate – mortgage – residential (1-4 family) first mortgages  1,061,049   25%   1,054,176   25%   995,662   24% 
Real estate – mortgage – home equity loans / lines of credit  354,669   8%   359,162   8%   373,797   9% 
Real estate – mortgage – commercial and other  1,794,794   42%   1,787,022   42%   1,718,698   42% 
Installment loans to individuals  69,503   1%   71,392   2%   71,257   2% 
    Subtotal  4,302,163   100%   4,247,765   100%   4,114,036   100% 
Unamortized net deferred loan costs (fees)  1,624       1,299       (251)    
    Total loans $4,303,787      $4,249,064      $4,113,785     

($ in thousands)September 30, 2019 December 31, 2018
 Amount Percentage Amount Percentage
All  loans:       
        
Commercial, financial, and agricultural$486,768
 11% $457,037
 11%
Real estate – construction, land development & other land loans471,326
 11% 518,976
 12%
Real estate – mortgage – residential (1-4 family) first mortgages1,093,619
 25% 1,054,176
 25%
Real estate – mortgage – home equity loans / lines of credit343,378
 8% 359,162
 8%
Real estate – mortgage – commercial and other1,928,931
 44% 1,787,022
 42%
Installment loans to individuals70,962
 1% 71,392
 2%
Subtotal4,394,984
 100% 4,247,765
 100%
Unamortized net deferred loan costs1,560
   1,299
  
Total loans$4,396,544
   $4,249,064
  


Included in the table above are the following amounts of SBA loans:
($ in thousands)September 30,
2019		 December 31,
2018
Guaranteed portions of SBA Loans included in table above$47,280

53,205
Unguaranteed portions of SBA Loans included in table above112,976

97,572
Total SBA loans included in the table above$160,256

150,777
 




Sold portions of SBA loans with servicing retained - not included in table above$308,842

230,424

At March 31,September 30, 2019 and December 31, 2018, there was a remaining unaccreted discount on the retained portion of sold SBA loans amounting to $6.2$7.2 million and $5.7 million, respectively. As of March 31,September 30, 2019 and December 31, 2018, there was a remaining accretable discount of $14.1$12.1 million and $15.0 million, respectively, related to purchased non-impaired loans. Both types of discounts are amortized as yield adjustments over the respective lives of the loans, so long as the loans perform.

The following table presents changes in the recorded investment of purchased credit impaired (“PCI”) loans.

($ in thousands)

 

 

 

PCI loans

 For the
Quarter Ended
March 31,
2019		  For the Year
Ended
December 31,
2018		  For the
Quarter Ended
March 31,
2018		 
Balance at beginning of period $17,393   23,165   23,165 
Change due to payments received and accretion  (1,556)  (5,799)  (1,023)
Change due to loan charge-offs  (8)  (10)  — 
Transfers to foreclosed real estate  —   (4)  — 
Other  38   41   5 
Balance at end of period $15,867   17,393   22,147 

PCI loansFor the Nine Months Ended September 30, 2019 For the Year Ended September 30,
2018
Balance at beginning of period$17,393
 23,165
Change due to payments received and accretion(3,694) (2,994)
Change due to loan charge-offs(11) —
Transfers to foreclosed real estate—
 (10)
Other110
 28
Balance at end of period$13,798
 20,189


Page 17
Index

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

($ in thousands)

 

 

 

Accretable Yield for PCI loans

 For the
Quarter Ended
March 31,
2019		  For the Year
Ended
December 31,
2018		  For the
Quarter Ended
March 31,
2018		 
Balance at beginning of period $4,750   4,688   4,688 
Accretion  (392)  (2,050)  (374)
Reclassification from (to) nonaccretable difference  237   849   155 
Other, net  550   1,263   (73)
Balance at end of period $5,145   4,750   4,396 

Accretable Yield for PCI loansFor the Nine Months Ended September 30,
2019		 For the Nine Months Ended September 30,
2018
Balance at beginning of period$4,750
 4,688
Accretion(1,050) (1,169)
Reclassification from (to) nonaccretable difference583
 712
Other, net211
 831
Balance at end of period$4,494
 5,062

During the first threenine months of 2019, the Company received $133,000$291,000 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$28,000 was recorded as additional loan interest income. During the first threenine months of 2018, the Company received $68,000$225,000 in payments that exceeded the carrying amount of the related PCI loans, all of which $184,000 was recognized as loan discount accretion income and $41,000 was recorded as additional loan interest income.

Page 15 

Index

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

($ in thousands) March 31,
2019		  December 31,
2018		  March 31,
2018		 
          
Nonperforming assets            
Nonaccrual loans $20,684   22,575   21,849 
TDRs- accruing  12,457   13,418   18,495 
Accruing loans > 90 days past due  —   —   — 
     Total nonperforming loans  33,141   35,993   40,344 
Foreclosed real estate  6,390   7,440   11,307 
Total nonperforming assets $39,531   43,433   51,651 
             
       Purchased credit impaired loans not included above (1) $15,867   17,393   22,147 

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

 
Nonaccrual loans$19,720

22,575
TDRs- accruing9,566

13,418
Accruing loans > 90 days past due—

—
Total nonperforming loans29,286

35,993
Foreclosed real estate4,589

7,440
Total nonperforming assets$33,875

43,433






Purchased credit impaired loans not included above (1)$13,798

17,393






(1) In the March 3, 2017 acquisition of Carolina Bank, and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.6 million, $0.6$1.1 million and $0.5$0.6 million in PCI loans at March 31,September 30, 2019 December 31, 2018, and MarchDecember 31, 2018, respectively, that were contractually past due 90 days or more.

At March 31,September 30, 2019 and December 31, 2018, the Company had $1.5$1.0 million and $0.7 million in residential mortgage loans in process of foreclosure, respectively.

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

($ in thousands) March 31,
2019		  December 31,
2018		 
Commercial, financial, and agricultural $980   919 
Real estate – construction, land development & other land loans  1,677   2,265 
Real estate – mortgage – residential (1-4 family) first mortgages  9,958   10,115 
Real estate – mortgage – home equity loans / lines of credit  1,632   1,685 
Real estate – mortgage – commercial and other  6,280   7,452 
Installment loans to individuals  157   139 
  Total $20,684   22,575 
         

($ in thousands)September 30,
2019		 December 31,
2018
Commercial, financial, and agricultural$2,472
 919
Real estate – construction, land development & other land loans1,235
 2,265
Real estate – mortgage – residential (1-4 family) first mortgages7,661
 10,115
Real estate – mortgage – home equity loans / lines of credit1,878
 1,685
Real estate – mortgage – commercial and other6,370
 7,452
Installment loans to individuals104
 139
Total$19,720
 22,575



Page 18
Index

The following table presents an analysis of the payment status of the Company’s loans as of March 31,September 30, 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 $817   319   —   980   466,067   468,183 
Real estate – construction, land development & other land loans  369   93   —   1,677   551,446   553,585 
Real estate – mortgage – residential (1-4 family) first mortgages  6,480   485   —   9,958   1,038,072   1,054,995 
Real estate – mortgage – home equity loans / lines of credit  624   —   —   1,632   352,081   354,337 
Real estate – mortgage – commercial and other  438   275   —   6,280   1,778,884   1,785,877 
Installment loans to individuals  526   51   —   157   68,585   69,319 
Purchased credit impaired  340   389   551   —   14,587   15,867 
  Total $9,594   1,612   551   20,684   4,269,722   4,302,163 
Unamortized net deferred loan costs                      1,624 
           Total loans                     $4,303,787 

Page 16 

Index

($ in thousands)
Accruing
30-59
Days Past
Due
 
Accruing
60-89
Days
Past
Due
 
Accruing
90 Days
or More
Past
Due
 
Nonaccrual
Loans
 
Accruing
Current
 
Total Loans
Receivable
Commercial, financial, and agricultural$5,995
 95
 —
 2,472
 477,964
 486,526
Real estate – construction, land development & other land loans803
 —
 —
 1,235
 469,119
 471,157
Real estate – mortgage – residential (1-4 family) first mortgages2,392
 1,185
 —
 7,661
 1,076,708
 1,087,946
Real estate – mortgage – home equity loans / lines of credit712
 399
 —
 1,878
 340,180
 343,169
Real estate – mortgage – commercial and other3,376
 121
 —
 6,370
 1,911,677
 1,921,544
Installment loans to individuals299
 46
 —
 104
 70,395
 70,844
Purchased credit impaired6
 390
 1,065
 —
 12,337
 13,798
Total$13,583
 2,236
 1,065
 19,720
 4,358,380
 4,394,984
Unamortized net deferred loan costs          1,560
Total loans          $4,396,544
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2018.

($ in thousands) Accruing
30-59
Days
Past
Due		  Accruing
60-89
Days
Past
Due		  Accruing
90 Days
or More
Past Due		  Nonaccrual
Loans		  Accruing
Current		  Total Loans
Receivable		 
                   
Commercial, financial, and agricultural $191   5   —   919   455,692   456,807 
Real estate – construction, land development & other land loans  849   212   —   2,265   515,472   518,798 
Real estate – mortgage – residential (1-4 family) first mortgages  14,178   1,369   —   10,115   1,022,261   1,047,923 
Real estate – mortgage – home equity loans / lines of credit  1,048   254   —   1,685   355,831   358,818 
Real estate – mortgage – commercial and other  709   520   —   7,452   1,768,205   1,776,886 
Installment loans to individuals  359   220   —   139   70,422   71,140 
Purchased credit impaired  990   138   583   —   15,682   17,393 
  Total $18,324   2,718   583   22,575   4,203,565   4,247,765 
Unamortized net deferred loan costs                      1,299 
           Total loans                     $4,249,064 

($ in thousands)
Accruing
30-59
Days
Past
Due
 
Accruing
60-89
Days
Past
Due
 
Accruing
90 Days
or More
Past
Due
 
Nonaccrual
Loans
 
Accruing
Current
 
Total Loans
Receivable
Commercial, financial, and agricultural$191
 5
 —
 919
 455,691
 456,806
Real estate – construction, land development & other land loans849
 212
 —
 2,265
 515,472
 518,798
Real estate – mortgage – residential (1-4 family) first mortgages14,178
 1,369
 —
 10,115
 1,022,262
 1,047,924
Real estate – mortgage – home equity loans / lines of credit1,048
 254
 —
 1,685
 355,831
 358,818
Real estate – mortgage – commercial and other709
 520
 —
 7,452
 1,768,205
 1,776,886
Installment loans to individuals359
 220
 —
 139
 70,422
 71,140
Purchased credit impaired990
 138
 583
 —
 15,682
 17,393
Total$18,324
 2,718
 583
 22,575
 4,203,565
 4,247,765
Unamortized net deferred loan costs          1,299
Total loans          $4,249,064



Page 19
Index

The following table presents the activity in the allowance for loan losses for all loans for the three and nine months ended March 31,September 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		  Installment
Loans to
Individuals		  Unallo
-cated		  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 costs                              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		 Installment
Loans to
Individuals		 Unallocated Total
As of and for the three months ended September 30, 2019
                
Beginning balance$3,218
 1,815
 4,123
 1,271
 8,852
 1,211
 299
 20,789
Charge-offs(288) (47) (194) (70) (617) (119) —
 (1,335)
Recoveries163
 308
 139
 58
 176
 67
 —
 911
Provisions(226) (270) (112) (122) (199) (141) (35) (1,105)
Ending balance$2,867
 1,806
 3,956
 1,137
 8,212
 1,018
 264
 19,260
                
As of and for the nine months ended September 30, 2019
                
Beginning balance$2,889
 2,243
 5,197
 1,665
 7,983
 952
 110
 21,039
Charge-offs(1,224) (340) (379) (216) (1,455) (555) —
 (4,169)
Recoveries768
 797
 521
 513
 550
 154
 —
 3,303
Provisions434
 (894) (1,383) (825) 1,134
 467
 154
 (913)
Ending balance$2,867
 1,806
 3,956
 1,137
 8,212
 1,018
 264
 19,260
                
Ending balance as of September 30, 2019: Allowance for loan losses
Individually evaluated for impairment$168
 45
 828
 —
 230
 —
 —
 1,271
Collectively evaluated for impairment$2,657
 1,761
 3,060
 1,137
 7,925
 1,005
 264
 17,809
Purchased credit impaired$42
 —
 68
 —
 57
 13
 —
 180
                
Loans receivable as of September 30, 2019
Ending balance – total$486,768
 471,326
 1,093,619
 343,378
 1,928,931
 70,962
 —
 4,394,984
Unamortized net deferred loan costs              1,560
Total loans              $4,396,544
                
Ending balances as of September 30, 2019: Loans
Individually evaluated for impairment$1,090
 804
 9,942
 338
 6,941
 —
 —
 19,115
Collectively evaluated for impairment$485,436
 470,353
 1,078,004
 342,831
 1,914,603
 70,844
 —
 4,362,071
Purchased credit impaired$242
 169
 5,673
 209
 7,387
 118
 —
 13,798


Page 17 

20
Index
Index

The following table presents the activity in the allowance for loan losses for the year ended December 31, 2018.

 

($ in thousands)

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

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


Page 18 

21
Index
Index

The following table presents the activity in the allowance for loan losses for all loans for the three and nine months ended March 31,September 30, 2018.

 

($ in thousands)

 Commercial,
Financial,
and
Agricultural		  Real Estate
–
Construction,
Land
Development,
& Other
Land Loans		  Real Estate
–
Residential
(1-4 Family)
First
Mortgages		  Real Estate
– Mortgage
– Home
Equity
Lines of
Credit		  Real Estate
– Mortgage
–
Commercial
and Other		  Installment
Loans to
Individuals		  Unallo
-cated		  Total 
                
As of and for the three months ended March 31, 2018
Beginning balance $3,111   2,816   6,147   1,827   6,475   950   1,972   23,298 
Charge-offs  (239)  (2)  (243)  (176)  (41)  (118)  —   (819)
Recoveries  499   3,046   145   153   582   53   —   4,478 
Provisions  (835)  (3,543)  (157)  462   (1,025)  (41)  1,480   (3,659)
Ending balance $2,536   2,317   5,892   2,266   5,991   844   3,452   23,298 
                                 
Ending balances as of March 31, 2018:  Allowance for loan losses
Individually evaluated for impairment $143   22   1,120   —   398   —   —   1,683 
Collectively evaluated for impairment $2,391   2,295   4,598   2,225   5,581   844   3,452   21,386 
Purchased credit impaired $2   —   174   41   12   —   —   229 
                                 
Loans receivable as of March 31, 2018:
Ending balance – total $411,662   542,960   995,662   373,797   1,718,698   71,257   —   4,114,036 
Unamortized net deferred loan fees                              (251)
Total loans                             $4,113,785 
                                 
Ending balances as of March 31, 2018: Loans
Individually evaluated for impairment $433   3,242   13,783   23   9,063   —   —   26,544 
Collectively evaluated for impairment $410,816   539,317   973,550   373,501   1,697,319   70,842   —   4,065,345 
Purchased credit impaired $413   401   8,329   273   12,316   415   —   22,147 

($ in thousands)Commercial,
Financial,
and
Agricultural		 Real Estate
–
Construction,
Land
Development,
& Other
Land Loans		 Real Estate
–
Residential
(1-4 Family)
First
Mortgages		 Real Estate
– Mortgage
– Home
Equity
Lines of
Credit		 Real Estate
– Mortgage
–
Commercial
and Other		 Installment
Loans to
Individuals		 Unallocated Total
As of and for the three months ended September 30, 2018
                
Beginning balance$2,268
 2,692
 7,059
 2,250
 7,295
 897
 837
 23,298
Charge-offs(933) (126) (1,183) (192) (1,086) (232) —
 (3,752)
Recoveries159
 181
 155
 51
 209
 158
 —
 913
Provisions1,221
 (366) (664) (330) 753
 79
 (606) 87
Ending balance$2,715
 2,381
 5,367
 1,779
 7,171
 902
 231
 20,546
                
As of and for the nine months ended September 30, 2018
                
Beginning balance$3,111
 2,816
 6,147
 1,827
 6,475
 950
 1,972
 23,298
Charge-offs(1,542) (158) (1,598) (378) (1,398) (494) —
 (5,568)
Recoveries971
 3,568
 671
 294
 1,333
 261
 —
 7,098
Provisions175
 (3,845) 147
 36
 761
 185
 (1,741) (4,282)
Ending balance$2,715
 2,381
 5,367
 1,779
 7,171
 902
 231
 20,546
                
Ending balances as of September 30, 2018: Allowance for loan losses
Individually evaluated for impairment$126
 —
 1,004
 —
 502
 —
 —
 1,632
Collectively evaluated for impairment$2,585
 2,335
 4,306
 1,765
 6,662
 887
 231
 18,771
Purchased credit impaired$4
 46
 57
 14
 7
 15
 —
 143
                
Loans receivable as of September 30, 2018
Ending balance – total$435,730
 559,450
 1,038,436
 362,829
 1,723,598
 70,096
 —
 4,190,139
Unamortized net deferred loan fees              489
Total loans              4,190,628
                
Ending balances as of September 30, 2018: Loans
Individually evaluated for impairment$1,981
 2,642
 12,617
 22
 10,490
 —
 —
 27,752
Collectively evaluated for impairment$433,485
 556,283
 1,019,645
 362,462
 1,700,519
 69,804
 —
 4,142,198
Purchased credit impaired$264
 525
 6,174
 345
 12,589
 292
 —
 20,189



Page 19 

22
Index
Index

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

 

($ in thousands)

 Recorded
Investment		  Unpaid
Principal
Balance		  Related
Allowance		  Average
Recorded
Investment		 
Impaired loans with no related allowance recorded:                
                 
Commercial, financial, and agricultural $28   29   —   169 
Real estate – mortgage – construction, land development & other land loans  458   782   —   472 
Real estate – mortgage – residential (1-4 family) first mortgages  4,789   5,112   —   4,708 
Real estate – mortgage –home equity loans / lines of credit  21   30   —   21 
Real estate – mortgage –commercial and other  4,016   4,808   —   3,745 
Installment loans to individuals  —   —   —   — 
Total impaired loans with no allowance $9,312   10,761   —   9,115 
                 
                 
Impaired loans with an allowance recorded:                
                 
Commercial, financial, and agricultural $1,016   1,016   857   701 
Real estate – mortgage – construction, land development & other land loans  339   339   28   599 
Real estate – mortgage – residential (1-4 family) first mortgages  6,102   6,303   858   6,934 
Real estate – mortgage –home equity loans / lines of credit  —   —   —   137 
Real estate – mortgage –commercial and other  4,380   4,998   312   5,215 
Installment loans to individuals  —   —   —   — 
Total impaired loans with allowance $11,837   12,655   2,055   13,586 

($ in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
Impaired loans with no related allowance recorded:       
        
Commercial, financial, and agricultural$18
 20
 —
 89
Real estate – mortgage – construction, land development & other land loans227
 263
 —
 403
Real estate – mortgage – residential (1-4 family) first mortgages3,713
 3,951
 —
 4,443
Real estate – mortgage –home equity loans / lines of credit338
 358
 —
 100
Real estate – mortgage –commercial and other2,781
 3,758
 —
 3,390
Installment loans to individuals—
 —
 —
 —
Total impaired loans with no allowance$7,077
 8,350
 —
 8,425
        
Impaired loans with an allowance recorded:       
        
Commercial, financial, and agricultural$1,072
 1,125
 168
 866
Real estate – mortgage – construction, land development & other land loans577
 577
 45
 589
Real estate – mortgage – residential (1-4 family) first mortgages6,229
 6,466
 828
 6,446
Real estate – mortgage –home equity loans / lines of credit—
 —
 —
 69
Real estate – mortgage –commercial and other4,160
 4,795
 230
 4,689
Installment loans to individuals—
 —
 —
 —
Total impaired loans with allowance$12,038
 12,963
 1,271
 12,659
Interest income recorded on impaired loans during the threenine months ended March 31,September 30, 2019 was insignificant.



Page 23
Index

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

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


Interest income recorded on impaired loans during the year ended December 31, 2018 was insignificant. Interest income recorded on impaired loans during the three months ended March 31, 2018 was insignificant.

Page 20 

Index

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



Page 24
Index

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

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

P

(Pass)

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

F

(Fail)

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

Page 21 

Index

The following table presents the Company’s recorded investment in loans by credit quality indicators as of March 31,September 30, 2019.

($ in thousands)   
  Pass  Special
Mention Loans		  Classified
Accruing Loans		  Classified
Nonaccrual
Loans		  Total 
                
Commercial, financial, and agricultural $460,963   4,667   1,573   980   468,183 
Real estate – construction, land development & other land loans  544,496   5,960   1,452   1,677   553,585 
Real estate – mortgage – residential (1-4 family) first mortgages  1,009,860   16,271   18,905   9,958   1,054,994 
Real estate – mortgage – home equity loans / lines of credit  345,187   1,466   6,052   1,632   354,337 
Real estate – mortgage – commercial and other  1,752,757   18,664   8,177   6,280   1,785,878 
Installment loans to individuals  68,606   227   329   157   69,319 
Purchased credit impaired  8,148   4,025   3,694   —   15,867 
  Total $4,190,017   51,280   40,182   20,684   4,302,163 
Unamortized net deferred loan costs                  1,624 
            Total loans                  4,303,787 

($ in thousands)Pass 
Special
Mention Loans
 
Classified
Accruing Loans
 
Classified
Nonaccrual
Loans
 Total
Commercial, financial, and agricultural$471,225
 7,735
 5,094
 2,472
 486,526
Real estate – construction, land development & other land loans463,122
 4,640
 2,160
 1,235
 471,157
Real estate – mortgage – residential (1-4 family) first mortgages1,047,592
 15,193
 17,500
 7,661
 1,087,946
Real estate – mortgage – home equity loans / lines of credit334,054
 1,267
 5,970
 1,878
 343,169
Real estate – mortgage – commercial and other1,888,049
 20,081
 7,044
 6,370
 1,921,544
Installment loans to individuals70,122
 218
 400
 104
 70,844
Purchased credit impaired8,279
 2,797
 2,722
 —
 13,798
Total$4,282,443
 51,931
 40,890
 19,720
 4,394,984
Unamortized net deferred loan costs        1,560
Total loans        4,396,544


Page 25
Index

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

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


Troubled Debt Restructurings

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

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

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

Page 22 

Index

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

($ in thousands) For three months ended
March 31, 2019		  For the three months ended
March 31, 2018		 
  Number of
Contracts		  Pre-
Modification
Restructured
Balances		  Post-
Modification
Restructured
Balances		  Number of
Contracts		  Pre-
Modification
Restructured
Balances		  Post-
Modification
Restructured
Balances		 
TDRs – Accruing                        
Commercial, financial, and agricultural  —  $—  $—   —  $—  $— 
Real estate – construction, land development & other land loans  —   —   —   —   —   — 
Real estate – mortgage – residential (1-4 family) first mortgages  1   55   55   —   —   — 
Real estate – mortgage – home equity loans / lines of credit  —   —   —   —   —   — 
Real estate – mortgage – commercial and other  —   —   —   —   —   — 
Installment loans to individuals  —   —   —   —   —   — 
                         
TDRs – Nonaccrual                        
Commercial, financial, and agricultural  —   —   —   —   —   — 
Real estate – construction, land development & other land loans  —   —   —   1   61   61 
Real estate – mortgage – residential (1-4 family) first mortgages  —   —   —   2   254   264 
Real estate – mortgage – home equity loans / lines of credit  —   —   —   —   —   — 
Real estate – mortgage – commercial and other  —   —   —   —   —   — 
Installment loans to individuals  —   —   —   —   —   — 
Total TDRs arising during period  1  $55  $55   3  $315  $325 
                         



Page 26
Index

($ in thousands)For the three months ended
September 30, 2019		 For the three months ended
September 30, 2018
 Number of
Contracts		 Pre-
Modification
Restructured
Balances		 Post-
Modification
Restructured
Balances		 Number of
Contracts		 Pre-
Modification
Restructured
Balances		 Post-
Modification
Restructured
Balances
TDRs – Accruing           
Commercial, financial, and agricultural—
 $—
 $—
 —
 $—
 $—
Real estate – construction, land development & other land loans—
 —
 —
 —
 —
 —
Real estate – mortgage – residential (1-4 family) first mortgages1
 133
 133
 —
 —
 —
Real estate – mortgage – home equity loans / lines of credit—
 —
 —
 —
 —
 —
Real estate – mortgage – commercial and other—
 —
 —
 —
 —
 —
Installment loans to individuals—
 —
 —
 —
 —
 —
TDRs – Nonaccrual        

  
Commercial, financial, and agricultural—
 —
 —
 —
 —
 —
Real estate – construction, land development & other land loans—
 —
 —
 —
 —
 —
Real estate – mortgage – residential (1-4 family) first mortgages—
 —
 —
 —
 —
 —
Real estate – mortgage – home equity loans / lines of credit—
 —
 —
 —
 —
 —
Real estate – mortgage – commercial and other—
 —
 —
 —
 —
 —
Installment loans to individuals—
 —
 —
 —
 —
 —
Total TDRs arising during period1
 $133
 $133
 —
 $—
 $—



Page 27
Index

The following table presents information related to loans modified in a troubled debt restructuring during the nine months ended September 30, 2019 and 2018.
($ in thousands)For the nine months ended
September 30, 2019		 For the nine months ended
September 30, 2018
 Number of Contracts Pre- Modification Restructured Balances Post- Modification Restructured Balances Number of Contracts Pre- Modification Restructured Balances Post- Modification Restructured Balances
TDRs – Accruing           
Commercial, financial, and agricultural1
 $143
 $143
 —
 $—
 $—
Real estate – construction, land development & other land loans—
 —
 —
 —
 —
 —
Real estate – mortgage – residential (1-4 family) first mortgages3
 387
 391
 1
 18
 18
Real estate – mortgage – home equity loans / lines of credit—
 —
 —
 —
 —
 —
Real estate – mortgage – commercial and other—
 —
 —
 —
 —
 —
Installment loans to individuals—
 —
 —
 —
 —
 —
TDRs – Nonaccrual        

  
Commercial, financial, and agricultural—
 —
 —
 —
 —
 —
Real estate – construction, land development & other land loans—
 —
 —
 1
 61
 61
Real estate – mortgage – residential (1-4 family) first mortgages—
 —
 —
 2
 254
 264
Real estate – mortgage – home equity loans / lines of credit—
 —
 —
 —
 —
 —
Real estate – mortgage – commercial and other—
 —
 —
 —
 —
 —
Installment loans to individuals—
 —
 —
 —
 —
 —
Total TDRs arising during period4
 $530
 $534
 4
 $333
 $343


Page 28
Index

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended March 31,September 30, 2019 and 2018 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate.

($ in thousands) For the three months ended
March 31, 2019		  For the three months ended
March 31, 2018		 
  Number of
Contracts		  Recorded
Investment		  Number of
Contracts		  Recorded
Investment		 
             
Accruing TDRs that subsequently defaulted                
Real estate – mortgage – residential (1-4 family first mortgages)  1  $93   —  $— 
Real estate – mortgage – commercial and other  —   —   1   570 
                 
Total accruing TDRs that subsequently defaulted  1  $93   1  $570 

Page 23 

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the nine months ended September 30, 2019 and 2018 are presented in the table below.
($ in thousands)For the Nine Months Ended September 30, 2019 For the Nine Months Ended September 30, 2018
 Number of
Contracts		 Recorded
Investment		 Number of
Contracts		 Recorded
Investment
Accruing TDRs that subsequently defaulted       
Real estate – mortgage – residential (1-4 family first mortgages)1
 $93
 1
 $60
Real estate – mortgage – commercial and other—
 —
 3
 1,333
Total accruing TDRs that subsequently defaulted1
 $93
 4
 $1,393


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

Note 8 – Goodwill and Other Intangible Assets

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

  March 31, 2019  December 31, 2018  March 31, 2018 
($ in thousands) Gross Carrying
Amount		  Accumulated
Amortization		  Gross Carrying
Amount		  Accumulated
Amortization		  Gross Carrying
Amount		  Accumulated
Amortization		 
Amortizable intangible assets:                        
   Customer lists $6,013   1,774   6,013   1,637   6,013   1,185 
   Core deposit intangibles  28,440   17,585   28,440   16,469   28,440   12,803 
   SBA servicing asset  6,072   1,352   5,472   1,053   3,348   319 
   Other  1,303   1,036   1,303   957   1,303   718 
        Total $41,828   21,747   41,228   20,116   39,104   15,025 
                         
Unamortizable intangible                        
    assets:                        
   Goodwill $234,368       234,368       231,681     

  September 30, 2019 December 31, 2018
($ in thousands) 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Amortizable intangible assets:        
Customer lists $6,013
 2,048
 6,013
 1,637
Core deposit intangibles 28,440
 19,650
 28,440
 16,469
SBA servicing asset 7,528
 2,028
 5,472
 1,053
Other 1,303
 1,102
 1,303
 957
Total $43,284
 24,828
 41,228
 20,116
         
Unamortizable intangible assets:        
Goodwill $234,368
   234,368
  

The Company recorded $600,000$2,056,000 and $1,154,000$2,755,000 in servicing assets associated with the guaranteed portion of SBA loans originated and sold during the first quartersnine months of 2019 and 2018, respectively. During the first quartersnine months of 2019 and 2018, the Company recorded $299,000$975,000 and $112,000,$555,000, respectively, in related amortization expense. Servicing assets are recorded for loans, or portions thereof, that the Company has sold but continue to service for a fee. Servicing assets are 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 to offset SBA servicing fees.

Amortization expense of all other intangible assets totaled $1,332,000$1,163,000 and $1,560,000$1,452,000 for the three months ended March 31,September 30, 2019 and 2018, respectively, and $3,737,000 and $4,518,000 for the nine months ended September 30, 2019 and 2018, respectively.

The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets forassets. These amounts will be recorded as "Intangibles amortization expense" within the last three quarters of calendar year 2019 and for eachnoninterest expense section of the four calendar years ending December 31, 2023 and the estimated amount amortizable thereafter.Consolidated Statements of Income. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets.

($ in thousands)

 

 Estimated Amortization
Expense		 
April 1 to December 31, 2019 $4,191 
2020  4,641 
2021  3,628 
2022  2,525 
2023  1,453 
Thereafter  3,643 
         Total $20,081 

Additionally, as noted in the table above, the Company has a SBA servicing asset at September 30, 2019 with a remaining book value of $5,500,000. This servicing asset will be amortized over the lives of the related loans, with such amortization expense recorded as a reduction of servicing



Page 24 

29
Index

income within the line item "Other service charges, commissions and fees" of the Consolidated Statements of Income.
($ in thousands) 
Estimated Amortization
Expense
October 1 to December 31, 2019 $1,121
2020 3,841
2021 2,927
2022 2,022
2023 1,041
Thereafter 2,004
Total $12,956

Index

Note 9 – Pension Plans

The Company has historically sponsored two2 defined benefit pension plans – a qualified retirement plan (the “Pension Plan”) which was generally available to all employees, and a Supplemental Executive Retirement Plan (the “SERP”), which was for the benefit of certain senior management executives of the Company. Effective December 31, 2012, the Company froze both plans for all participants. Although no previously accrued benefits were lost, employees no longer accrue benefits for service subsequent to 2012.

The Company recorded periodic pension cost totaling $244,000 and $365,000$136,000 for the three months ended March 31,September 30, 2019 and 2018, respectively, and $732,000 and $408,000 for the nine months ended September 30, 2019 and 2018, respectively. The following table contains the components of the pension cost.

  For the Three Months Ended March 31, 
  2019  2018  2019  2018  2019 Total  2018 Total 
($ in thousands) Pension Plan  Pension Plan  SERP  SERP  Both Plans  Both Plans 
Service cost $—   —   —   29   —   29 
Interest cost  372   330   41   57   413   387 
Expected return on plan assets  (397)  (103)  —   —   (397)  (103)
Amortization of net (gain)/loss  223   60   5   (8)  228   52 
   Net periodic pension cost $198   287   46   78   244   365 

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

—

—

32

—

32
Interest cost367

328

82

40

449

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

—

(360)
(177)
Amortization of net (gain)/loss282

(93)
(127)
6

155

(87)
Net periodic pension cost$289

58

(45)
78

244

136

 For the Nine Months Ended September 30,
($ in thousands)2019
Pension Plan		 2018
Pension Plan		 2019
SERP		 2018
SERP		 2019 Total
Both Plans		 2018 Total
Both Plans
Service cost$—
 —
 —
 94
 —
 94
Interest cost1,111
 984
 164
 150
 1,275
 1,134
Expected return on plan assets(1,154) (836) —
 —
 (1,154) (836)
Amortization of net (gain)/loss733
 26
 (122) (10) 611
 16
Net periodic pension cost$690
 174
 42
 234
 732
 408

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 not0t contribute to the Pension Plan in the first quarternine months of 2019 and does not0t expect to contribute to the Pension Plan in the remainder of 2019.

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



Page 30
Index

Note 10 – 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, 2019  December 31, 2018  March 31, 2018 
Unrealized gain (loss) on securities available for sale $(6,487)  (12,390)  (9,501)
     Deferred tax asset (liability)  1,516   2,896   2,220 
Net unrealized gain (loss) on securities available for sale  (4,971)  (9,494)  (7,281)
             
Additional pension asset (liability)  (2,992)  (3,220)  (3,148)
     Deferred tax asset (liability)  699   753   736 
Net additional pension asset (liability)  (2,293)  (2,467)  (2,412)
             
Total accumulated other comprehensive income (loss) $(7,264)  (11,961)  (9,693)

Page 25 

Index
($ in thousands)September 30, 2019 December 31, 2018
Unrealized gain (loss) on securities available for sale$7,327
 (12,390)
Deferred tax asset (liability)(1,684) 2,896
Net unrealized gain (loss) on securities available for sale5,643
 (9,494)
    
Additional pension asset (liability)(2,609) (3,220)
Deferred tax asset (liability)600
 753
Net additional pension asset (liability)(2,009) (2,467)
    
Total accumulated other comprehensive income (loss)$3,634
 (11,961)


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

($ in thousands)

 

 Unrealized Gain
(Loss) on
Securities
Available for Sale		  Additional
Pension Asset
(Liability)		  Total 
Beginning balance at January 1, 2019 $(9,494)  (2,467)  (11,961)
     Other comprehensive income (loss) before reclassifications  4,523   —   4,523 
     Amounts reclassified from accumulated other comprehensive income  —   174   174 
Net current-period other comprehensive income (loss)  4,523   174   4,697
             
Ending balance at March 31, 2019 $(4,971)  (2,293)  (7,264)

($ in thousands)
Unrealized Gain
(Loss) on
Securities
Available for Sale
 
Additional
Pension Asset
(Liability)
 Total
Beginning balance at January 1, 2019$(9,494) (2,467) (11,961)
Other comprehensive income (loss) before reclassifications15,212
 —
 15,212
Amounts reclassified from accumulated other comprehensive income(75) 458
 383
Net current-period other comprehensive income (loss)15,137
 458
 15,595
      
Ending balance at September 30, 2019$5,643
 (2,009) 3,634
The following table discloses the changes in accumulated other comprehensive income (loss) for the threenine months ended March 31,September 30, 2018 (all amounts are net of tax).

($ in thousands)

 

 Unrealized Gain
(Loss) on
Securities
Available for Sale		  Additional
Pension Asset
(Liability)		  Total 
Beginning balance at January 1, 2018 $(1,694)  (2,452)  (4,146)
     Other comprehensive income (loss) before reclassifications  (5,587)  —   (5,587)
     Amounts reclassified from accumulated other comprehensive income  —   40   40 
Net current-period other comprehensive income (loss)  (5,587)  40   (5,547)
             
Ending balance at March 31, 2018 $(7,281)  (2,412)  (9,693)

($ in thousands)
Unrealized Gain
(Loss) on
Securities
Available for Sale
 
Additional
Pension Asset
(Liability)
 Total
Beginning balance at January 1, 2018$(1,694) (2,452) (4,146)
Other comprehensive income (loss) before reclassifications(7,839) —
 (7,839)
Amounts reclassified from accumulated other comprehensive income—
 12
 12
Net current-period other comprehensive income (loss)(7,839) 12
 (7,827)
      
Ending balance at September 30, 2018$(9,533) (2,440) (11,973)







Page 31
Index

Note 11 – Fair Value

Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

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

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

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

Page 26 

Index

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

($ in thousands)      
Description of Financial Instruments Fair Value at
March 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 $78,887   —   78,887   — 
        Mortgage-backed securities  526,948   —   526,948   — 
        Corporate bonds  33,774   —   33,774   — 
          Total available for sale securities $639,609   —   639,609   — 
                 
Nonrecurring                
     Impaired loans $10,820   —   —   10,820 
     Foreclosed real estate  6,390   —   —   6,390 

($ in thousands)
Description of Financial Instruments Fair Value at
September 30, 2019		 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Recurring        
Securities available for sale:        
Government-sponsored enterprise securities $30,053
 —
 30,053
 —
Mortgage-backed securities 640,488
 —
 640,488
 —
Corporate bonds 34,683
 —
 34,683
 —
Total available for sale securities $705,224
 —
 705,224
 —
         
Nonrecurring        
Impaired loans $12,406
 —
 —
 12,406
Foreclosed real estate 2,294
 —
 —
 2,294
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2018.

($ in thousands)      
Description of Financial Instruments Fair Value at
December 31,
2018		  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		  Significant Other
Observable Inputs
(Level 2)		  Significant
Unobservable
Inputs
(Level 3)		 
Recurring                
Securities available for sale:                
Government-sponsored enterprise securities $82,662   —   82,662   — 
Mortgage-backed securities  385,551   —   385,551   — 
Corporate bonds  33,138   —   33,138   — 
Total available for sale securities $501,351   —   501,351   — 
                 
Nonrecurring                
     Impaired loans $13,071   —   —   13,071 
     Foreclosed real estate  7,440   —   —   7,440 

($ in thousands)    
Description of Financial Instruments Fair Value at
December 31, 2018		 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Recurring        
Securities available for sale:        
Government-sponsored enterprise securities $82,662
 —
 82,662
 —
Mortgage-backed securities 385,551
 —
 385,551
 —
Corporate bonds 33,138
 —
 33,138
 —
Total available for sale securities $501,351
 —
 501,351
 —
         
Nonrecurring        
Impaired loans $13,071
 —
 —
 13,071
  Foreclosed real estate 7,440
 —
 —
 7,440




Page 32
Index

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

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

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

Page 27 

Index

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

Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). At the time of foreclosure, any excess of the loan balance 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,September 30, 2019, the significant unobservable inputs used in the fair value measurements were as follows:

($ in thousands)     
Description Fair Value at
March 31,
2019		  Valuation
Technique		 Significant Unobservable
Inputs		 Range
of Significant
Unobservable
Input Values
Impaired loans $10,820  Appraised value; PV of expected cash flows Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0-10%
Foreclosed real estate  6,390  Appraised value; List or contract price Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell 0-10%
           



Page 33
Index

($ in thousands)      
Description Fair Value at
September 30, 2019		 
Valuation
Technique
 
Significant Unobservable
Inputs
 
Range of Significant
Unobservable
Input Values
Impaired loans $12,406
 Appraised value; PV of expected cash flows Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0-10%
Foreclosed real estate 2,294
 Appraised value; List or contract price Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell 0-10%
         
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

($ in thousands)     
Description Fair Value at
December 31,
2018		  Valuation
Technique		 Significant Unobservable
Inputs		 Range
of Significant
Unobservable
Input Values
Impaired loans $13,071  Appraised value; PV of expected cash flows Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0-10%
Foreclosed real estate  7,440  Appraised value; List or contract price Discounts to reflect current market conditions and estimated costs to sell 0-10%
           

($ in thousands)      
Description Fair Value at
December 31, 2018		 
Valuation
Technique
 
Significant Unobservable
Inputs
 
Range
of Significant
Unobservable
Input Values
Impaired loans $13,071
 Appraised value; PV of expected cash flows Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0-10%
Foreclosed real estate 7,440
 Appraised value; List or contract price Discounts to reflect current market conditions and estimated costs to sell 0-10%
         

Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities measured on a recurring basis during the threenine months ended March 31,September 30, 2019 or 2018.

For the threenine months ended March 31,September 30, 2019 and 2018, the increase (decrease) in the fair value of securities available for sale was $5,903,000$19,814,000 and ($7,290,000)10,229,000), respectively, which is included in other comprehensive income (net of tax benefit (expense) of ($1,380,000)4,602,000) and $1,703,000,$2,390,000, respectively). Fair value measurement methods at March 31,September 30, 2019 and 2018 are consistent with those used in prior reporting periods.

Page 28 

Index

The carrying amounts and estimated fair values of financial instruments at March 31,September 30, 2019 and December 31, 2018 are as follows:

    March 31, 2019  December 31, 2018 

 

($ in thousands)

 Level in Fair
Value
Hierarchy		 Carrying
Amount		  Estimated
Fair Value		  Carrying
Amount		  Estimated
Fair Value		 
               
Cash and due from banks, noninterest-bearing Level 1 $80,620   80,620   56,050   56,050 
Due from banks, interest-bearing Level 1  366,187   366,187   406,848   406,848 
Securities available for sale Level 2  639,609   639,609   501,351   501,351 
Securities held to maturity Level 2  90,903   90,280   101,237   99,906 
Presold mortgages in process of settlement Level 1  3,318   3,318   4,279   4,279 
Total loans, net of allowance Level 3  4,282,692   4,228,688   4,228,025   4,181,139 
Accrued interest receivable Level 1  16,516   16,516   16,004   16,004 
Bank-owned life insurance Level 1  102,524   102,524   101,878   101,878 
SBA Servicing Asset Level 3  4,720   4,990   4,419   4,617 
                   
Deposits Level 2  4,797,238   4,792,368   4,659,339   4,653,522 
Borrowings Level 2  406,125   401,064   406,609   402,556 
Accrued interest payable Level 2  2,341   2,341   1,976   1,972 
                   



Page 29 

34
Index
Index

   September 30, 2019 December 31, 2018
($ in thousands)
Level in Fair
Value
Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Cash and due from banks, noninterest-bearingLevel 1 $52,621
 52,621
 56,050
 56,050
Due from banks, interest-bearingLevel 1 264,840
 264,840
 406,848
 406,848
Securities available for saleLevel 2 705,224
 705,224
 501,351
 501,351
Securities held to maturityLevel 2 74,265
 74,465
 101,237
 99,906
Presold mortgages in process of settlementLevel 1 16,269
 16,269
 4,279
 4,279
Total loans, net of allowanceLevel 3 4,377,284
 4,341,770
 4,228,025
 4,181,139
Accrued interest receivableLevel 1 16,297
 16,297
 16,004
 16,004
Bank-owned life insuranceLevel 1 103,806
 103,806
 101,878
 101,878
SBA Servicing AssetLevel 3 5,500
 5,966
 4,419
 4,617
          
DepositsLevel 2 4,875,382
 4,874,274
 4,659,339
 4,653,522
BorrowingsLevel 2 300,656
 294,913
 406,609
 402,556
Accrued interest payableLevel 2 2,169
 2,169
 1,976
 1,972

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

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

Note 12 – Revenue from Contracts with Customers

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

  For the Three Months Ended 
$ in thousands March 31, 2019  March 31, 2018 
       
Noninterest Income        
  In-scope of Topic 606:        
     Service charges on deposit accounts: $2,945   3,263 
     Other service charges, commissions, and fees:        
        Interchange income  3,551   3,061 
        Other service charges and fees  1,697   1,424 
     Commissions from sales of insurance and financial products:        
        Insurance income  1,368   1,414 
        Wealth management income  661   526 
     SBA consulting fees  1,263   1,141 
     Foreclosed property gains (losses), net  (245)  (288)
   Noninterest income (in-scope of Topic 606)  11,240   10,541 
   Noninterest income (out-of-scope of Topic 606)  3,335   5,288 
Total noninterest income $14,575   15,829 
         



Page 35
Index

 For the Three Months Ended For the Nine Months Ended
$ in thousandsSeptember 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Noninterest Income       
In-scope of Topic 606:       
Service charges on deposit accounts:$3,388
 3,221
 9,543
 9,606
Other service charges, commissions, and fees:       
Interchange income3,975
 3,374
 11,754
 9,917
Other service charges and fees1,839
 1,568
 5,094
 4,184
Commissions from sales of insurance and financial products:       
Insurance income1,355
 1,627
 4,027
 4,530
Wealth management income848
 798
 2,409
 1,954
SBA consulting fees663
 1,287
 2,847
 3,554
Foreclosed property gains (losses), net(273) (192) (899) (579)
Noninterest income (in-scope of Topic 606)11,795
 11,683
 34,775
 33,166
Noninterest income (out-of-scope of Topic 606)3,835
 3,489
 11,419
 13,707
Total noninterest income$15,630
 15,172
 46,194
 46,873

A description of the Company’s revenue streams accounted for under Topic 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. 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.

Page 30 

Index

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

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

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



Page 36
Index

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

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

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

Note 13 – Leases

Effective January 1, 2019, the Company adopted new accounting guidance regardingLeases(Topic (Topic 842). As of March 31,September 30, 2019, the Company leased eight8 branch offices for which the land and buildings are leased and nine9 branch offices for which the land is leased but the building is owned. The Company also leases one1 loan production office and office space for several operational departments. All of the Company’s leases have historically qualified as operating leases under prior accounting guidance, and therefore, were not previously recognized on the Company’s Consolidated Balance Sheets. The lease agreements have maturity dates ranging from January 2021 through May 2076, some of which include options for multiple five- and ten-year extensions. The weighted average remaining life of the lease term for these leases was 21.1919.80 years as of March 31,September 30, 2019.

The discount rate that was determined for each lease was based on the Company’s incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The weighted average discount rate for leases was 3.42%3.30% as of March 31,September 30, 2019.

Total operating lease expense was $0.6$1.9 million for the threenine months ended March 31,September 30, 2019. The right-of-use assets, included in premises and equipment, and lease liabilities, included in other liabilities, were $18.9$20.6 million and $19.0$20.7 million as of March 31,September 30, 2019, respectively.

Page 31 

Index

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

($ in thousands)

 

 Estimated Amortization
Expense		 
April 1 to December 31, 2019 $2,206 
2020  2,175 
2021  1,986 
2022  1,699 
2023  1,607 
Thereafter  19,571 
Total estimated lease payments  29,244 
Less effect of discounting  (10,268)
Present value of estimated lease payments (lease liability) $18,976 

($ in thousands)Maturity Analysis of Lease Liabilities
October 1 to December 31, 2019$583
20202,504
20212,329
20221,941
20231,848
Thereafter21,145
Total estimated lease payments30,350
Less effect of discounting(9,607)
Present value of estimated lease payments (lease liability)$20,743



Page 32 

37
Index


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

Note 14 - Equity Issuance

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


Page 38
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.

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

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

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

Purchased loans are recorded at fair value at the acquisition date. Therefore, amounts deemed uncollectible at the acquisition date represent a discount to the loan value and become a part of the fair value calculation. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan and this accretion is referred to as “loan discount accretion.”

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



Page 33 

39
Index
Index

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

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

Intangible Assets

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

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

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

Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill. We have three reporting units – 1) First Bank with $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.

In our October 31, 2018 goodwill impairment evaluation, we concluded that the goodwill for each of our reporting units was not impaired.

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

Page 34 

Index

Fair Value and Discount Accretion of Acquired Loans

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



Page 40
Index

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

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

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

Current Accounting Matters

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

adopted and accounting standards that are pending adoption.

FINANCIAL OVERVIEW


Net income availableamounted to $25.0 million, or $0.84 per diluted common shareholdersshare, for the firstthree months ended September 30, 2019, an increase of 13.5% in earnings per share from the $22.0 million, or $0.74 per diluted common share, recorded in the third quarter of 2018.

For the nine months ended September 30, 2019, was $22.3we recorded net income of $71.2 million, or $0.75$2.39 per diluted common share, an increase of 7.1%8.1% in earnings per share from the $20.7$65.4 million, or $0.70$2.21 per diluted common share, recorded infor the first quarter ofnine months ended September 30, 2018.


Net Interest Income and Net Interest Margin


Net interest income for the third quarter of 2019 was $53.8 million, a 3.7% increase from the $51.8 million recorded in the third quarter of 2018. Net interest income for the first quarternine months of 2019 was $53.4amounted to $161.5 million, a 5.7%5.2% increase from the $50.5$153.6 million recorded in the first quartercomparable period of 2018. The increaseincreases in net interest income wasfor the periods presented were primarily due to growth in interest-earning assets.

assets, which have increased by 6.7% over the past year.


Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the firstthird quarter of 2019 was 4.06% compared to 4.17% for3.95%, which was 8 basis points lower than the first4.03% realized in the third quarter of 2018. For the nine month period ended September 30, 2019, our net interest margin was 4.02% compared to 4.09% for the same period in 2018. The decreaselower margins were due to a combination of lower loan discount accretion and funding costs that rose by more than asset yields.

We recorded loan discount accretion of $1.3 million in the third quarter of 2019, compared to $1.6 million in the third quarter of 2018. For the nine months ended September 30, 2019 and 2018, loan discount accretion amounted to $4.5 million and $6.0 million, respectively. The lower loan discount accretion accounted for approximately 3 basis points out of the 8 basis point decline in the net interest margin realized inwhen comparing the third quarter of 2019 was primarily due to 2018


Page 41
Index

and for 5 basis points of the 7 basis point decline on a year to date basis. The lower loan discount accretion significant interest recoveries realizedwas attributable to paydowns in the prior year, and interest bearing liability costs that have increased more than earning asset yields.

our acquired loan portfolios.


Provision for Loan Losses and Asset Quality


We recorded a provision for loan losses of $0.5 million in the first quarter of 2019 compared to a negative provision for loan losses of $3.7$1.1 million (reduction of the allowance for loan losses) in the firstthird quarter of 2019 compared to a provision for loan losses of $0.1 million in the third quarter of 2018. For the nine months ended September 30, 2019, we recorded a negative provision for loan losses of $0.9 million compared to a negative provision for loan losses of $4.3 million in the same period of 2018. In the first quarter of 2018, we experienced net loan recoveries of $3.7 million, which droveresulting in the negative provision for the quarter.during 2018. Our provision for loan losses has remained at a low levellevels over the past several years as a result of strong asset quality, including low loan charge-offs.

Page 35 

Index

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

Noninterest Income


Total noninterest income was $14.6$15.6 million and $15.8$15.2 million for the three months ended March 31,September 30, 2019 and March 31, 2018, respectively,respectively. For the nine months ended September 30, 2019, noninterest income amounted to $46.2 million compared to $46.9 million for the same period of 2018.

For the third quarter of 2019, we experienced strong increases in “Other service charges, commissions, and fees,” due to higher debit card and credit card interchange fees associated with increased usage, and "Fees from Presold Mortgages," as a result of higher mortgage loan originations. Offsetting those increases was lower SBA consulting fee income and lower SBA loan sale gains, which both declined due to lower origination activity.

For the majority of the decrease relating to declines innine months ended September 30, 2019, higher “Other service charges, commissions and fees” were substantially offset by lower SBA consulting fee income and lower gains on sales of SBA loan sales.

loans.


Other gains (losses) amounted to a loss of $0.3 million in the first nine months of 2019 due to miscellaneous items, whereas in the first nine months of 2018, we recorded a net gain of $0.8 million, which included a $0.9 million gain on the sale of a former branch location.

Noninterest Expenses


Noninterest expenses amounted to $39.3$38.9 million in the firstthird quarter of 2019, compared to $43.5a 0.3% decrease from the $39.0 million recorded in the firstthird quarter of 2018. Most categoriesNoninterest expenses for the nine months ended September 30, 2019 amounted to $118.6 million compared to $121.2 million in 2018, a decrease of noninterest2.1%.

Personnel expense decreasedincreased by 3%-5% for the periods in 2019 compared 2018, which was offset by lower intangible amortization, merger expenses and other miscellaneous expenses (including lower FDIC insurance expense which is discussed in the first quarter 2019 compared to the first quartercomponents of 2018 due to operating efficiencies realized subsequent to the March 2018 merger conversion of the Asheville Savings Bank operations into First Bank.

earnings section below).


Income Taxes


Our effective tax rate for the firstthird quarter of 2019 was 20.9%20.8% compared to 22.0%21.2% in the firstthird quarter of 2018. For the nine months ended September 30, 2019 and 2018, our effective tax rates were 21.0% and 21.8%, respectively. The decline waslower 2019 effective tax rates were primarily due to a decrease in the North Carolina corporate income tax rate from 3.0% to 2.5%, as well as the impact of certain merger expenses recorded in 2018 that were not tax deductible.

which became effective January 1, 2019.


Balance Sheet and Capital


Total assets at March 31,September 30, 2019 amounted to $6.1 billion, a 7.2%3.5% increase from a year earlier.December 31, 2018. Total loans at March 31,September 30, 2019 amounted to $4.3$4.4 billion, a 4.6%3.5% increase from a year earlier,December 31, 2018, and total deposits amounted to $4.8$4.9 billion at March 31,September 30, 2019, a 6.7%4.6% increase from a year earlier.

We experienced steady organicDecember 31, 2018.




Page 42

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

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

During the third quarter of 2019, we repurchased 99,625 shares of the Company’s common stock at an average price of $34.89, which totaled $3.5 million. For the first nine months of 2019, we repurchased 281,593 shares at an average cost of $35.48 for a total of $10 million. We have $15 million of remaining repurchase authority and, depending on market conditions, may continue share repurchases up to that limit during the firstlast quarter of 2019. Organic loan growth amounted to $54.7 million, or 5.2% annualized, and organic deposit growth amounted to $137.9 million, or 12.0% annualized. We have ongoing internal initiatives to enhance loan and deposit growth, including our continued expansion into higher growth markets such as Charlotte and Raleigh.


We remain well-capitalized by all regulatory standards, with an estimateda Total Risk-Based Capital Ratio at March 31,September 30, 2019 of 14.21%14.88%, an increase from the 12.79%13.97% reported at MarchDecember 31, 2018.

Impact of New Lease Accounting Standard

During the first quarter of 2019, we adopted new accounting guidance which required us to record all long-term leases on our balance sheet. With the adoption of this guidance, we recorded $19.5 million in right-to-use lease assets, which was recorded within premises and equipment, and $19.5 million in lease obligations, which was recorded in other liabilities. These additions had an insignificant impact on our capital ratios, and there was no impact to our earnings related to the adoption of this new standard.

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,September 30, 2019 amounted to $53.4$53.8 million, an increase of $2.9$1.9 million, or 5.7%3.7%, from the $50.5$51.8 million recorded in the firstthird quarter of 2018. Net interest income on a tax-equivalent basis for the three month period ended March 31,September 30, 2019 amounted to $53.8$54.2 million, an increase of $2.9$1.9 million, or 5.7%3.7%, from the $50.9$52.3 million recorded in the firstthird quarter of 2018. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.

  Three Months Ended March 31, 
($ in thousands) 2019  2018 
Net interest income, as reported $53,361   50,507 
Tax-equivalent adjustment  424   356 
Net interest income, tax-equivalent $53,785   50,863 

Page 36 

Index

 Three Months Ended September 30,
($ in thousands)2019 2018
Net interest income, as reported$53,778
 51,845
Tax-equivalent adjustment413
 428
Net interest income, tax-equivalent$54,191
 52,273
Net interest income for the nine month period ended September 30, 2019 amounted to $161.5 million, an increase of $8.0 million, or 5.2%, from the $153.6 million recorded in the first nine months of 2018. Net interest income on a tax-equivalent basis for the nine month period ended September 30, 2019 amounted to $162.8 million, an increase of $8.1 million, or 5.2%, from the $154.7 million recorded in the comparable period of 2018.
 Nine Months Ended September 30,
($ in thousands)2019 2018
Net interest income, as reported$161,548
 153,584
Tax-equivalent adjustment1,260
 1,151
Net interest income, tax-equivalent$162,808
 154,735
There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

For the three and nine months ended March 31,September 30, 2019, the higher net interest income compared to the same periodcomparable periods of 2018 was primarily due to growth in interest-earning assets, including higher amounts of loans outstanding.

and securities. The growth in interest-earning assets was driven by funds provided from growth in deposits.



Page 43

The following table presents an analysis of net interest income.

  For the Three Months Ended March 31, 
  2019  2018 
($ in thousands) Average
Volume		  Average
Rate		  Interest
Earned
or Paid		  Average
Volume		  Average
Rate		  Interest
Earned
or Paid		 
Assets                        
Loans (1) $4,280,272   5.11%  $53,960  $4,099,495   4.96%  $50,170 
Taxable securities  651,878   2.95%   4,737   410,586   2.55%   2,586 
Non-taxable securities  45,752   2.99%   337   52,945   2.91%   380 
Short-term investments, primarily overnight funds  394,864   2.77%   2,701   386,586   2.02%   1,925 
Total interest-earning assets  5,372,766   4.66%   61,735   4,949,612   4.51%   55,061 
                         
Cash and due from banks  55,899           93,185         
Premises and equipment  137,023           115,956         
Other assets  379,361           390,763         
   Total assets $5,945,049          $5,549,516         
                         
Liabilities                        
Interest bearing checking $908,039   0.15%  $327  $885,428   0.09%  $199 
Money market deposits  1,056,931   0.54%   1,395   1,005,588   0.23%   575 
Savings deposits  426,843   0.27%   287   448,785   0.19%   205 
Time deposits >$100,000  712,540   1.81%   3,178   599,727   1.00%   1,475 
Other time deposits  263,171   0.60%   390   282,678   0.31%   219 
     Total interest-bearing deposits  3,367,524   0.67%   5,577   3,222,206   0.34%   2,673 
Borrowings  406,190   2.79%   2,797   407,158   1.87%   1,881 
Total interest-bearing liabilities  3,773,714   0.90%   8,374   3,629,364   0.51%   4,554 
                         
Noninterest bearing checking  1,336,707           1,181,599         
Other liabilities  59,569           37,142         
Shareholders’ equity  775,059           701,411         
Total liabilities and
shareholders’ equity		 $5,945,049          $5,549,516         
                         
Net yield on interest-earning assets and net interest income      4.03%  $53,361       4.14%  $50,507 
Net yield on interest-earning assets and net interest income – tax-equivalent (2)      4.06%  $53,785       4.17%  $50,863 
                         
Interest rate spread      3.76%           4.00%     
                         
Average prime rate      5.50%           4.53%     
(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)Includes tax-equivalent adjustments of $424,000 and $356,000 in 2019 and 2018, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

 For the Three Months Ended September 30,
 2019 2018
($ in thousands)
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
 
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
Assets 
  
  
  
  
  
Loans (1)$4,354,477
 5.02% $55,142
 $4,191,751
 4.96% $52,407
Taxable securities747,044
 2.72% 5,129
 400,861
 2.48% 2,501
Non-taxable securities27,711
 3.04% 212
 50,373
 2.89% 367
Short-term investments, primarily overnight funds310,781
 2.42% 1,898
 500,435
 2.33% 2,944
Total interest-earning assets5,440,013
 4.55% 62,381
 5,143,420
 4.49% 58,219
            
Cash and due from banks54,132
     78,078
    
Premises and equipment136,468
     113,812
    
Other assets391,366
     377,630
    
Total assets$6,021,979
     $5,712,940
    
            
Liabilities           
Interest bearing checking$883,002
 0.15% $338
 862,065
 0.11% $235
Money market deposits1,124,240
 0.68% 1,915
 1,018,933
 0.34% 869
Savings deposits416,732
 0.29% 307
 435,579
 0.21% 230
Time deposits >$100,000692,417
 2.02% 3,519
 658,479
 1.39% 2,302
Other time deposits261,424
 0.79% 518
 272,468
 0.39% 270
Total interest-bearing deposits3,377,815
 0.77% 6,597
 3,247,524
 0.48% 3,906
Borrowings300,714
 2.65% 2,006
 406,652
 2.41% 2,468
Total interest-bearing liabilities3,678,529
 0.93% 8,603
 3,654,176
 0.69% 6,374
            
Noninterest bearing checking1,460,759
     1,278,488
    
Other liabilities55,777
     42,716
    
Shareholders’ equity826,914
     737,560
    
Total liabilities and
shareholders’ equity
$6,021,979
     5,712,940
    
            
Net yield on interest-earning assets and net interest income  3.92% $53,778
   4.00% $51,845
Net yield on interest-earning assets and net interest income – tax-equivalent (2)  3.95% $54,191
   4.03% $52,273
            
Interest rate spread  3.62%     3.80%  
            
Average prime rate  5.27%     5.01%  
(1)   Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)   Includes tax-equivalent adjustments of $413,000 and $428,000 in 2019 and 2018, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.


Page 44

 For the Nine Months Ended September 30,
 2019 2018
($ in thousands)
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
 
Average
Volume
 
Average
Rate
 
Interest
Earned
or Paid
Assets 
  
  
  
  
  
Loans (1)$4,322,078
 5.10% $164,754
 $4,141,645
 4.97% $154,028
Taxable securities706,300
 2.81% 14,859
 406,975
 2.48% 7,552
Non-taxable securities34,833
 3.15% 820
 51,283
 2.91% 1,115
Short-term investments, primarily overnight funds347,335
 2.58% 6,705
 457,908
 2.14% 7,320
Total interest-earning assets5,410,546
 4.62% 187,138
 5,057,811
 4.49% 170,015
            
Cash and due from banks54,579
     88,596
    
Premises and equipment136,550
     114,656
    
Other assets384,966
     383,629
    
Total assets$5,986,641
     $5,644,692
    
            
Liabilities           
Interest bearing checking$894,488
 0.14% $966
 $874,921
 0.10% $646
Money market deposits1,093,736
 0.62% 5,036
 1,019,399
 0.28% 2,151
Savings deposits419,210
 0.29% 903
 442,345
 0.20% 648
Time deposits >$100,000709,247
 1.93% 10,221
 629,175
 1.20% 5,627
Other time deposits262,424
 0.70% 1,372
 278,950
 0.35% 740
Total interest-bearing deposits3,379,105
 0.73% 18,498
 3,244,790
 0.40% 9,812
Borrowings343,431
 2.76% 7,092
 406,954
 2.17% 6,619
Total interest-bearing liabilities3,722,536
 0.92% 25,590
 3,651,744
 0.60% 16,431
            
Noninterest bearing checking1,405,830
     1,236,002
    
Other liabilities57,047
     37,964
    
Shareholders’ equity801,228
     718,982
    
Total liabilities and
shareholders’ equity
$5,986,641
     $5,644,692
    
            
Net yield on interest-earning assets and net interest income  3.99% $161,548
   4.06% $153,584
Net yield on interest-earning assets and net interest income – tax-equivalent (2)  4.02% $162,808
   4.09% $154,735
            
Interest rate spread  3.70%     3.89%  
            
Average prime rate  5.42%     4.78%  
(1)   Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)   Includes tax-equivalent adjustments of $1,260,000 and $1,151,000 in 2019 and 2018, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.
Average loans outstanding for the firstthird quarter of 2019 were $4.280$4.354 billion, which was $181$163 million, or 4.4%3.9%, higher than the average loans outstanding for the firstthird quarter of 2018 ($4.0994.192 billion). For the first nine months of 2019, average loans outstanding were $4.322 billion, which was $180 million, or 4.4% higher than the average loans outstanding for the comparable period of 2018 ($4.142 billion). The higher amount of average loans outstanding in 2019 was primarily due to our loan growth initiatives, including our continued focus and expansion into higher growth markets.

The mixmarkets, our hiring of experienced bankers and our emphasis on SBA lending.



Page 45

As previously noted, in late 2018 and early 2019, in order to reduce exposure to the possibility of lower interest rates, we invested a portion of our loan portfolio remained substantiallyinterest-bearing cash balances into fixed rate investment securities. As a result, as shown in the same at March 31,tables above, our average balance of taxable securities grew by $346 million, or 86.4% when comparing the third quarter of 2019 to the third quarter of 2018. On a year to date basis, average taxable securities increased by $299 million, or 73.5%, when comparing 2019 to 2018.

The increases in loans and securities were partially funded from the banks overnight funds, which declined for the periods in 2019 compared to December 31, 2018, with approximately 88%as shown in the tables above. However the larger source of funding arose from growth in our loans being real estate loans, 11% being commercial, financial, and agricultural loans, anddeposit balances, as discussed in the remaining 1% being consumer installment loans. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

Page 37 

following paragraph.
Index

Average total deposits outstanding for the firstthird quarter of 2019 were $4.704$4.839 billion, which was $300$313 million, or 6.9%, higher than the average deposits outstanding for the third quarter of 2018 ($4.526 billion). Average total deposits for the nine months ended September 30, 2019 were $4.785 billion, which was $304 million, or 6.8%, higher than the average deposits outstanding for the first quartersame period of 2018 ($4.4044.481 billion). We continue to implement strategies to grow deposits, which we believe to be the principal reason for the increases in the past year.our deposit balances in 2019. Average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $3.521$3.573 billion at March 31,during the first nine months of 2018 to $3.729$3.813 billion at March 31,during the first nine months of 2019, representing growth of $207$240 million, or 5.9%6.7%. Average time deposits also increased from $882$908 million at March 31,during the first nine months of 2018 to $976$972 million at March 31,for the first nine months of 2019, an increase of $93$64 million, or 10.6%7.0%.

The funding provided by the growth in deposits also allowed us to pay down our borrowings in 2019. Average borrowings remained stable at approximately $406decreased by $106 million, at March 31,or 26.1%, and $63.5 million, or 15.6%, during the three and nine months ended September 30, 2019, and 2018. Our cost of funds, which includes noninterest bearing checking accounts at a zero percent cost, was 0.66%respectively, in comparison to the first quarter of 2019 compared to 0.38% in the first quarter of 2018.

prior periods.

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


Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the firstthird quarter of 2019 was 4.06% and3.95%, which was 4.17% for8 basis points lower than the first4.03% realized in the third quarter of 2018. The decrease inFor the nine month period ended September 30, 2019, our net interest margin realizedwas 4.02% compared to 4.09% for the same period in 2019 was primarily2018. The lower margins were due to a combination of lower loan discount accretion significant interest recoveries realized in the prior year and interest bearing liabilityfunding costs that have increasedrose by more than earning asset yields, as discussed in the following paragraph.

yields.


We recorded loan discount accretion of $1.4$1.3 million in the firstthird quarter of 2019, compared to $2.1$1.6 million in the firstthird quarter of 2018. LoanFor the nine months ended September 30, 2019 and 2018, loan discount accretion had an 11amounted to $4.5 million and $6.0 million, respectively. The lower loan discount accretion accounted for approximately 3 basis points out of the 8 basis point impact ondecline in the net interest margin inwhen comparing the firstthird quarter of 2019 compared to an 182018 and for 5 basis points of the 7 basis point impact in the first quarter of 2018.decline on a year to date basis. The lower discount accretion in 2019 was attributable to paydowns in our acquired loan portfolios. Additionally,
As derived from the tables above, in comparing the periods in 2019 to the periods in 2018, interest-earning asset yields increased 6 basis points in the third quarter of 2019 compared to the third quarter of 2018, while interest-bearing liability costs increased by 24 basis points over that same period. On a year to date basis, interest-earning asset yields increased 13 basis points in 2019 compared to 2018, whereas interest-bearing liability costs increased by 32 basis points. The narrowing of that spread in 2019 was primarily due to flattening of the yield curve and competitive pressures.
The impact of the higher rising interest-bearing liability costs in 2019 has been partially offset by the impact of the approximately 13% growth in average noninterest-bearing deposits since December 31, 2018. Our total cost of funds, which includes noninterest bearing checking accounts at a zero percent cost only rose by 15 basis points (from 0.51% to 0.66%) and 22 basis points (from 0.45% to 0.67%) for the three and nine month periods in 2019, respectively, compared to the same periods of 2018.
Also slightly impacting comparability of the net interest margin for the first nine months in 2019 versus 2018 was $750,000 in interest recoveries received in the first quarter of 2018 we received approximately $750,000 in interest recoveries onrelated to loans that had been charged off in the past, thatwhich added approximately 62 basis points to the net interest margin infor the first quarternine months of 2018. Finally, over the past year, our interest bearing liability costs have increased more than earning asset yields, with the rate on interest bearing liabilities being 39 basis points higher in the first quarter of 2019 compared to the first quarter of 2018, while earning asset yields increased by approximately 27 basis points for that same period (exclusive of the impact of the loan discount accretion and interest recovery variances).

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




Page 46

We recorded a negative provision for loan losses of $1.1 million (reduction of the allowance for loan losses) in the third quarter of 2019 compared to a provision for loan losses of $0.5$0.1 million forin the firstthird quarter of 20182018. For the nine months ended September 30, 2019, we recorded a negative provision for loan losses of $0.9 million compared to a negative provision for loan losses (reduction of the allowance for loan losses) of $3.7$4.3 million in first quarterthe same period of 2018. In the first quarter of 2018, we experienced net loan recoveries of $3.7 million, which droveresulting in the negative provision for the quarter.during 2018. Our provision for loan losses has remained at a low levellevels over the past several years as a result of strong asset quality, including low loan charge-offs.


Our provision for loan loss levels have been impacted by continued improvement in asset quality. Nonperforming assets amounted to $39.5$33.9 million at March 31,September 30, 2019, a decrease of 23.5%22% from the $51.7$43.4 million one year earlier.at December 31, 2018. Our nonperforming assets to total assets ratio was 0.65%0.56% at March 31,September 30, 2019 compared to 0.92%0.74% at MarchDecember 31, 2018. AnnualizedThe ratio of annualized net charge-offs (recoveries) as a percentage ofto average loans for the threenine months ended March 31,September 30, 2019 was 0.04%0.03%, compared to (0.36%(0.05%) for the same period of 2018.


Total noninterest income was $14.6$15.6 million in the first quarter of 2019 compared to $15.8and $15.2 million for the first quarterthree months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019, noninterest income amounted to $46.2 million compared to $46.9 million for the same period of 2018, as presented in the following table:

Page 38 

2018.
Index

  For the Three Months Ended 
$ in thousands March 31,
2019		  March 31,
2018		 
       
Service charges on deposit accounts $2,945   3,263 
Other service charges, commissions, and fees  5,248   4,485 
Fees from presold mortgage loans  545   859 
Commissions from sales of insurance and financial products  2,029   1,940 
SBA consulting fees  1,263   1,141 
SBA loan sale gains  2,062   3,802 
Bank-owned life insurance income  646   623 
Foreclosed property gains (losses), net  (245)  (288)
Other gains (losses), net  82  4
          Noninterest income  14,575   15,829 
Non-GAAP adjustments        
          Add: Foreclosed property gains (losses), net  245  288
          Less: Other gains (losses), net  (82)  (4)
        Adjusted noninterest income $14,738   16,113 

 For the Three Months EndedFor the Nine Months Ended
$ in thousandsSeptember 30, 2019 September 30, 2018September 30, 2019 September 30, 2018
Service charges on deposit accounts$3,388
 3,221
9,543
 9,606
Other service charges, commissions, and fees5,814
 4,942
16,848
 14,101
Fees from presold mortgage loans1,275
 576
2,677
 2,231
Commissions from sales of insurance and financial products2,203
 2,425
6,436
 6,484
SBA consulting fees663
 1,287
2,847
 3,554
SBA loan sale gains1,917
 2,373
7,048
 8,773
Bank-owned life insurance income651
 641
1,928
 1,892
Foreclosed property gains (losses), net(273) (192)(899) (579)
Securities gains (losses), net97
 —
97
 —
Other gains (losses), net(105) (101)(331) 811
Noninterest income$15,630
 15,172
46,194
 46,873
Non-GAAP adjustments - Exclude:      
Foreclosed property losses from above273
 192
899
 579
Securities gains (losses), net(97) —
(97) —
Other gains and losses from above105
 101
331
 (811)
Adjusted noninterest income$15,911
 15,465
47,327
 46,641

Management evaluates noninterest income on a basis that excludes items that can be volatile in nature, such as foreclosed property gains (losses), net. We consider this adjusted noninterest income.income and believe it reflects regular sources of noninterest income, that are within the control of management. As presented in the table above, adjusted noninterest income for the firstthird quarter of 2019 was $14.7$15.9 million, a decrease of 7.9%2.9% increase from the $16.1$15.5 million reported for the third quarter of 2018. Adjusted noninterest income for the nine months ended September 30, 2019 was $47.3 million, a 1.5% increase from the $46.6 million reported for the first quarternine months of 2018, which was primarily due to decreases in SBA loan sale gains recorded in 2019 (see additional discussion below). Adjusted noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgage loans, iv) commissions from sales of insurance and financial products, v) SBA consulting fees, vi) SBA loan sale gains, and vii) bank-owned life insurance income.

2018.

As shown in the table above, service charges on deposit accounts decreasedincreased from $3.3$3.2 million in the firstthird quarter of 2018 to $2.9$3.4 million in the firstthird quarter of 2019. The decrease in 2019, was primarilyan increase that we believe is due to fewer instancespromotion of fees earnednew deposit products. For the nine months ended September 30, 2019, service charges on deposit accounts amounted to $9.5 million, which is a $0.1 million decrease from customers overdrawing their accounts.

the $9.6 million recorded in the comparable period of 2018.

Other service charges, commissions, and fees increased in the first quarter of 2019 compared to 2018, primarily as a result of higher debit card and credit card interchange fees associated with increased usage. We earn a small fee each time a customer uses a debit or credit card to make a purchase. Due to the growth in checking accounts and increased customer usage of debit cards, we have experienced increases in this line item. Interchange income from credit


Page 47

cards has also increased due to growth in the number and usage of credit cards, which we believe is a result of continued promotion of this product

Fees from presold mortgages decreasedincreased significantly from $0.9$0.6 million in the firstthird quarter of 2018 to $0.5$1.3 million in the firstthird quarter of 2019. Fees decreasedFor the nine months ended September 30, 2019, fees amounted to $2.7 million, an increase of $0.4 million, from the $2.2 million recorded in the first quartercomparable period of 2018. The higher fees in 2019 are due to overall lowerhiring additional originators, as well a increased volumes in the mortgage industry and employee turnover within the mortgage department.

due to declining interest rates.

Commissions from sales of insurance and financial products amounteddid not vary significantly for the periods presented, amounting to approximately $2.0$2.2 million and $1.9$2.4 million for the third quarters of 2019 and 2018, respectively, and $6.4 million and $6.5 million for the first threenine months of 2019 and 2018, respectively. The increase
Both SBA consulting fees and SBA loans sale gains were lower in 2019 was primarily duecompared to increases in commissions from the sales of our wealth management products.

During2018. For the three months ended March 31,September 30, 2019, SBA consulting fees amounted to $0.7 million compared to $1.3 million in the third quarter of 2018. The quarterly decline was also the driver for these fees being lower on a year to date basis, with these fees amounting to $2.8 million for the nine months ended September 30, 2019 compared to $3.6 million for the first nine months of 2018. As it relates to SBA loan sale gains, we recorded $1.9 million for the third quarter of 2019 compared to $2.4 million for the third quarter of 2018. For the nine months ended September 30, 2019 and 2018, we realized $2.0recorded $7.0 million and $3.8$8.8 million in gains on SBA loan sales, respectively. The declinedeclines in both of these SBA items was due to lower origination activity, which we believe was primarily caused by the timing of the funding of loans in the firstpipeline. Lower loan sale premiums in 2019 also impacted loan sale gains.


In the third quarter of 2019, we sold $39.7 million in available for sale securities that resulted in $0.1 million in gains. There were no sales in 2018.

Other gains was(losses) amounted to losses of $0.1 million and $0.3 million in the three and nine months ended September 30, 2019, respectively, and losses of $0.1 million and gains of $0.8 million for the three and nine months ended September 30, 2018. Losses in 2019 were due to miscellaneous items, whereas in the second quarter of 2018, we recorded a result$0.9 million gain on the sale of a combination of a lower sales volume and lower premiums realized.

former branch location.


Noninterest expenses amounted to $39.3$38.9 million in the firstthird quarter of 2019, compared to $43.5a 0.3% decrease from the $39.0 million recorded in the firstthird quarter of 2018. Most categories of noninterest expense decreased inNoninterest expenses for the first quarternine months ended September 30, 2019 amounted to $118.6 million compared to the first quarter$121.2 million in 2018, a decrease of 2018 due2.1%.
Personnel expense increased 5.0% to operating efficiencies realized subsequent to the March 2018 merger conversion of the Asheville Savings Bank operations into First Bank.

Salaries expense decreased to $19.0$24.0 million in the firstthird quarter of 2019 from the $19.4$22.8 million in the firstthird quarter of 2018,2018. For the first nine months of 2019, personnel expense increased 3.3% to $71.7 million from $69.4 million in the prior year period. The increases in 2019 were primarily due to a lower estimated payout for our annual incentive plan for the 2019 fiscal year. Employee benefits expense remained relatively unchanged and amounted to $4.6 million in each of the first quarters of 2019 and 2018.

Company's growth initiatives.

The combined amount of occupancy and equipment expense remained stable at $4.1did not vary significantly among the periods presented.
Merger expenses declined significantly in 2019. There were no merger and acquisition expenses in the third quarter of 2019 compared $0.2 million in eachthe third quarter of 2018. For the first quarters ofnine months ended September 30, 2019 and 2018.

Page 39 

Index

Mergermerger and acquisition expenses amounted to $0.1$0.2 million compared to $3.6 million for the three months ended March 31, 2019, compared to $2.8 millionsame period in the comparable period of 2018. The higher merger and acquisition expenses recorded in the first quarter of 2018 related to the Asheville Savings Bank acquisition.

Intangibles amortization expense amounted to $1.3 millionacquisition which converted its operations into First Bank in the first quarter of 2018.


Intangibles amortization expense decreased from $1.5 million in the third quarter of 2018 to $1.2 million in the third quarter of 2019 and from $4.5 million in the first nine months of 2018 to $3.7 million in the first nine months of 2019. The declines were primarily as a result of the amortization of intangible assets associated with acquisitions that typically have amortization schedules that decline over time.
Other operating expenses amounted to $9.8 million for the third quarter of 2019 compared to $1.6$10.4 million in the third quarter of 2018. Other operating expenses amounted to $30.9 million in the first nine months of 2019 compared to $31.7 million in the same period of 2018. For the year to date period, the decline in this line item was impacted by efficiencies realized from the conversion of the operations of the Asheville Savings Bank into First Bank during the first quarter of 2018. Also, as a result of FDIC assessment credits allocated to the Company, we recorded no FDIC insurance expense for the third quarter of 2019 and also reversed a $400,000 expense accrual


Page 48

that had been recorded in the second quarter of 2019. We expect our remaining credits to result in no insurance expense in the fourth quarter of 2019 and to cover approximately one month of expense in the first quarter of 2018.

Other operating expenses amounted to $10.2 million for the first quarter of 2019 compared to $11.1 million in the first quarter of 2018, with the decrease relating to numerous operational efficiencies gained after the March 2018 merger conversion of the operations of Asheville Savings Bank into First Bank.

2020.

For the first quarter ofthree months ended September 30, 2019 and 2018, the provision for income taxes was $6.6 million, an effective tax rate of 20.8%, and $5.9 million, an effective tax rate of 20.9%.21.2%, respectively. For the first quarter ofnine months ended September 30, 2019 and 2018, the provision for income taxes was $5.8$18.9 million, an effective tax rate of 22.0%.21.0%, and $18.2 million, an effective tax rate of 21.8%, respectively. The decline was due to a decrease in the North Carolina corporate income tax rate from 3.0% to 2.5%, as well as the impact of certain merger expenses recorded in 2018 that were not tax deductible.

The consolidated statements of comprehensive income reflect other comprehensive income of $4.7$1.7 million during the firstthird quarter of 2019 compared other comprehensive loss of $5.5$0.8 million during the firstthird quarter of 2018. During the nine months ended September 30, 2019 and 2018, we recorded other comprehensive income of $15.6 million and other comprehensive loss of $7.8 million, respectively. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains (losses) of our available for sale securities. 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.

Page 40 

FINANCIAL CONDITION

Total assets at March 31,September 30, 2019 amounted to $6.1 billion, a 7.2%3.5% increase from a year earlier.December 31, 2018. Total loans at March 31,September 30, 2019 amounted to $4.3$4.4 billion, a 3.5% increase from December 31, 2018, and total deposits amounted to $4.9 billion, a 4.6% increase from a year earlier, and total deposits amounted to $4.8 billion, a 6.7% increase from a year earlier.

December 31, 2018.

The following table presents information regarding the nature of changes in our levels of loans and deposits for the twelvefirst nine months ended March 31, 2019 and for the first quarter of 2019.

April 1, 2018 to
March 31, 2019		 Balance at
beginning
of period		  Internal
Growth,
net		  Balance at
end of
period		  Total
percentage
growth		 
      
      
Total loans $4,113,785   190,002   4,303,787   4.6% 
                 
Deposits – Noninterest bearing checking  1,227,608   162,908   1,390,516   13.3% 
Deposits – Interest bearing checking  896,189   26,065   922,254   2.9% 
Deposits – Money market  1,026,043   52,959   1,079,002   5.2% 
Deposits – Savings  445,405   (27,593)  417,812   -6.2% 
Deposits – Brokered  251,043   (34,427)  216,616   -13.7% 
Deposits – Internet time  7,248   (3,820)  3,428   -52.7% 
Deposits – Time>$100,000  357,595   148,553   506,148   41.5% 
Deposits – Time<$100,000  284,577   (23,115)  261,462   -8.1% 
     Total deposits $4,495,708   301,530   4,797,238   6.7% 
                 
January 1, 2019 to
March 31, 2019		                
Total loans $4,249,064   54,723   4,303,787   1.3% 
                 
Deposits – Noninterest bearing checking  1,320,131   70,385   1,390,516   5.3% 
Deposits – Interest bearing checking  916,374   5,880   922,254   0.6% 
Deposits – Money market  1,035,523   43,479   1,079,002   4.2% 
Deposits – Savings  432,389   (14,577)  417,812   -3.4% 
Deposits – Brokered  239,875   (23,259)  216,616   -9.7% 
Deposits – Internet time  3,428   —   3,428   0.0% 
Deposits – Time>$100,000  447,619   58,529   506,148   13.1% 
Deposits – Time<$100,000  264,000   (2,538)  261,462   -1.0% 
     Total deposits $4,659,339   137,899   4,797,238   3.0% 
                 

January 1, 2019 to
September 30, 2019
 
Balance at
beginning
of period
 
Internal
Growth,
net
 
Balance at
end of
period
 
Total
percentage
growth
Total loans $4,249,064
 147,480
 4,396,544
 3.5 %
         
Deposits – Noninterest bearing checking 1,320,131
 171,363
 1,491,494
 13.0 %
Deposits – Interest bearing checking 916,374
 (21,597) 894,777
 (2.4)%
Deposits – Money market 1,035,523
 89,091
 1,124,614
 8.6 %
Deposits – Savings 432,389
 (14,346) 418,043
 (3.3)%
Deposits – Brokered 239,875
 (112,356) 127,519
 (46.8)%
Deposits – Internet time 3,428
 (1,983) 1,445
 (57.8)%
Deposits – Time>$100,000 447,619
 109,971
 557,590
 24.6 %
Deposits – Time<$100,000 264,000
 (4,100) 259,900
 (1.6)%
Total deposits $4,659,339
 216,043
 4,875,382
 4.6 %
         
As derived from the table above, for the twelve months preceding March 31, 2019, our total loans increased $190.0 million, or 4.6%. For the first threenine months of 2019, loan growth was $54.7$147.5 million, or 1.3%3.5% (4.6% on an annualized basis). Loan growth for both periodsthe period was organic and driven by our continued expansion into high-growth markets, our hiring of experienced bankers and our emphasis on SBA lending. We expect continued growth in our loan portfolio infor the remainder of 2019.

The mix of our loan portfolio remains substantially the same at March 31,September 30, 2019 compared to December 31, 2018. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Note 6 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

For both the three and twelvenine month periodsperiod ended March 31,September 30, 2019, we experienced internal growth in our core deposit accounts (checking, money market and savings) and in our retail time deposits, excludingwhich exclude brokered and internet time


Page 49

deposits. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services. Total brokered and internet time deposits declined in both periods due to
A combination of the strongsignificant growth experienced in our retail deposits.

Page 41 

Index

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

Our liquidity levels have increased over the past twelve months, our liquidity levels have increased.year. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 20.0%21.0% at MarchDecember 31, 2018 to 22.6%21.5% at March 31,September 30, 2019. 

Over the past year,nine months, we have also invested a portion of our cash balances into fixed rate available for sale investment securities, primarily to achieve higher yields.yields and reduce the risk of lower interest rates.  Total securities available for sale increased from $341.0$501.4 million at MarchDecember 31, 2018 to $639.6$705.2 million at March 31,September 30, 2019, while total cash balance have declined from $526.7$462.9 million to $446.8$317.5 million over that same period.

Nonperforming Assets

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

 

 

ASSET QUALITY DATA($ in thousands)

 As of/for the
quarter ended
March 31, 2019		  As of/for the
quarter ended
December 31, 2018		  As of/for the
quarter ended
March 31, 2018		 
          
Nonperforming assets            
   Nonaccrual loans $20,684   22,575   21,849 
   TDRs – accruing  12,457   13,418   18,495 
   Accruing loans >90 days past due  —   —   — 
      Total nonperforming loans  33,141   35,993   40,344 
   Foreclosed real estate  6,390   7,440   11,307 
          Total nonperforming assets $39,531   43,433   51,651 
             
Purchased credit impaired loans not included above (1) $15,867   17,393   22,147 
             
Asset Quality Ratios – All Assets            
Net charge-offs to average loans - annualized  0.04%   0.02%   (0.36%)
Nonperforming loans to total loans  0.77%   0.85%   0.98% 
Nonperforming assets to total assets  0.65%   0.74%   0.92% 
Allowance for loan losses to total loans  0.49%   0.50%   0.57% 
Allowance for loan losses + unaccreted discount on acquired loans to total loans  0.86%   0.90%   1.11% 
Allowance for loan losses to nonperforming loans  63.65%   58.45%   57.75% 

 
 
ASSET QUALITY DATA ($ in thousands)
 As of/for the quarter ended September 30, 2019 As of/for the quarter ended December 31, 2018
Nonperforming assets    
Nonaccrual loans $19,720
 22,575
TDRs – accruing 9,566
 13,418
Accruing loans >90 days past due —
 —
Total nonperforming loans 29,286
 35,993
Foreclosed real estate 4,589
 7,440
Total nonperforming assets $33,875
 43,433
     
Purchased credit impaired loans not included above (1) $13,798
 17,393
     
Asset Quality Ratios – All Assets    
Net charge-offs to average loans - annualized 0.04% 0.02%
Nonperforming loans to total loans 0.67% 0.85%
Nonperforming assets to total assets 0.56% 0.74%
Allowance for loan losses to total loans 0.44% 0.50%
Allowance for loan losses to nonperforming loans 65.77% 58.45%
(1)In the March 3, 2017 acquisition of Carolina Bank and the October 1, 2017 acquisition of Asheville Savings Bank, we acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from the nonperforming loan amounts, including $0.6 million, $0.6$1.1 million and $0.5$0.6 million in PCI loans at March 31,September 30, 2019 December 31, 2018, and MarchDecember 31, 2018, respectively, that were contractually past due 90 days or more.

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

As noted in the table above, at March 31,September 30, 2019, total nonaccrual loans amounted to $20.7$19.7 million, compared to $22.6 million at December 31, 2018 and $21.8 million at March 31, 2018. Nonaccrual loans are at low levels and have generally declined in recent years as our local economies have improved, and we continue to focus on resolving our problem assets.



Page 50

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,September 30, 2019, total accruing TDRs amounted to $12.5$9.6 million, compared to $13.4 million at December 31, 2018 and $18.5 million at March 31, 2018.

Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $6.4$4.6 million at March 31,September 30, 2019 and $7.4 million at December 31, 2018, and $11.3 million at March 31, 2018. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and the improvement in our overall asset quality.

Page 42 

Index

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

($ in thousands) At March 31,
2019		  At December 31,
2018		  At March 31,
2018		 
Commercial, financial, and agricultural $980   919   801 
Real estate – construction, land development, and other land loans  1,677   2,265   1,766 
Real estate – mortgage – residential (1-4 family) first mortgages  9,958   10,115   12,073 
Real estate – mortgage – home equity loans/lines of credit  1,632   1,685   1,980 
Real estate – mortgage – commercial and other  6,280   7,452   5,119 
Installment loans to individuals  157   139   110 
   Total nonaccrual loans $20,684   22,575   21,849 

($ in thousands)At September 30, 2019 At December 31, 2018 
Commercial, financial, and agricultural$2,472
 919
 
Real estate – construction, land development, and other land loans1,235
 2,265
 
Real estate – mortgage – residential (1-4 family) first mortgages7,661
 10,115
 
Real estate – mortgage – home equity loans/lines of credit1,878
 1,685
 
Real estate – mortgage – commercial and other6,370
 7,452
 
Installment loans to individuals104
 139
 
Total nonaccrual loans$19,720
 22,575
 
The table above indicated decreases in most categories of nonaccrual loans. The decreases reflect stabilization in most of our market areas and our increased focus on the resolution of our nonperforming assets.

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

($ in thousands) At March 31, 2019  At December 31, 2018  At March 31, 2018 
Vacant land and farmland $1,968   2,035   2,852 
1-4 family residential properties  1,526   2,311   3,710 
Commercial real estate  2,896   3,094   4,745 
   Total foreclosed real estate $6,390   7,440   11,307 

($ in thousands)At September 30, 2019 At December 31, 2018 
Vacant land and farmland$1,733
 2,035
 
1-4 family residential properties1,220
 2,311
 
Commercial real estate1,636
 3,094
 
Total foreclosed real estate$4,589
 7,440
 
The following table presents geographical information regarding our nonperforming assets at March 31,September 30, 2019.

 As of March 31, 2019 
($ in thousands) Total
Nonperforming
Loans		  Total Loans  Nonperforming
Loans to Total
Loans		  Total
Foreclosed
Real Estate		 
             
Region (1)            
Eastern Region (NC) $8,487   916,000   0.93%  $1,973 
Triangle Region (NC)  7,722   914,000   0.84%   1,148 
Triad Region (NC)  5,521   867,000   0.64%   202 
Charlotte Region (NC)  1,223   334,000   0.37%   180 
Southern Piedmont Region (NC)  5,868   268,000   2.19%   743 
Western Region (NC)  1,137   684,000   0.17%   1,064 
South Carolina Region  1,186   161,000   0.74%   389 
Former Virginia Region  91   1,000   9.10%   691 
Other  1,906   159,000   1.20%   — 
      Total $33,141   4,304,000   0.77%  $6,390 

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

 As of September 30, 2019
($ in thousands)
Total
Nonperforming
Loans
 Total Loans 
Nonperforming
Loans to Total
Loans
 
Total
Foreclosed
Real Estate
Region (1) 
  
    
Eastern Region (NC)$6,344
 927,000
 0.68% $617
Triangle Region (NC)7,426
 951,000
 0.78% 706
Triad Region (NC)4,305
 885,000
 0.49% 480
Charlotte Region (NC)950
 332,000
 0.29% —
Southern Piedmont Region (NC)3,185
 285,000
 1.12% 360
Western Region (NC)673
 667,000
 0.10% 738
South Carolina Region765
 163,000
 0.47% 822
Former Virginia Region191
 1,000
 19.10% 444
Other5,447
 186,000
 2.93% 422
Total$29,286
 4,397,000
 0.67% $4,589
(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



Page 51

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

Summary of Loan Loss Experience

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

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

Page 43 

Index

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



Page 52

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

($ in thousands) Three Months
Ended
March 31,		  Twelve Months
Ended
December 31,		  Three Months
Ended
March 31,		 
  2019  2018  2018 
Loans outstanding at end of period $4,303,787   4,249,064   4,113,785 
Average amount of loans outstanding $4,280,272   4,161,838   4,099,495 
             
Allowance for loan losses, at beginning of year $21,039   23,298   23,298 
Provision (reversal) for loan losses  500   (3,589)  (3,659)
   21,539   19,709   19,639 
Loans charged off:            
Commercial, financial, and agricultural  (246)  (2,128)  (239)
Real estate – construction, land development & other land loans  (264)  (158)  (2)
Real estate – mortgage – residential (1-4 family) first mortgages  (30)  (1,734)  (243)
Real estate – mortgage – home equity loans / lines of credit  (80)  (711)  (176)
Real estate – mortgage – commercial and other  (836)  (1,459)  (41)
Installment loans to individuals  (281)  (781)  (118)
       Total charge-offs  (1,737)  (6,971)  (819)
Recoveries of loans previously charged-off:            
Commercial, financial, and agricultural  414   1,195   499 
Real estate – construction, land development & other land loans  287   4,097   3,046 
Real estate – mortgage – residential (1-4 family) first mortgages  160   833   145 
Real estate – mortgage – home equity loans / lines of credit  128   364   153 
Real estate – mortgage – commercial and other  271   1,503   582 
Installment loans to individuals  33   309   53 
       Total recoveries  1,293   8,301   4,478 
            Net (charge-offs) recoveries  (444)  1,330   3,659 
Allowance for loan losses, at end of period $21,095   21,039   23,298 
             
Ratios:            
   Net charge-offs (recoveries) as a percent of average loans (annualized)  0.04%   (0.03%)  (0.36%)
   Allowance for loan losses as a percent of loans at end of period  0.49%   0.50%   0.57% 
   Allowance for loan losses + unaccreted discount on acquired loans as a percent of loans  0.86%   0.90%   1.11% 
             

($ in thousands)
Nine Months
Ended
September 30,
2019
 
Twelve Months
Ended December 31,
2018
 
Nine Months
Ended
September 30,
2018
Loans outstanding at end of period$4,396,544
 4,249,064
 4,190,628
Average amount of loans outstanding$4,322,078
 4,161,838
 4,141,645
      
Allowance for loan losses, at beginning of year$21,039
 23,298
 23,298
Provision (reversal) for loan losses(913) (3,589) (4,282)
 20,126
 19,709
 19,016
      
Loans charged off:     
Commercial, financial, and agricultural(1,224) (2,128) (1,542)
Real estate – construction, land development & other land loans(340) (158) (158)
Real estate – mortgage – residential (1-4 family) first mortgages(379) (1,734) (1,598)
Real estate – mortgage – home equity loans / lines of credit(216) (711) (378)
Real estate – mortgage – commercial and other(1,455) (1,459) (1,398)
Installment loans to individuals(555) (781) (494)
Total charge-offs(4,169) (6,971) (5,568)
Recoveries of loans previously charged-off:     
Commercial, financial, and agricultural768
 1,195
 971
Real estate – construction, land development & other land loans797
 4,097
 3,568
Real estate – mortgage – residential (1-4 family) first mortgages521
 833
 671
Real estate – mortgage – home equity loans / lines of credit513
 364
 294
Real estate – mortgage – commercial and other550
 1,503
 1,333
Installment loans to individuals154
 309
 261
Total recoveries3,303
 8,301
 7,098
Net (charge-offs) recoveries(866) 1,330
 1,530
Allowance for loan losses, at end of period$19,260
 21,039
 20,546
      
Ratios:     
Net charge-offs (recoveries) as a percent of average loans (annualized)0.03% (0.03)% (0.05)%
Allowance for loan losses as a percent of loans at end of period0.44% 0.50 % 0.49 %
We recorded a provision for loan losses of $0.5 million in the first quarter of 2019, compared to a negative provision for loan losses (reduction of the allowance for loan losses) of $3.7$0.9 million in the first quarternine months of 2019, compared to a negative provision for loan losses of $4.3 million in the first nine months of 2018. In the first quarternine months of 2018, the Company experienced net loan recoveries of $3.7$1.5 million, which drove the negative provision for the quarterperiod and was the primary reason for the variance in the provision for loan losses when comparing the first quarternine months of 2019 to the first quarternine months of 2018. Other factors impacting the provision for loan loss are discussed in the following two paragraphs.

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



Page 44 

53

Organic loan growth for the first three months of 2019 of $54.7 million was relatively consistent with the $71.4 million realized for first quarter of 2018, with the variance not significantly impacting the required allowance for loan losses. As it relates to asset quality trends, our total classified and nonaccrual loans amounted to $61 million at both March 31, 2019 and December 31, 2018 compared to $80.0 million at March 31, 2018.

The ratio of our allowance to total loans was 0.49%,0.44% and 0.50%, at September 30, 2019 and 0.57% at March 31, 2019, December 31, 2018, and March 31, 2018, respectively. The decline in this ratio was a result of the factors discussed above that impacted our relatively low levels of provision for loan losses. Our relatively low level of allowance to total loans is significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank in 2017, which had over $1 billion in total loans. Applicable accounting guidance 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 will beis 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 $16.1$13.8 million and $17.3 million and $22.3 million at March 31,September 30, 2019 and December 31, 2018, and March 31, 2018, 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,September 30, 2019, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2018.

Liquidity, Commitments, and Contingencies

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

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $1.080$1.045 billion line of credit with the Federal Home Loan Bank (of which $247 million and $352 million was outstanding at both March 31,September 30, 2019 and December 31, 2018)2018, respectively), 2) a $35 million federal funds line with a correspondent bank (of which none was outstanding at March 31,September 30, 2019 or December 31, 2018), and 3) an approximately $123$130 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at March 31,September 30, 2019 or December 31, 2018). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was reduced by $190 million at both March 31,September 30, 2019 and December 31, 2018, as a result of our pledging letters of credit for public deposits at each of those dates. Unused and available lines of credit amounted to $505$773 million at March 31,September 30, 2019 compared to $502$664 million at December 31, 2018.

Our overall liquidity has increased since MarchDecember 31, 2018 due primarily to the strong deposit growth expeirenced.which has exceeded loan growth. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 20.0%21.0% at MarchDecember 31, 2018 to 22.6%21.5% at March 31,September 30, 2019.

Page 45 

Index

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

The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2018, detail of which is presented in Table 18 on page 77 of our 2018 Annual Report on Form 10-K.



Page 54

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,September 30, 2019, and have no current plans to do so.

Capital Resources

The Company is regulated by the Board of Governors of the Federal Reserve Board (“Federal Reserve”) and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. Our banking subsidiary, First Bank, is also regulated by the North Carolina Office of the Commissioner of Banks. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.

We must comply with regulatory capital requirements established by the Federal Reserve. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The capital standards require us to maintain minimum ratios of “Common Equity Tier 1” capital to total risk-weighted assets, “Tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively. Common Equity Tier 1 capital is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier 1 capital is comprised of Common Equity Tier 1 capital plus Additional Tier 1 Capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in Federal Reserve regulations.

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

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

Page 46 

Index

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

  March 31,
2019		  December 31,
2018		  March 31,
2018		 
          
Risk-based capital ratios:            
Common equity Tier 1 to Tier 1 risk weighted assets  12.51%   12.28%   11.01% 
Minimum required Common equity Tier 1 capital  7.00%   6.375%   6.375% 
             
Tier I capital to Tier 1 risk weighted assets  13.73%   13.48%   12.23% 
Minimum required Tier 1 capital  8.50%   7.875%   7.875% 
             
Total risk-based capital to Tier II risk weighted assets  14.21%   13.97%   12.78% 
Minimum required total risk-based capital  10.50%   9.875%   9.875% 
             
Leverage capital ratios:            
Tier 1 capital to quarterly average total assets  10.69%   10.47%   9.88% 
Minimum required Tier 1 leverage capital  4.00%   4.00%   4.00% 




Page 55

 
September 30,
2019
 
December 31,
2018
 
Risk-based capital ratios: 
  
 
Common equity Tier 1 to Tier 1 risk weighted assets13.27% 12.28% 
Minimum required Common equity Tier 1 capital7.00% 6.375% 
     
Tier I capital to Tier 1 risk weighted assets14.44% 13.48% 
Minimum required Tier 1 capital8.50% 7.875% 
     
Total risk-based capital to Tier II risk weighted assets14.88% 13.97% 
Minimum required total risk-based capital10.50% 9.875% 
     
Leverage capital ratios: 
  
 
Tier 1 capital to quarterly average total assets11.17% 10.47% 
Minimum required Tier 1 leverage capital4.00% 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,September 30, 2019, First Bank significantly exceeded the minimum ratios established by the regulatory authorities.

In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible assets (“TCE Ratio”). Our TCE ratio was 9.21% at March 31, 2019 compared to 9.07% at December 31, 2018 and 8.35% at March 31, 2018.

BUSINESS DEVELOPMENT MATTERS

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

·On February 5, 2019, the Company announced a quarterly cash dividend of $0.12 per share payable on April 25, 2019 to shareholders of record on March 31, 2019. The dividend rate represents a 20% increase over the previous dividend rate of $0.10 the Company declared in the first quarter of 2018.

On September 13, 2019, the Company announced a quarterly cash dividend of $0.12 per share payable on October 25, 2019 to shareholders of record on September 30, 2019. The dividend rate represents a 20% increase over the previous dividend rate of $0.10 the Company declared in the third quarter of 2018.
SHARE REPURCHASES

We did not repurchase anyrepurchased 282,000 shares of our common stock during the first threenine months of 2019.2019 at an average price of $35.48 per share, which totaled $10.0 million. At March 31,September 30, 2019, we had authority from our board of directors to repurchase up to $25an additional $15 million in shares of the Company’s common stock. We may repurchase these shares in open market and privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations. See also Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

Net interest income is our most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, our level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to our various categories of earning assets and interest-bearing liabilities. It is our policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. Our exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of “shock” interest rates. Over the years, we have been able to maintain a fairly consistent yield on average earning assets (net(and net interest margin). Over the past five calendar years, our net interest margin has ranged from a low of 4.03% (realized in 2016) to a high of 4.58% (realized in 2014). From 2008 until the fourth quarter of 2015, the prime rate of interest had remained at 3.25%. Beginning in December 2015, the Federal Reserve began steadily increasing the prime rate of interest, which reached a rate of 5.50% in December 2018 (also the current rate at March 31, 2019). The consistency of the net interestOur consistent margin ishas been aided by thea relatively low level of long-term interest rate exposure that we maintain. At March 31,September 30, 2019, approximately 77%76% of our interest-earning assets were subject to repricing within five years (because they are either adjustable rate assets or they are fixed rate assets that mature) and substantially all of our interest-bearing liabilities reprice within five years.



Page 47 

56

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,September 30, 2019, we had $1.4$1.5 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,September 30, 2019 are deposits totaling $2.4 billion comprised of checking, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced with, or in the same proportion, as general market indicators.

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

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

The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-term interest rates are substantially the same as long-term interest rates. As a result of the prolonged negative/fragile economic environment, the Federal Reserve took steps to suppress long-term interest rates in an effort to boost the housing market, increase employment, and stimulate the economy, which resulted in a flat interest rate curve.curve that remains in effect. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the Company, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge, the profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin.

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

As it relates to deposits, after cutting interest rates to historic lows in 2008 in an effort to stimulate the economy, the Federal Reserve made no changes to the short term interest rates it sets directly from 2008 until mid-December 2015, and since2015. During that timeperiod, we have beenwere able to reprice manysubstantially all of our maturing time deposits at lower interest rates. We were also able to generally decrease the rates we paid on other categories of deposits as a result of declining short-term interest rates in the marketplace and an increase in liquidity that lessened our need to offer premium interest rates. However, aslow levels. As a result of the nine interest rate increases initiated by the Federal Reserve sincefrom 2015 through 2018 and significant competitive pressures in our market area, we have hadour deposits costs began to increase deposit rates.rise. Deposit pricing competition began to intensify in the second half of 2018, and we expect it to continue.which continued into 2019. In the first quarternine months of 2019, our deposit costs have risenrose at a higher rate than the increase in asset yields, which negatively impacted our net interest margin.

In the third quarter of 2019, in an effort to address concerns about the economy, the Federal Reserve cut short term interest rates twice by a total of 50 basis points, which resulted in the prime rate of interest declining to 5.00% And in late October 2019, the Federal Reserve cut rates by an additional 25 basis points. Our interest-bearing cash balances and thusmost of our variable rate loans, which comprise approximately one-third of our loan portfolio, reset to lower rates soon after those rate cuts and the offering rates on new loan originations also declined. Due to competitive pressures, we were unable to lower our deposit costs to offset the impact of the lower asset yields. Due largely to those reasons, our net interest margin compressed slightlydecreased in the first three monthsthird quarter of 2019.

2019 by 11 basis points from the preceding quarter. While we believe our deposit costs will begin to decline in the near future, we believe that the recent rate cuts will to continue to negatively impact our net interest margin for the reasons discussed above.



Page 48 

57

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 $1.1$4.5 million and $2.0$6.0 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that are initially recorded and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and susceptible to volatility. The remaining loan discount on acquired loans amounted to $16.1$13.8 million at March 31,September 30, 2019 compared to $22.3$17.3 million at MarchDecember 31, 2018.

Based on our most recent interest rate modeling, which assumes no more rate changes during 2019 (federal funds rate = 2.50%, prime = 5.50%), we project that our net interest margin for 2019 will likely decline slightly in the near term due to the loan and deposit pricing pressures discussed above.

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

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

Item 4 – Controls and Procedures

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

Part II. Other Information

Item 1 – Legal Proceedings

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

Item 1A – Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, 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.

Page 49 

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

Issuer Purchases of Equity Securities
PeriodTotal Number of
Shares
Purchased (2)		Average Price
Paid per Share		Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)		Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
January 1, 2019 to January 31, 2019———$25,000,000
February 1, 2019 to February 28, 2019———$25,000,000
March 1, 2019 to March 31, 2019———$25,000,000
Total———$25,000,000



Page 58

Issuer Purchases of Equity Securities
Period 
Total Number of
Shares
Purchased (2)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
July 1, 2019 to July 31, 2019 —
 $—
 $—
 $18,475,917
August 1, 2019 to August 31, 2019 99,625
 34.89
 3,475,797
 $15,000,120
September 1, 2019 to September 30, 2019 —
 —
 —
 $15,000,120
Total 99,625
 34.89
 3,475,797
 $15,000,120
Footnotes to the Above Table

(1)All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. On February 5, 2019, the Company announced that its board of directors had approved the repurchase of up to $25,000,000 in shares of the Company’s common stock. The repurchase authorization expires on December 31, 2019.

(2)The table above does not include shares that were used by option holders to satisfy the exercise price of the call options issued by the Company to its employees and directors pursuant to the Company’s stock option plans. There were no such exercises during the three months ended March 31,September 30, 2019.

During the three months ended March 31,September 30, 2019, there were no unregistered sales of the Company’s securities.



Page 59

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 asExhibits 3.a.i through 3.a.v to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed asExhibits 3.1 and3.2 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 asExhibit 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 asExhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed asExhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and are incorporated herein by 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.

Page 50 

Index

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

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



Page 51 

60

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 10,November 8, 2019BY:/s/  Richard H. Moore  
Richard H. Moore
 
Richard H. Moore
Chief Executive Officer
(Principal Executive Officer),
and Director
  
  
May 10,November 8, 2019BY:/s/  Eric P. Credle       
Eric P. Credle
 
Eric P. Credle
Executive Vice President
and Chief Financial Officer



Page 52 

61