0000870385 caro:FinancingReceivableImpairedNonCreditImpairedLoansMember us-gaap:MortgageReceivablesMember us-gaap:ConstructionLoansMember us-gaap:SpecialMentionMember 2018-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September~~June 30, ~~2018~~2019

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission file number001-10897

Carolina Financial Corporation

(Exact name of registrant as specified in its charter)

Delaware		57-1039673
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

288 Meeting Street, Charleston, South Carolina		29401
(Address of principal executive offices)		(Zip Code)

~~843-723-7700~~843-723-7700

(~~Registrant’s~~Registrant's telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 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. Yesx Noo

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesx Noo

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

Large ~~accelerated filer~~Accelerated Filer	ox	Accelerated filer	x	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller Reporting Company		o
Emerging Growth Company	xo

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.x

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

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

Title of Each Class:		Trading Symbol		Name of exchange on which registered
Common Stock, $0.01 par value per share		CARO		Nasdaq Capital Market

Indicate the number of shares outstanding of each of the ~~issuer’s~~registrant's classes of common stock, as of the latest practicable ~~date: 22,570,201 shares of common stock, par value $0.01 per share, were issued and outstanding as of November 6, 2018.~~date.

Class		Outstanding at August 1, 2019
Common Stock, $0.01 par value per share		22,270,538shares

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS


	September 30, 2018			December 31, 2017		June 30, 2019		December 31, 2018
	(Unaudited)			(Audited)		(Unaudited)		(Audited)
	(In thousands, except share data)					(In thousands)
ASSETS
Cash and due from banks	$	37,930			25,254	$	34,614		28,857
Interest-bearing cash		38,017			55,998		33,804		33,276
Cash and cash equivalents		75,947			81,252		68,418		62,133
Securities available-for-sale (cost of $823,467 at September 30, 2018 and $736,975 at December 31, 2017)		817,745			743,239
Securities available-for-sale (cost of $780,103 at June 30, 2019 and $844,461 at December 31, 2018)							791,151		842,801
Federal Home Loan Bank stock, at cost		17,446			19,065		19,900		21,696
Other investments		3,428			3,446		3,501		3,450
Derivative assets		6,151			2,803		2,399		4,032
Loans held for sale		25,356			35,292		28,521		16,972
Loans receivable, net of allowance for loan losses of $13,615 at September 30, 2018 and $11,478 at December 31, 2017		2,443,849			2,308,050
Loans receivable, net of allowance for loan losses of $15,867 at June 30, 2019 and $14,463 at December 31, 2018							2,635,369		2,509,873
Premises and equipment, net		61,702			61,407		59,829		60,866
Right of use operating lease asset							17,516		—
Accrued interest receivable		13,390			11,992		12,920		13,494
Real estate acquired through foreclosure, net		1,601			3,106		1,218		1,534
Deferred tax assets, net		6,746			2,436		1,512		5,786
Mortgage servicing rights		32,995			21,003		29,640		32,933
Cash value life insurance		58,354			57,195		59,294		58,728
Core deposit intangible		17,225			19,601		14,978		16,462
Goodwill		127,592			127,592		127,592		127,592
Other assets		11,958			21,538		14,316		12,396
Total assets	$	3,721,485			3,519,017	$	3,888,074		3,790,748

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits	$	567,394			525,615	$	616,823		547,022
Interest-bearing deposits		2,192,229			2,079,314		2,189,286		2,171,171
Total deposits		2,759,623			2,604,929		2,806,109		2,718,193
Short-term borrowed funds		320,500			340,500		370,500		405,500
Long-term debt		44,391			72,259		46,525		59,436
Right of use operating lease liability							17,807		—
Derivative liabilities		—			156		3,910		1,232
Drafts outstanding		8,593			7,324		13,908		8,129
Advances from borrowers for insurance and taxes		5,435			3,005		6,515		4,100
Accrued interest payable		1,793			1,126		2,450		1,591
Reserve for mortgage repurchase losses		1,442			1,892		1,092		1,292
Dividends payable to stockholders		1,580			1,051		2,007		1,576
Accrued expenses and other liabilities		14,101			11,394		11,672		14,414
Total liabilities		3,157,458			3,043,636		3,282,495		3,215,463
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.01; 1,000,000 shares authorized at September 30, 2018 and December 31, 2017; no shares issued or outstanding		—			—
Common stock, par value $.01; 50,000,000 shares and 25,000,000 shares authorized at September 30, 2018 and December 31, 2017, respectively; 22,570,445 and 21,022,202 issued and outstanding at September 30, 2018 and December 31, 2017, respectively		226			210
Stockholders' equity:
Preferred stock, par value $.01; 1,000,000 shares authorized at June 30, 2019 and December 31, 2018; no shares issued or outstanding							—		—
Common stock, par value $.01; 50,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively; 22,284,981 and 22,387,009 issued and outstanding at June 30, 2019 and December 31, 2018, respectively							223		224
Additional paid-in capital		412,990			348,037		404,578		408,224
Retained earnings		153,371			123,537		192,910		167,173
Accumulated other comprehensive income (loss), net of tax		(2,560	)		3,597		7,868		(336	)
Total stockholders’ equity		564,027			475,381
Total liabilities and stockholders’ equity	$	3,721,485			3,519,017
Total stockholders' equity							605,579		575,285
Total liabilities and stockholders' equity						$	3,888,074		3,790,748

See accompanying notes to consolidated financial statements.

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,						For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(In thousands, except share data)												(In thousands, except share data)
Interest income
Loans	$	33,623			18,960			98,037			52,207		$	36,571			32,753			71,548			64,416
Investment securities		6,912			3,761			18,979			9,975			7,108			6,359			14,464			12,066
Dividends from Federal Home Loan Bank stock		313			135			751			358			331			263			593			438
Other interest income		137			70			371			178			125			102			311			234
Total interest income		40,985			22,926			118,138			62,718			44,135			39,477			86,916			77,154
Interest expense
Deposits		5,029			2,422			12,919			6,212			6,796			4,248			13,100			7,891
Short-term borrowed funds		1,529			441			4,488			1,225			2,429			1,705			4,745			2,958
Long-term debt		544			514			1,813			1,364			627			619			1,318			1,269
Total interest expense		7,102			3,377			19,220			8,801			9,852			6,572			19,163			12,118
Net interest income		33,883			19,549			98,918			53,917			34,283			32,905			67,753			65,036
Provision for loan losses		750			—			1,309			—			680			559			1,380			559
Net interest income after provision for loan losses		33,133			19,549			97,609			53,917			33,603			32,346			66,373			64,477
Noninterest income
Mortgage banking income		3,685			3,625			11,701			11,522			4,318			4,215			7,736			8,017
Deposit service charges		2,084			1,072			6,096			2,928			1,678			1,988			3,346			4,012
Net loss on extinguishment of debt														(31	)		—			(31	)		—
Net gain (loss) on sale of securities		(849	)		368			(2,292	)		1,174			1,941			(746	)		3,135			(1,443	)
Fair value adjustments on interest rate swaps		628			90			1,883			(37	)		(2,164	)		451			(3,535	)		1,255
Net increase in cash value life insurance		378			267			1,153			759			398			385			796			775
Mortgage loan servicing income		2,313			1,652			6,428			4,822			2,566			2,090			5,204			4,114
Debit card income, net		1,086			459			3,562			1,346			1,215			1,267			2,191			2,194
Other		975			342			2,846			1,396			1,310			1,377			2,261			2,152
Total noninterest income		10,300			7,875			31,377			23,910			11,231			11,027			21,103			21,076
Noninterest expense
Salaries and employee benefits		13,451			8,623			40,660			26,487			13,159			13,541			26,630			27,210
Occupancy and equipment		4,113			2,508			11,860			7,129			4,116			4,094			8,237			7,747
Marketing and public relations		312			385			1,011			1,182			448			322			874			698
FDIC insurance		285			205			805			380			247			265			502			520
Recovery of mortgage loan repurchase losses		(150	)		(225	)		(450	)		(675	)		(100	)		(150	)		(200	)		(300	)
Legal expense		94			157			327			373			127			157			213			233
Other real estate (income) expense, net		(13	)		(5	)		(2	)		40
Other real estate expense, net														106			105			294			11
Mortgage subservicing expense		640			494			1,772			1,485			770			568			1,474			1,132
Amortization of mortgage servicing rights		1,099			748			2,967			2,083			1,342			889			2,578			1,868
Impairment of mortgage servicing rights														1,300			—			1,300			—
Amortization of core deposit intangible		778			170			2,375			472			735			849			1,484			1,598
Merger related expenses		—			311			15,216			1,910			—			506			—			15,216
Other		3,393			2,085			9,431			6,066			3,228			3,225			6,239			6,037
Total noninterest expense		24,002			15,456			85,972			46,932			25,478			24,371			49,625			61,970
Income before income taxes		19,431			11,968			43,014			30,895			19,356			19,002			37,851			23,583
Income tax expense		4,227			3,975			8,788			8,659			4,282			4,036			8,232			4,561
Net income	$	15,204			7,993			34,226			22,236		$	15,074			14,966			29,619			19,022

Earnings per common share:
Basic	$	0.67		$	0.50		$	1.58		$	1.48		$	0.68			0.70			1.33			0.91
Diluted	$	0.66		$	0.49		$	1.57		$	1.47		$	0.67			0.70			1.32			0.90
Dividends per common share	$	0.07		$	0.04		$	0.18		$	0.12
Dividends declared per common share													$	0.09			0.06			0.17			0.11
Weighted average common shares outstanding:
Basic		22,678,681			16,029,332			21,616,485			14,980,349			22,189,508			21,243,094			22,191,673			20,961,182
Diluted		22,898,983			16,187,869			21,842,769			15,146,972			22,372,273			21,454,039			22,374,534			21,174,936

See accompanying notes to consolidated financial statements.

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2018			2017			2018			2017			For the Three Months Ended June 30,						For the Six Months Ended June 30,
	(In thousands)												2019			2018			2019			2018
													(In thousands)
Net income	$	15,204			7,993			34,226			22,236		$	15,074			14,966			29,619			19,022

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities		(3,872	)		1,387			(12,195	)		9,511
Unrealized gains (losses) on securities														7,943			(1,759	)		15,879			(8,323	)
Tax effect		968			(499	)		3,049			(3,424	)		(1,986	)		440			(3,970	)		2,081

Reclassification adjustment for (gain) loss included in earnings		849			(368	)		2,292			(1,174	)		(1,941	)		746			(3,135	)		1,443
Tax effect		(212	)		132			(573	)		423			485			(187	)		784			(361	)

Unrealized gain (loss) on interest rate swaps designated as cash flow hedges		331			34			1,694			(217	)
Unrealized (loss) gain on interest rate swaps designated as cash flow hedges														(1,128	)		356			(1,806	)		1,363
Tax effect		(83	)		(12	)		(424	)		78			282			(89	)		452			(341	)

Other comprehensive (loss) income, net of tax		(2,019	)		674			(6,157	)		5,197
Other comprehensive income (loss), net of tax														3,655			(493	)		8,204			(4,138	)

Comprehensive income	$	13,185			8,667			28,069			27,433		$	18,729			14,473			37,823			14,884

See accompanying notes to consolidated financial statements.

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN ~~STOCKHOLDERS’~~STOCKHOLDERS' EQUITY

FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2018~~2019 AND ~~2017~~2018

(Unaudited)

Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
(In thousands, except share data)

Balance, December 31, 2016 12,548,328 $ 125 66,156 98,451 (1,542 ) 163,190
Issuance of common stock, net of offering expenses 1,807,143 18 47,653 — — 47,671
Stock issued - Greer Bancshares Incorporated acquisition 1,789,523 18 54,205 — — 54,223
Stock awards 71,385 1 108 — — 109
Vested stock awards surrendered in cashless exercise (57,670 ) — (383 ) (1,330 ) — (1,713 )
Stock options exercised 600 — 10 — — 10
Stock-based compensation expense, net — — 1,170 — — 1,170
Net income — — — 22,236 — 22,236
Dividends declared to stockholders — — — (1,869 ) — (1,869 )
Other comprehensive income, net of tax — — — — 5,197 5,197
Balance, September 30, 2017 16,159,309 $ 162 168,919 117,488 3,655 290,224

Balance, December 31, 2017 21,022,202 $ 210 348,037 123,537 3,597 475,381
Issuance of common stock, net of offering expenses 1,500,000 15 63,007 — — 63,022
Stock awards 59,305 1 106 — — 107
Vested stock awards surrendered in cashless exercise (18,658 ) — (245 ) (405 ) — (650 )
Stock options exercised 7,596 — 56 — — 56
Stock-based compensation expense, net — — 2,029 — — 2,029
Net income — — — 34,226 — 34,226
Dividends declared to stockholders — — — (3,987 ) — (3,987 )
Other comprehensive income, net of tax — — — — (6,157 ) (6,157 )
Balance, September 30, 2018 22,570,445 $ 226 412,990 153,371 (2,560 ) 564,027

													Accumulated
							Additional						Other
	Common Stock						Paid-in			Retained			Comprehensive
	Shares			Amount			Capital			Earnings			Income (Loss)			Total
	(In thousands, except share data)

Balance, December 31, 2017		21,022,202		$	210			348,037			123,537			3,597			475,381
Stock awards, net of forfeitures		42,807			1			105			—			—			106
Vested stock awards surrendered in cashless exercise		(12,534	)		—			(210	)		(279	)		—			(489	)
Stock options exercised		5,064			—			56			—			—			56
Stock-based compensation expense, net		—			—			633			—			—			633
Net income		—			—			—			4,056			—			4,056
Dividends declared to stockholders		—			—			—			(1,052	)		—			(1,052	)
Other comprehensive loss, net of tax		—			—			—			—			(3,645	)		(3,645	)
Balance, March 31, 2018		21,057,539			211			348,621			126,262			(48	)		475,046

Issuance of common stock, net of offering expenses		1,500,000			15			63,007			—			—			63,022
Stock awards, net of forfeitures		15,198			—			8			—			—			8
Vested stock awards surrendered in cashless exercise		(2,555	)		—			(36	)		(74	)		—			(110	)
Stock options exercised		—			—			—			—			—			—
Stock-based compensation expense, net		—			—			700			—			—			700
Net income		—			—			—			14,966			—			14,966
Dividends declared to stockholders		—			—			—			(1,355	)		—			(1,355	)
Other comprehensive loss, net of tax		—			—			—			—			(493	)		(493	)
Balance, June 30, 2018		22,570,182		$	226			412,300			139,799			(541	)		551,784

Balance, December 31, 2018		22,387,009		$	224			408,224			167,173			(336	)		575,285
Stock awards, net of forfeitures		35,708			—			124			—			—			124
Vested stock awards surrendered in cashless exercise		(11,421	)		—			(315	)		(88	)		—			(403	)
Stock options exercised		13,674			—			246			—			—			246
Stock repurchase plan, net of commissions		(128,598	)		(1	)		(4,156	)		—			—			(4,157	)
Stock-based compensation expense, net		—			—			746			—			—			746
Net income		—			—			—			14,545			—			14,545
Dividends declared to stockholders		—			—			—			(1,785	)		—			(1,785	)
Other comprehensive income, net of tax		—			—			—			—			4,549			4,549
Balance, March 31, 2019		22,296,372			223			404,869			179,845			4,213			589,150

Stock awards, net of forfeitures		9,197			—			1			—			—			1
Vested stock awards surrendered in cashless exercise		(811	)		—			(28	)		(2	)		—			(30	)
Stock options exercised		10,128			—			83			—			—			83
Stock repurchase plan, net of commissions		(29,905	)		—			(1,027	)		—			—			(1,027	)
Stock-based compensation expense, net		—			—			680			—			—			680
Net income		—			—			—			15,074			—			15,074
Dividends declared to stockholders		—			—			—			(2,007	)		—			(2,007	)
Other comprehensive income, net of tax		—			—			—			—			3,655			3,655
Balance, June 30, 2019		22,284,981		$	223			404,578			192,910			7,868			605,579

See accompanying notes to consolidated financial statements.

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the Nine Months
Ended September 30,
2018 2017
(In thousands)
Cash flows from operating activities:
Net income $ 34,226 22,236
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses 1,309 —
Amortization of unearned discount/premiums on investments, net 3,617 2,726
Accretion of deferred loan fees (981 ) (917 )
Accretion of acquired loans (7,035 ) (2,052 )
Amortization of core deposit intangibles 2,376 472
(Gain) loss on sale of available-for-sale securities, net 2,292 (1,174 )
Mortgage banking income (11,701 ) (11,522 )
Originations of loans held for sale (667,991 ) (671,103 )
Proceeds from sale of loans held for sale 689,628 687,513
Amortization of fair value adjustments on subordinated debentures 132 55
Recovery of mortgage loan repurchase losses (450 ) (675 )
Mortgage repurchase loan losses paid, net of recoveries — (76 )
Fair value adjustments on interest rate swaps (1,883 ) 37
Stock-based compensation 2,029 1,170
Increase in cash surrender value of bank owned life insurance (1,153 ) (759 )
Depreciation 3,084 1,881
Loss (gain) on disposals of premises and equipment (2 ) 3
Gain on sale of real estate acquired through foreclosure (79 ) (33 )
Write-down of real estate acquired through foreclosure 126 —
Purchases of mortgage servicing rights (9,970 ) —
Originations of mortgage servicing rights (4,989 ) (4,495 )
Amortization of mortgage servicing rights 2,967 2,083
Increase in:
Accrued interest receivable (1,398 ) (764 )
Other assets 9,708 (2,868 )
Increase (decrease) in:
Accrued interest payable 667 468
Dividends payable to stockholders 529 144
Accrued expenses and other liabilities 2,447 (5,461 )
Cash flows provided by operating activities 47,505 16,889

~~Continued~~


	For the Six Months Ended June 30,
	2019			2018
	(In thousands)
Cash flows from operating activities:
Net income	$	29,619			19,022
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,380			559
Amortization of unearned discount/premium on investments, net		2,016			2,520
Accretion of deferred loan fees		(1,248	)		(981	)
Accretion of acquired loans		(2,992	)		(4,817	)
Amortization of core deposit intangibles		1,484			1,598
(Gain) loss on sale of available-for-sale securities, net		(3,135	)		1,443
Mortgage banking income		(7,736	)		(8,017	)
Originations of loans held for sale		(379,242	)		(450,286	)
Proceeds from sale of loans held for sale		375,429			454,122
Loss on extinguishment of debt		31			—
Amortization of fair value adjustments on subordinated debentures		89			88
Recovery of mortgage loan repurchase losses		(200	)		(300	)
Fair value adjustments on interest rate swaps		3,535			(1,255	)
Stock-based compensation		1,426			1,333
Increase in cash surrender value of bank owned life insurance		(796	)		(775	)
Depreciation		2,155			2,001
Loss (gain) on sale of real estate acquired through foreclosure		174			(53	)
Write-down of real estate acquired through foreclosure		—			126
Originations of mortgage servicing rights		(585	)		(4,491	)
Impairment of mortgage servicing rights		1,300			—
Amortization of mortgage servicing rights		2,578			1,868
Decrease (increase) in:
Accrued interest receivable		574			(672	)
Other assets		(2,875	)		7,158
Increase (decrease) in:
Accrued interest payable		859			434
Dividends payable to stockholders		431			303
Accrued expenses and other liabilities		(1,070	)		(2,033	)
Cash flows provided by operating activities		23,201			18,895

Continued

CAROLINA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

For the Nine Months
Ended September 30,
2018 2017
(In thousands)
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases $ (286,485 ) (202,321 )
Maturities, payments and calls 76,972 37,097
Proceeds from sales 116,624 103,451
Increase in other investments — (21 )
Decrease in Federal Home Loan Bank stock 1,619 1,697
Increase in loans receivable, net (129,360 ) (109,649 )
Purchase of premises and equipment (3,400 ) (3,101 )
Proceeds from disposals of premises and equipment 10 —
Proceeds from sale of real estate acquired through foreclosure 1,726 661
Net cash received for acquisitions — 37,764
Cash flows used in investing activities (222,294 ) (134,422 )

Cash flows from financing activities:
Net increase in deposit accounts 154,694 138,328
Net decrease in Federal Home Loan Bank advances (48,000 ) (43,500 )
Principal repayment of subordinated debt — (3,871 )
Net (decrease) increase in drafts outstanding 1,269 (593 )
Net increase in advances from borrowers for insurance and taxes 2,430 2,105
Cash dividends paid on common stock (3,987 ) (1,725 )
Proceeds from exercise of stock options 56 10
Proceeds from issuance of common stock 63,022 47,671
Cash flows provided by financing activities 169,484 138,425
Net (decrease) increase in cash and cash equivalents (5,305 ) 20,892
Cash and cash equivalents, beginning of period 81,252 24,352
Cash and cash equivalents, end of period $ 75,947 $ 45,244

Supplemental disclosure:
Cash paid for:
Interest on deposits and borrowed funds $ 18,553 8,075
Income taxes paid, net of refunds 4,470 7,889
Noncash investing activities:
Transfer of loans receivable to real estate acquired through foreclosure $ 268 1,047
Acquisitions:
Fair value of tangible assets acquired $ — 380,011
Other intangible assets acquired — 4,480
Liabilities assumed — 358,866
Net identifiable assets acquired over liabilities assumed — 25,625
Common stock issued in acquisition — 54,223
Goodwill — 33,020

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


	For the Six Months Ended June 30,
	2019			2018
	(In thousands)
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases	$	(113,659	)		(215,651	)
Maturities, payments and calls		43,123			57,796
Proceeds from sales		136,013			85,300
Decrease in Federal Home Loan Bank stock		1,796			46
Increase in loans receivable, net		(123,250	)		(101,036	)
Purchases of premises and equipment		(1,128	)		(3,145	)
Proceeds from sale of real estate acquired through foreclosure		756			1,398
Cash flows used in investing activities		(56,349	)		(175,292	)

Cash flows from financing activities:
Net increase in deposit accounts		87,916			103,869
Net decrease in Federal Home Loan Bank advances		(48,031	)		(12,000	)
Net increase in drafts outstanding		5,779			3,130
Net increase in advances from borrowers for insurance and taxes		2,415			1,553
Cash dividends paid on common stock		(3,792	)		(2,407	)
Proceeds from exercise of stock options		329			56
Proceeds from issuance of common stock		—			63,022
Cash paid for common stock repurchase		(5,184	)		—
Cash flows provided by financing activities		39,432			157,223
Net increase in cash and cash equivalents		6,284			826
Cash and cash equivalents, beginning of period		62,133			81,252
Cash and cash equivalents, end of period	$	68,418			82,078

Supplemental disclosure:
Cash paid for:
Interest on deposits and borrowed funds	$	18,304			11,684	��
Income taxes paid, net of refunds		6,816			63
Noncash investing activities:
Transfer of loans receivable to real estate acquired through foreclosure	$	614			91

See accompanying notes to consolidated financial statements.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Carolina Financial Corporation (“Carolina Financial” or the “Company”), incorporated under the laws of the State of Delaware, is a financial holding company with one ~~wholly owned~~wholly-owned subsidiary, CresCom Bank (the “Bank”). CresCom Bank operates ~~five wholly-owned subsidiaries,~~ Crescent Mortgage Company, Carolina Services Corporation of Charleston (“Carolina Services”), DTFS, Inc., ~~CresCom Insurance, LLC~~ and CresCom Leasing, LLC. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. In consolidation, all material intercompany accounts and transactions have been eliminated. The results of operations of the businesses acquired in transactions accounted for as purchases are included only from the dates of acquisition. All majority-owned subsidiaries are consolidated unless control is temporary or does not rest with the Company.

At ~~September~~June 30, ~~2018,~~2019, statutory business trusts (“Trusts”) created or acquired by the Company had outstanding trust preferred securities with an aggregate par value of ~~$36.0~~$36.0 million. The principal assets of the Trusts are ~~$37.1~~$37.1 million of the ~~Company’s~~Company's subordinated debentures with identical rates of interest and maturities as the trust preferred securities. The Trusts have issued ~~$1.1~~$1.1 million of common securities to the Company and are included in other investments in the accompanying consolidated balance sheets. The Trusts are not consolidated subsidiaries of the Company.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~2019. For further information, refer to the consolidated financial statements and notes thereto included in the ~~Company’s~~Company's Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 as filed with the Securities and Exchange Commission (the “SEC”) on March ~~16, 2018.~~1, 2019. There have been no significant changes to the accounting policies as disclosed in the ~~Company’s~~Company's Form 10-K, except as reflected in Recently Adopted Accounting Pronouncements of this Note 1 – Summary of Significant Accounting Policies.

~~Management’s~~

Management's Estimates

The financial statements are prepared in accordance with GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, including valuation for impaired loans, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, the valuation of securities, the valuation of derivative instruments, the valuation of assets acquired and liabilities assumed in business combinations, the valuation of mortgage servicing rights, the determination of the reserve for mortgage loan repurchase losses, asserted and unasserted legal claims and deferred tax assets or liabilities. In connection with the determination of the allowance for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

Management uses available information to recognize losses on loans and foreclosed real estate. However, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the ~~Bank’s~~Bank's allowance for loan losses and foreclosed real estate. It is reasonably possible that the allowance for loan losses and valuation of foreclosed real estate may change materially in the near term.

Earnings Per Share

Basic earnings per share (“EPS”) represents income available to common stockholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflects additional shares that would have been outstanding if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate solely to outstanding stock options, restricted stock (non-vested shares), restricted stock units (“RSUs”) and warrants, and are determined using the treasury stock method. Under the treasury stock method, the number of incremental shares is determined by assuming the issuance of stock for the outstanding stock options, unvested restricted stock, ~~and~~ RSUs, and warrants, reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the average market price for the period of the ~~Company’s~~Company's stock.

All share, earnings per share, and per share data have been retroactively adjusted to reflect the stock splits for all periods presented in accordance with GAAP.

Subsequent Events

Subsequent events are material events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the statement of financial condition but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events ~~were identified that required~~occurred requiring accrual or disclosure except as follows:

On ~~October 17, 2018,~~July 24, 2019, the ~~Company~~Company's Board of Directors declared a ~~$0.07~~$0.09 dividend per common share, payable on ~~January~~October 4, 2019, to stockholders of record on ~~December 14, 2018.~~September 13, 2019.

~~Reclassification~~On July 15, 2019, the Company and Carolina Trust BancShares, Inc., the parent company of Carolina Trust Bank (together, “Carolina Trust”), jointly announced the signing of a definitive merger agreement. Carolina Trust had assets of $617 million at June 30, 2019. Refer to Note 2 – Business Combinations for more information.

Reclassification

Certain reclassifications of accounts reported for previous periods have been made in these consolidated financial statements. Such reclassifications had no effect on ~~stockholders’~~stockholders' equity or ~~the~~ net income as previously reported.

Recently Adopted Accounting Pronouncements

During the first quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. The Company has elected to apply the package of practical expedients permitting entities to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Additionally, as provided by ASU 2016-02, the Company has elected not to apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of 12 months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term.

We adopted the guidance using the modified retrospective approach on January 1, 2019 and elected the practical expedients for transition including the transition option provided in ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allowed us to initially apply the new leases standard at the adoption date. Consequently, the reporting for the comparative periods presented continued to be in accordance with ASC Topic 840, Leases. Therefore, the 2018 financial results and disclosures have not been adjusted.

The Company implemented internal controls as well as lease accounting software to facilitate the preparation of financial information. The Company is largely accounting for our existing operating leases consistent with prior guidance except for the incremental balance sheet recognition for leases. There was no cumulative effect adjustment to retained earnings as of January 1, 2019. On January 1, 2019, the Company recorded a ROU operating lease asset and corresponding operating lease liability of $18.4 million and $18.8 million, respectively, on the consolidated balance sheet. The new standard did not have a material impact on the Company's results of operations or cash flows.

During the first quarter of 2019, the Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 amends the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification (“ASC”) to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The Company adopted the guidance using the modified retrospective approach on January 1, 2019. The guidance did not have a material effect on the Company's financial statements, particularly as the Company has not recorded any hedge ineffectiveness since inception.

During the first quarter of 2019, the Company adopted ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Cost (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). ASU 2017-08 shortens the amortization period for the premium to the earliest call date. The Company adopted the guidance using the modified retrospective approach on January 1, 2019. The guidance did not have a material effect on the Company's consolidated financial statements.

During the first quarter of 2018, the Company adopted ~~Accounting Standards Update (“ASU”)~~ASU No. 2016-01, Recognition and Measurement of Financial Assets and ~~Liabilities.~~Liabilities. The amendments included within this standard, which are applied prospectively, require the Company to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using an exit price notion. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. Refer to Note ~~8 -Estimated~~8—Estimated Fair Value of Financial Instruments for more information.

In May 2017, Financial Accounting Standards Board (the “FASB”) issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) (“ASU 2017-09”). ASU 2017-09 provides clarity when applying guidance to a change to the terms or conditions of a share-based payment award. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted ASU No. 2017-09 and its related amendments on its required effective date of January 1, 2018. The amendments have been applied to awards modified on or after the adoption date. The Company has determined that this guidance did not have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent ~~considerations~~Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance: (i) require an entity to determine whether it is a principal or an agent for each distinct good or service (or a distinct bundle of goods or services) to be provided to the customer; (ii) illustrate how an entity that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved in providing goods or services to a customer and (iii) clarify that the purpose of certain specific control indicators is to support or assist in the assessment of whether an entity controls a good or service before it is transferred to the customer, provide more specific guidance on how the indicators should be considered, and clarify that their relevance will vary depending on the facts and circumstances. The ~~Company’s~~Company's revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. A description of the Company's revenue streams accounted for under ASC 606, Revenue from Contracts with Customers follows:

Deposit service charges: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Debit card income: The Company earns interchange fees from debit cardholder transactions conducted through payment networks. 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.

The Company has evaluated ASU 2016-08 and 2014-09 and determined that this guidance did not have a material impact on the way the Company currently recognizes revenue or the way it recognizes expenses related to those revenue streams. The Company adopted ASU No. 2014-09 and its related amendments on its required effective date of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts.

Recently Issued Accounting Pronouncements

In ~~May 2017,~~April 2019, the FASB issued ASU ~~No. 2017-09, Compensation-Stock Compensation (Topic 718)~~2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU ~~2017-09”~~2019-04”). ASU ~~2017-09 provides clarity when applying~~2019-04 clarifies and improves areas of guidance ~~to a change~~related to the ~~terms or conditions~~recently issued standards on credit losses, hedging, and recognition and measurement of ~~a share-based payment award.~~financial instruments. The amendments ~~are~~related to credit losses and related to recognition and measurement of financial instruments will be effective for ~~annual~~the Company for reporting periods ~~and~~beginning after December 15, 2019. Refer below for further information surrounding the Company's adoption of these standards. The amendments related to hedging were effective for the Company for interim ~~periods within those~~and annual periods beginning after December 15, ~~2017. The Company adopted ASU No. 2017-09 and its related~~2018. These amendments ~~on its required effective date of January 1, 2018. The amendments will be applied prospectively to an award modified on or after the adoption date. The Company has determined that this guidance~~ did not have a material ~~impact~~effect on the ~~Company’s consolidated~~Company's financial statements.

~~Recently Issued Accounting Pronouncements~~

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 amends 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~~.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 on this ASU 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 July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). ASU 2018-11 amends the Leases Topic of the Accounting Standards Codification to give entities another option for transition and to provide lessors with a practical expedient. The amendments will be effective for the Company for reporting periods beginning after December 15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 amends the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification (“ASC”) to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Cost (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). ASU 2017-08 shortens the amortization period of the premium for certain callable debt securities, from the contractual maturity date to the earliest call date. The amendments do not require an accounting change for securities held at a discount; an entity will continue to amortize to the contractual maturity date the discount related to callable debt securities. The amendments apply to the amortization of premiums on callable debt securities with explicit, non-contingent call features that are callable at fixed prices on preset dates. For public business entities, ASU 2017-08 is effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities, including in an interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the amendments are adopted. The Company has determined that this guidance will not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification. For public business entities, the amendments in ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. We expect to adopt the guidance using the modified retrospective approach on January 1, 2019 and elect the practical expedients for transition including the transition option provided in ASU 2018-11. The practical expedients allow us to largely account for our existing operating leases consistent with current guidance except for the incremental balance sheet recognition for leases. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to have an immaterial impact on the Company’s consolidated balance sheet, as well as our regulatory capital ratios. The Company is nearing completion of identifying a complete inventory of arrangements containing a lease and accumulating the lease data necessary to apply the amended guidance. In addition, the Company has obtained new software to aid in the transition to the new leasing guidance, and the majority of the Company’s leases have been entered into this new leasing software program.

In January 2017, the FASB issued ASU No. 2017-04, Intangible-Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in ~~today’s~~today's two-step impairment test under ~~Accounting Standards Codification~~ ASC 350 and eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting ~~unit’s~~unit's fair value. The guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those years. The amendments should be adopted prospectively and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has determined that this guidance is not expected to have a material impact on the ~~Company’s~~Company's consolidated financial statements.

In June 2016, the FASB ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“(“ASU 2016-13”). ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Entities will apply the ~~standard’s~~standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. While early adoption was permitted beginning in the first quarter of 2019, we do not expect to early adopt the standard.

The Company's preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company's consolidated financial statements, in particular the level of the reserve for credit losses over the contractual life of the loans. In addition, the guidance eliminates the current guidance for purchased credit impaired loans, and requires an increase in the allowance for loan losses and an increase in the recorded investment of purchased credit impaired loans for the nonaccretable difference. In addition to the allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio's composition and credit quality at the adoption date as well as economic conditions and forecasts at that time. While the guidance changes the measurement of the allowance, it does not change the Company's credit risk of our lending and securities portfolios or the ultimate losses in those portfolios.

The Company is continuing to assess the impact that this new guidance will have on its consolidated financial statements and refine its models, fulfill data needs for new disclosures and draft accounting policies through its cross-functional implementation team. The team has assigned roles and responsibilities, key tasks to complete, and a timeline to be followed. The implementation team meets periodically to discuss the latest developments and ensure progress is being made. The team also keeps current on evolving interpretations and industry practices related to ASU 2016-13 via webcasts, publications, and conferences. The Company has engaged an outside consultant to assist with the methodology review and validation, as well as other key aspects of implementing the standard. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

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~~Company's financial position, results of operations or cash flows.

NOTE 2 – BUSINESS COMBINATIONS

Pending Acquisition of Carolina Trust BancShares, Inc.

On ~~November 1, 2017,~~July 15, 2019, the Company ~~acquired all~~announced the execution of an agreement and plan of merger and reorganization, by and between the Company and Carolina Trust BancShares, Inc. (“Carolina Trust”), pursuant to which, subject to the terms and conditions set forth therein, Carolina Trust will merge with and into the Company, with the Company as the surviving corporation of the ~~common stock~~merger. The agreement provides that as soon as practicable following the merger, Carolina Trust's wholly-owned subsidiary, Carolina Trust Bank, will merge with and into the Bank, with the Bank as the surviving entity. The Company anticipates closing the merger during the first quarter of ~~First South Bancorp, Inc., the holding company for First South Bank (“First South”). Under the terms of~~2020.

Pursuant to the merger agreement, each share of ~~First South~~Carolina Trust common stock ~~was~~will be converted into the right to receive ~~0.5064~~0.3000 shares of the ~~Company’s~~Company's common ~~stock.~~

~~The following table presents a summary of total consideration paid by the Company at the acquisition date (dollars~~stock, or $10.57 in ~~thousand).~~

Common stock issued (4,822,540 shares at $36.85 per share) $ 177,711
Cash in lieu of fractional shares and fair value of stock options 983
Total consideration paid $ 178,694

~~The assets acquired and liabilities assumed from First South were recorded at their fair value as of the closing date of the merger. Fair values were preliminary and subject to refinement~~cash for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values became available. Goodwill of $90.3 million was recorded at the time of the acquisition. The following table summarizes the consideration paid by the Company in the merger with First South and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

As Reported by Fair Value As Recorded by
November 1, 2017 First South Adjustments the Company
Assets (In thousands)
Cash and cash equivalents $ 66,109 — 66,109
Securities available-for-sale 186,038 — 186,038
Federal Home Loan Bank stock 1,593 — 1,593
Loans held for sale 1,282 — 1,282
Loans receivable 783,779 (24,620 )(a) 759,159
Allowance for loan losses (9,495 ) 9,495 (b) —
Premises and equipment 10,761 1,500 (c) 12,261
Foreclosed assets 1,922 (556 )(d) 1,366
Core deposit intangible 1,410 11,090 (e) 12,500
Deferred tax asset, net 3,961 238 (f) 4,199
Other assets 33,552 (3,417 )(g) 30,135
Total assets acquired $ 1,080,912 (6,270 ) 1,074,642

Liabilities
Deposits $ 952,573 78 (h) 952,651
Borrowings 26,810 (1,439 )(i) 25,371
Other liabilities 8,515 (284 )(j) 8,231
Total liabilities assumed $ 987,898 (1,645 ) 986,253
Net identifiable assets acquired over liabilities assumed 88,389
Total consideration paid 178,694
Goodwill $ 90,305

~~Explanation of fair value adjustments:~~

~~(a)~~

~~Represents the amount necessary to adjust loans to their fair value due to interest rate and credit factors.~~

~~(b)~~

~~Reflects the elimination of First South’s historical allowance for loan losses.~~

~~(c)~~

~~Reflects fair value adjustments on acquired branch and administrative offices based on the Company’s assessment.~~

~~(d)~~

~~Reflects the impact of acquisition accounting fair value adjustments.~~

~~(e)~~

~~Reflects the fair value adjustment to record the estimated core deposit intangible based on the Company’s assessment.~~

~~(f)~~

~~Reflects the tax impact of acquisition accounting fair value adjustments.~~

~~(g)~~

~~Reflects the fair value adjustment based on the Company’s evaluation of acquired other assets.~~

~~(h)~~

~~Represents the fair value adjustment due to interest rate factors.~~

~~(i)~~

~~Represents the fair value adjustment due to interest rate factors.~~

~~(j)~~

~~Reflects the fair value adjustment based on the Company’s evaluation of acquired other liabilities.~~

~~Acquisition of Greer Bancshares Incorporated~~

~~On March 18, 2017, the Company completed its acquisition of Greer Bancshares Incorporated (“Greer”), the holding company for Greer State Bank. Under the terms of the merger agreement,~~ each share of ~~Greer~~the Company's common stock ~~was converted into~~outstanding, subject to election and proration such that the ~~right to receive $18.00~~aggregate consideration will consist of 90% Carolina Financial stock and 10% cash. Cash will also be paid in ~~cash or 0.782 shares~~lieu of fractional shares. The aggregate merger consideration equals $100.1 million as of July 12, 2019, based on closing price of a share of the ~~Company’s~~Company's common stock ~~or a combination thereof, subject to certain limitations.~~as of that date.

~~The following table presents a summary of total consideration paid by the Company at the acquisition date (dollars in thousand).~~

Common stock issued (1,789,523 shares at $30.30 per share) $ 54,223
Cash payments to common stockholders 4,422
Total consideration paid $ 58,645

The assets acquired and liabilities assumed from Greer were recorded at their fair value as of the closing date of the merger. Fair values were preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values became available. Goodwill of $33.0 million was recorded at the time of the acquisition. The following table summarizes the consideration paid by the Company in the merger with Greer and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

As Reported Fair Value As Recorded by
March 18, 2017 by Greer Adjustments the Company
Assets (In thousands)
Cash and cash equivalents $ 42,187 — 42,187
Securities available for sale 121,374 — 121,374
Loans held for sale 105 — 105
Loans receivable 205,209 (10,559 )(a) 194,650
Allowance for loan losses (3,198 ) 3,198 (b) —
Premises and equipment 3,928 4,202 (c) 8,130
Foreclosed assets 42 — 42
Core deposit intangible — 4,480 (d) 4,480
Deferred tax asset, net 3,831 (1,434 )(e) 2,397
Other assets 11,367 (241 )(f) 11,126
Total assets acquired $ 384,845 (354 ) 384,491

Liabilities
Deposits $ 310,866 200 (g) 311,066
Borrowings 43,712 (3,510 )(h) 40,202
Other liabilities 7,086 512 (i) 7,598
Total liabilities assumed $ 361,664 (2,798 ) 358,866
Net identifiable assets acquired over liabilities assumed 25,625
Total consideration paid 58,645
Goodwill $ 33,020

~~Explanation of fair value adjustments:~~

~~(a)~~

~~Adjustment represents the amount necessary to adjust loans to their fair value due to interest rate and credit factors.~~

~~(b)~~

~~Adjustment reflects the elimination of Greer’s historical allowance for loan losses.~~

~~(c)~~

~~Adjustment reflects fair value adjustments on acquired branch and administrative offices based on third party appraisals.~~

~~(d)~~

~~Adjustment reflects the fair value adjustment to record the estimated core deposit intangible based on the Company’s third party valuation report.~~

~~(e)~~

~~Adjustment reflects the tax impact of acquisition accounting fair value adjustments.~~

~~(f)~~

~~Adjustment reflects the fair value adjustment based on the Company’s evaluation of acquired other assets.~~

~~(g)~~

~~Adjustment represents the fair value adjustment due to interest rate factors.~~

~~(h)~~

~~Adjustment represents the fair value adjustment due to interest rate factors.~~

~~(i)~~

~~Adjustment reflects the fair value adjustment based on the Company’s evaluation of acquired other liabilities.~~

NOTE 3 – SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities available-for-sale at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 follows:

September 30, 2018 December 31, 2017
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
(In thousands)
Securities available-for-sale:
Municipal securities $ 214,553 1,531 (2,370 ) 213,714 240,904 6,790 (344 ) 247,350
US government agencies 24,772 — (222 ) 24,550 11,983 34 (9 ) 12,008
Collateralized loan obligations 198,806 278 (160 ) 198,924 128,080 581 (18 ) 128,643
Corporate securities 6,909 86 (16 ) 6,979 6,891 115 — 7,006
Mortgage-backed securities:
Agency 207,146 356 (3,975 ) 203,527 243,075 1,234 (714 ) 243,595
Non-agency 160,026 442 (1,949 ) 158,519 94,834 551 (260 ) 95,125
Total mortgage-backed securities 367,172 798 (5,924 ) 362,046 337,909 1,785 (974 ) 338,720
Trust preferred securities 11,255 1,858 (1,581 ) 11,532 11,208 1,132 (2,828 ) 9,512
Total $ 823,467 4,551 (10,273 ) 817,745 736,975 10,437 (4,173 ) 743,239

	June 30, 2019									December 31, 2018
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(In thousands)
Securities available-for-sale:
Municipal securities	$	174,055		6,993		(43	)		181,005		212,215		2,768		(1,269	)		213,714
US government agencies		10,000		422		—			10,422		24,772		505		—			25,277
Collateralized loan obligations		234,181		116		(983	)		233,314		231,172		119		(592	)		230,699
Corporate securities		6,927		51		(16	)		6,962		6,915		69		(24	)		6,960
Mortgage-backed securities:
Agency		178,882		2,589		(737	)		180,734		199,518		427		(2,425	)		197,520
Non-agency		164,941		2,627		(53	)		167,515		158,803		423		(1,695	)		157,531
Total mortgage-backed securities		343,823		5,216		(790	)		348,249		358,321		850		(4,120	)		355,051
Trust preferred securities		11,117		1,772		(1,690	)		11,199		11,066		1,713		(1,679	)		11,100
Total	$	780,103		14,570		(3,522	)		791,151		844,461		6,024		(7,684	)		842,801

The Company had no held-to-maturity securities as of ~~September~~June 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

The amortized cost and fair value of debt securities by contractual maturity at ~~September~~June 30, ~~2018~~2019 follows:


	At June 30, 2019
	Amortized		Fair
	Cost		Value
	(In thousands)
Securities available-for-sale:
Less than one year	$	1,531		1,531
One to five years		6,744		6,818
Six to ten years		95,105		96,930
After ten years		676,723		685,872
Total	$	780,103		791,151

At September 30, 2018
Amortized Fair
Cost Value
(In thousands)
Securities available-for-sale:
Less than one year $ 1,604 1,590
One to five years 7,827 7,837
Six to ten years 114,295 113,616
After ten years 699,741 694,702
Total $ 823,467 817,745

The contractual maturity dates of the securities were used for mortgage-backed securities and asset-backed securities. No estimates were made to anticipate principal repayments.

1514

The following table summarizes the gross realized gains and losses from sales of investment securities available-for-sale for the periods indicated.

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2018 2017 2018 2017
(In thousands)

Proceeds $ 31,324 22,430 116,624 103,451

Realized gains $ 8 368 77 1,388
Realized losses (857 ) — (2,369 ) (214 )
Total investment securities gains (losses), net $ (849 ) 368 (2,292 ) 1,174


	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2019		2018			2019			2018
	(In thousands)

Proceeds	$	64,979		34,122			136,013			85,300

Realized gains	$	1,941		55			3,387			69
Realized losses		—		(801	)		(252	)		(1,512	)
Total investment securities gains (losses), net	$	1,941		(746	)		3,135			(1,443	)

At ~~September~~June 30, 2019, the Company had pledged securities with a market value of $79.5 million for Federal Home Loan Bank (“FHLB”) advances. At December 31, 2018, the Company had pledged securities with a market value of ~~$86.5~~$84.3 million ~~as collateral~~ for ~~Federal Home Loan Bank (“FHLB”)~~FHLB advances.

At ~~September~~June 30, ~~2018,~~2019, the Company ~~has~~had pledged ~~$175.3~~$156.1 million of securities to secure public agency funds.

At ~~September 30,~~December 31, 2018, the Company had ~~$320.5~~pledged $165.5 million of ~~loans pledged for FRB advances.~~securities to secure public agency funds.

The following tables summarize gross unrealized losses on investment securities and the fair market value of the related securities at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

At September 30, 2018
Less than 12 Months 12 Months or Greater Total
Amortized Fair Unrealized Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Losses Cost Value Losses Cost Value Losses
(In thousands)
Available-for-sale:
Municipal securities $ 112,668 110,736 (1,932 ) 8,629 8,191 (438 ) 121,297 118,927 (2,370 )
US government agencies 24,772 24,550 (222 ) — — — 24,772 24,550 (222 )
Collateralized loan obligations 86,037 85,877 (160 ) — — — 86,037 85,877 (160 )
Corporate securities 480 464 (16 ) — — — 480 464 (16 )
Mortgage-backed securities:
Agency 134,779 131,785 (2,994 ) 32,399 31,418 (981 ) 167,178 163,203 (3,975 )
Non-agency 113,069 111,183 (1,886 ) 7,675 7,612 (63 ) 120,744 118,795 (1,949 )
Total mortgage-backed securities 247,848 242,968 (4,880 ) 40,074 39,030 (1,044 ) 287,922 281,998 (5,924 )
Trust preferred securities — — — 8,449 6,868 (1,581 ) 8,449 6,868 (1,581 )
Total $ 471,805 464,595 (7,210 ) 57,152 54,089 (3,063 ) 528,957 518,684 (10,273 )


	At June 30, 2019
	Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)
Available-for-sale:
Municipal securities	$	3,041		3,038		(3	)		4,024		3,984		(40	)		7,065		7,022		(43	)
US government agencies		—		—		—			—		—		—			—		—		—
Collateralized loan obligations		102,792		102,455		(337	)		56,528		55,882		(646	)		159,320		158,337		(983	)
Corporate securities		—		—		—			483		467		(16	)		483		467		(16	)
Mortgage-backed securities:
Agency		2,867		2,854		(13	)		49,944		49,220		(724	)		52,811		52,074		(737	)
Non-agency		73		72		(1	)		13,683		13,631		(52	)		13,756		13,703		(53	)
Total mortgage-backed securities		2,940		2,926		(14	)		63,627		62,851		(776	)		66,567		65,777		(790	)
Trust preferred securities		—		—		—			8,193		6,503		(1,690	)		8,193		6,503		(1,690	)
Total	$	108,773		108,419		(354	)		132,854		129,687		(3,167	)		241,627		238,106		(3,522	)

1615


	At December 31, 2017																					At December 31, 2018
	Less than 12 Months							12 Months or Greater							Total							Less than 12 Months							12 Months or Greater							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
	(In thousands)																					(In thousands)
Available-for-sale:
Municipal securities	$	23,849		23,631		(218	)		3,606		3,480		(126	)		27,455		27,111		(344	)	$	12,395		12,331		(64	)		55,189		53,984		(1,205	)		67,584		66,315		(1,269	)
US government agencies		1,681		1,672		(9	)		—		—		—			1,681		1,672		(9	)		—		—		—			—		—		—			—		—		—
Collateralized loan obligations		23,000		22,982		(18	)		—		—		—			23,000		22,982		(18	)		146,913		146,344		(569	)		5,000		4,977		(23	)		151,913		151,321		(592	)
Corporate securities																							2,980		2,956		(24	)		—		—		—			2,980		2,956		(24	)
Mortgage-backed securities:
Agency		107,501		107,011		(490	)		17,484		17,260		(224	)		124,985		124,271		(714	)		14,615		14,450		(165	)		120,325		118,065		(2,260	)		134,940		132,515		(2,425	)
Non-agency		21,874		21,704		(170	)		9,889		9,799		(90	)		31,763		31,503		(260	)		71,376		70,709		(667	)		43,138		42,110		(1,028	)		114,514		112,819		(1,695	)
Total mortgage-backed securities		129,375		128,715		(660	)		27,373		27,059		(314	)		156,748		155,774		(974	)		85,991		85,159		(832	)		163,463		160,175		(3,288	)		249,454		245,334		(4,120	)
Trust preferred securities		—		—		—			8,516		5,688		(2,828	)		8,516		5,688		(2,828	)		—		—		—			8,214		6,535		(1,679	)		8,214		6,535		(1,679	)
Total	$	177,905		177,000		(905	)		39,495		36,227		(3,268	)		217,400		213,227		(4,173	)	$	248,279		246,790		(1,489	)		231,866		225,671		(6,195	)		480,145		472,461		(7,684	)

The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospect of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the difference between the ~~investment’s~~investment's cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.

At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had ~~270~~80 and ~~135,~~214, respectively, individual investments available-for-sale that were in an unrealized loss position. The unrealized losses on the ~~Company’s~~Company's investments were attributable primarily to changes in interest rates. Management has performed various analyses, including cash flows testing as needed, and determined that no OTTI expense was necessary during ~~2018~~2019 or ~~2017.~~2018.

NOTE 4 – DERIVATIVES

In the ordinary course of business, the Company enters into various types of derivative transactions. For its related mortgage banking activities, the Company holds derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate mortgage loans to customers (interest rate lock commitments) and forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans. The ~~Company’s~~Company's objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock commitments and the mortgage loans that are held for sale. Derivative instruments not related to mortgage banking activities primarily relate to interest rate swap agreements.

1716

The derivative positions of the Company at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are as follows:

At September 30, At December 31,
2018 2017
Fair Notional Fair Notional
Value Value Value Value
(In thousands)
Derivative assets:
Cash flow hedges:
Interest rate swaps $ 2,338 45,000 644 45,000
Non-hedging derivatives:
Interest rate swaps 2,562 85,000 964 50,000
Mortgage loan interest rate lock commitments 783 99,979 890 98,584
Mortgage loan forward sales commitments 178 15,739 305 23,401
Mortgage-backed securities forward sales commitments 290 82,000 — —
Total derivative assets $ 6,151 327,718 2,803 216,985

Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps $ — — 95 5,000
Mortgage-backed securities forward sales commitments — — 61 75,000
Total derivative liabilities $ — — 156 80,000

	At June 30,				At December 31,
	2019				2018
	Fair		Notional		Fair		Notional
	Value		Value		Value		Value
	(In thousands)
Derivative assets:
Cash flow hedges:
Interest rate swaps	$	—		—		1,232		45,000
Non-hedging derivatives:
Interest rate swaps		279		35,000		1,198		50,000
Mortgage loan interest rate lock commitments		1,590		131,734		1,199		76,571
Mortgage loan forward sales commitments		530		20,833		403		13,241
Total derivative assets	$	2,399		187,567		4,032		184,812

Derivative liabilities:
Cash flow hedges:
Interest rate swaps	$	574		45,000		—		—
Non-hedging derivatives:
Interest rate swaps		2,886		50,000		937		50,000
Mortgage-backed securities forward sales commitments		450		93,000		295		52,000
Total derivative liabilities	$	3,910		188,000		1,232		102,000

Non-Designated Hedges

Derivative Loan Commitments and Forward Sales Commitments

The Company enters into mortgage loan commitments that are also referred to as derivative loan commitments, if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the secondary market.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments typically decreases. Conversely, if interest rates decrease, the value of these loan commitments typically increases.

To protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.

1817

Derivatives related to these commitments are recorded as either a derivative asset or a derivative liability on the balance sheet and are measured at fair value. Both the interest rate lock commitments and the forward commitments are reported at fair value, with adjustments recorded in current period earnings in “mortgage banking income” within noninterest income in the consolidated statements of operations.

Interest Rate Swaps

The Company enters into interest rate swaps that do not meet the hedge accounting requirements and are recorded at fair value as a derivative asset or liability. Interest rate swaps that are not designated as hedges are primarily used to more closely match the interest rate characteristics of assets and liabilities and to mitigate the risks arising from timing mismatches between assets and liabilities including duration mismatches. Fair value changes are recognized in noninterest income as “fair value adjustments on interest rate swaps.”

Cash Flow Hedges of Interest Rate Risk

The ~~Company’s~~Company's objectives in using certain interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The Company has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable to changes in forecasted LIBOR-based FHLB borrowings. These derivative instruments are designated as cash flow hedges. The hedged item is the LIBOR portion of the series of future adjustable rate borrowings over the term of the interest rate swap. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. The Company tests for hedging effectiveness on a quarterly basis. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ~~ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The~~ Company has not recorded any hedge ineffectiveness since inception.

Risk Management Objective of Using Derivatives

When using derivatives to hedge fair value and cash flow risks, the Company exposes itself to potential credit risk from the counterparty to the hedging instrument. This credit risk is normally a small percentage of the notional amount and fluctuates as interest rates change. The Company analyzes and approves credit risk for all potential derivative counterparties prior to execution of any derivative transaction. The Company seeks to minimize credit risk by dealing with highly rated counterparties and by obtaining collateralization for exposures above certain predetermined limits. If significant counterparty risk is determined, the Company would adjust the fair value of the derivative recorded asset balance to consider such risk.

NOTE 5 - LOANS RECEIVABLE, NET

We emphasize a range of lending services, including commercial and residential real estate mortgage loans, real estate construction loans, commercial and industrial loans, commercial leases, and consumer loans. Our customers are generally individuals and small to medium-sized businesses and professional firms that are located in or conduct a substantial portion of their business in our market areas. We have focused our lending activities primarily on the professional market, including ~~doctors, dentists,~~ small business to medium-sized owners and commercial real estate developers.

1918

Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer lending limits, with approval processes for larger loans, documentation examination, and follow-up procedures for any exceptions to credit policies. Our loan approval policies provide for various levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds the maximum senior ~~officer’s~~officer's lending authority, the loan request will be considered by the management loan committee, or MLC, which is comprised of ~~four~~five members, all of whom are part of the senior management team of the Bank. The MLC meets weekly to approve loans with total loan commitment relationships generally exceeding $2.5 million. The loan authority of the MLC is equal to two-thirds of the legal lending limit of the Bank which is equivalent to the in-house loan limit. Total credit exposure above the in-house limit requires approval by the majority of the board of directors. We do not make any loans to any director, executive officer of the Bank, or the related interests of each, unless the loan is approved by the full Board of Directors of the Bank and is on terms not more favorable than would be available to a person not affiliated with the Bank.

The following is a description of the risk characteristics of the material loan portfolio segments:

Residential Mortgage Loans and Home Equity Loans. We generally originate and hold short-term and long-term first mortgages and traditional second mortgage residential real estate loans. Generally, we limit the loan-to-value ratio on our residential real estate loans to 80%. Loans over 80% LTV generally require private mortgage insurance. We offer fixed and adjustable rate residential real estate loans with terms of up to 30 years. We also offer a variety of lot loan options to consumers to purchase the lot on which they intend to build their home. The options available depend on whether the borrower intends to begin building within 12 months of the lot purchase or at an undetermined future date. We also offer traditional home equity loans and lines of credit. Our underwriting criteria for, and the risks associated with, home equity loans and lines of credit are generally the same as those for first mortgage loans. Home equity loans typically have terms of 10 years or less.

Commercial Real Estate. Commercial real estate loans generally have terms of five years or less, although payments may be structured on a longer amortization basis. We evaluate each borrower on an individual basis and attempt to determine their business risks and credit profile. We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, generally does not exceed 80%. We also generally require that a ~~borrower’s~~borrower's cash flow exceed 120% of monthly debt service obligations. In order to ensure secondary sources of payment and liquidity to support a loan request, we typically review all of the personal financial statements of the principal owners and require their personal guarantees.

Real Estate Construction and Development Loans.We offer fixed and adjustable rate residential and commercial construction loan financing to builders and developers and to consumers who wish to build their own home. The term of construction and development loans generally is limited to 18 months, although payments may be structured on a longer amortization basis. Most loans will mature and require payment in full upon the sale of the property. We believe that construction and development loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and usually on the subsequent sale of the property. We attempt to reduce risk associated with construction and development loans by obtaining personal guarantees and by keeping the maximum loan-to-value ratio at or below 65%-80% of the lesser of cost or appraised value, depending on the project type. Generally, we do not have interest reserves built into loan commitments but require periodic cash payments for interest from the ~~borrower’s~~borrower's cash flow.

Commercial Loans.We make loans for commercial purposes in various lines of businesses, including the manufacturing industry, service industry, and professional service areas. Commercial loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or if they are secured, the value of the collateral may be difficult to assess and more likely to decrease than real estate. Equipment loans typically will be made for a term of 10 years or less at fixed or variable rates, with the loan fully amortized over the term and secured by the financed equipment. Generally, we limit the loan-to-value ratio on these loans to 75% of cost. Working capital loans typically have terms not exceeding one year and usually are secured by accounts receivable, inventory, or personal guarantees of the principals of the business. For loans secured by accounts receivable or inventory, principal will typically be repaid as the assets securing the loan are converted into cash, and in other cases principal will typically be due at maturity. Trade letters of credit, standby letters of credit, and foreign exchange will generally be handled through a correspondent bank as agent for the Bank.

2019

The ~~Company’s~~Company's primary markets are generally concentrated in real estate lending. However, in order to diversify our lending portfolio, the Company purchases nationally syndicated commercial and industrial loans. These loans typically have terms of seven years and are generally tied to a floating rate index such as LIBOR or prime. To effectively manage this line of business, the Company has an experienced senior lending executive who leads a team with relevant experience to manage this area of this segment of the loan portfolio. In addition, the Company engaged a consulting firm that specializes in syndicated loans to assist in monitoring performance analytics. As of ~~September~~June 30, ~~2018~~2019, and December 31, ~~2017,~~2018, there were approximately ~~$91.3~~$96.9 million and ~~$75.0~~$99.8 million in broadly syndicated loans outstanding. Syndicated loans are grouped within commercial business loans below.

The Bank ~~began originating~~originates leases, primarily on equipment utilized for business purposes, ~~as a result of the First South acquisition. Lease~~with terms that generally range from 12 to 60 months and include options to purchase the leased equipment at the end of the lease. Most leases provide 100% of the cost of the equipment and are secured by the leased equipment. The Company requires the leased equipment to be insured and that we be listed as a loss payee and named as an additional insured on the insurance policy. We manage credit risk associated with our lease financing loan class based upon the dollar amount of the lease and the level of credit risk. We follow a formal review process that entails analysis of the following factors: equipment value/residual value, exposure levels, jurisdiction risk, industry risk, guarantor requirements, and regulatory compliance. As of ~~September~~June 30, ~~2018~~2019, and December 31, ~~2017,~~2018, there were approximately ~~$20.8~~$19.4 million and ~~$24.0~~$23.1 million in lease receivables outstanding. Lease receivables are grouped within commercial business loans below.

Consumer Loans.We make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. Consumer loans are underwritten based on the ~~borrower’s~~borrower's income, current debt level, past credit history, and the availability and value of collateral. Consumer rates are both fixed and variable, with negotiable terms. Our installment loans ~~generally~~typically amortize over periods up to 72 months. Although we typically require monthly payments of interest and a portion of the principal on our loan products, we will offer consumer loans with a single maturity date when a specific source of repayment is available. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.

Loans receivable, net at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are summarized by category as follows:

At September 30, At December 31,
2018 2017
% of Total % of Total
All Loans: Amount Loans Amount Loans
(Dollars in thousands)
Loans secured by real estate:
One-to-four family $ 721,010 29.34 % 665,774 28.70 %
Home equity 85,483 3.48 % 90,141 3.89 %
Commercial real estate 981,132 39.92 % 933,820 40.26 %
Construction and development 312,072 12.70 % 294,793 12.71 %
Consumer loans 20,627 0.84 % 19,990 0.86 %
Commercial business loans 337,140 13.72 % 315,010 13.58 %
Total gross loans receivable 2,457,464 100.00 % 2,319,528 100.00 %
Less:
Allowance for loan losses 13,615 11,478
Total loans receivable, net $ 2,443,849 2,308,050


	At June 30,					At December 31,
	2019					2018
			% of Total					% of Total
All Loans:	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	734,652		27.71	%		732,717		29.03	%
Home equity		77,375		2.92	%		83,770		3.32	%
Commercial real estate		1,094,754		41.29	%		1,034,117		40.96	%
Construction and development		317,035		11.96	%		290,494		11.51	%
Consumer loans		23,554		0.89	%		23,845		0.94	%
Commercial business loans		403,866		15.23	%		359,393		14.24	%
Total gross loans receivable		2,651,236		100.00	%		2,524,336		100.00	%
Less:
Allowance for loan losses		15,867					14,463
Total loans receivable, net	$	2,635,369					2,509,873

2120

Loans receivable, net at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 for purchased non-credit impaired loans and nonacquired loans are summarized by category as follows:

At September 30, At December 31,
2018 2017
Purchased Non-Credit Impaired Loans % of Total % of Total
(ASC 310-20) and Nonacquired Loans: Amount Loans Amount Loans

(Dollars in thousands)
Loans secured by real estate:
One-to-four family $ 711,863 29.66 % 654,597 29.21 %
Home equity 85,409 3.56 % 89,961 4.01 %
Commercial real estate 944,765 39.37 % 891,469 39.77 %
Construction and development 308,410 12.85 % 287,437 12.83 %
Consumer loans 20,560 0.86 % 19,895 0.89 %
Commercial business loans 328,724 13.70 % 297,754 13.29 %
Total gross loans receivable 2,399,731 100.00 % 2,241,113 100.00 %
Less:
Allowance for loan losses 13,615 11,478
Total loans receivable, net $ 2,386,116 2,229,635


	At June 30,					At December 31,
	2019					2018
Purchased Non-Credit Impaired Loans			% of Total					% of Total
(ASC 310-20) and Nonacquired Loans:	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	726,773		27.87	%		723,641		29.24	%
Home equity		77,353		2.97	%		83,717		3.38	%
Commercial real estate		1,069,623		41.02	%		1,004,420		40.59	%
Construction and development		314,341		12.05	%		287,673		11.63	%
Consumer loans		23,514		0.90	%		23,792		0.96	%
Commercial business loans		396,040		15.19	%		351,194		14.20	%
Total gross loans receivable		2,607,644		100.00	%		2,474,437		100.00	%
Less:
Allowance for loan losses		15,677					14,463
Total loans receivable, net	$	2,591,967					2,459,974

Loans receivable, net at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 for purchased credit impaired loans are summarized by category below.

At September 30, At December 31,
2018 2017
Purchased Credit Impaired % of Total % of Total
Loans (ASC 310-30): Amount Loans Amount Loans
(Dollars in thousands) (Dollars in thousands)
Loans secured by real estate:
One-to-four family $ 9,146 15.85 % 11,177 14.25 %
Home equity 75 0.13 % 180 0.23 %
Commercial real estate 36,367 62.99 % 42,351 54.01 %
Construction and development 3,662 6.34 % 7,356 9.38 %
Consumer loans 66 0.11 % 95 0.12 %
Commercial business loans 8,417 14.58 % 17,256 22.01 %
Total gross loans receivable 57,733 100.00 % 78,415 100.00 %
Less:
Allowance for loan losses — —
Total loans receivable, net $ 57,733 78,415


	At June 30,					At December 31,
	2019					2018
Purchased Credit Impaired			% of Total					% of Total
Loans (ASC 310-30):	Amount		Loans			Amount		Loans
	(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	7,879		18.07	%		9,077		18.19	%
Home equity		22		0.06	%		53		0.11	%
Commercial real estate		25,131		57.65	%		29,696		59.51	%
Construction and development		2,694		6.18	%		2,821		5.65	%
Consumer loans		40		0.09	%		53		0.11	%
Commercial business loans		7,826		17.95	%		8,199		16.43	%
Total gross loans receivable		43,592		100.00	%		49,899		100.00	%
Less:
Allowance for loan losses		190					—
Total loans receivable, net	$	43,402					49,899

Included in the loan totals, net of purchase discount, were ~~$749.4~~$601.2 million and ~~$952.2~~$686.4 million in loans acquired through acquisitions at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the purchase discount on ~~purchased~~acquired non-credit impaired loans was ~~$12.1~~$9.1 million and ~~$17.7~~$10.9 million, respectively. No allowance for loan losses related to the acquired loans iswas recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

2221

There are two methods to account for acquired loans as part of a business combination. Acquired loans that contain evidence of credit deterioration on the date of purchase are carried at the net present value of expected future proceeds in accordance with ASC 310-30 and are considered purchased credit impaired (“PCI”) loans. All other acquired loans are recorded at their initial fair value, adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on purchase, charge-offs and any other adjustment to carrying value in accordance with ASC 310-20.

PCI loans are aggregated into pools of loans based on common risk characteristics such as the type of loan, payment status, or collateral type. The Company estimates the amount and timing of expected cash flows for each purchased loan pool and the expected cash flows in excess of the amount paid are recorded as interest income over the remaining life of the pool (accretable yield). The excess of the ~~pool’s~~pool's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

At ~~September~~June 30, 2019, the outstanding balance and recorded investment of PCI loans was $56.3 million and $43.6 million, respectively. At December 31, 2018, the outstanding balance and recorded investment of PCI loans was ~~$72.1~~$63.7 million and ~~$57.7~~$49.9 million, respectively. ~~At December 31, 2017, the outstanding balance and recorded investment of PCI loans was $93.8 million and $78.4 million, respectively,~~

The following table presents changes in the value of PCI loans receivable for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~September 30, 2017:~~2018:

For the Three Months Ended
September 30, For the Nine Months Ended
September 30,
2018 2017 2018 2017
(In thousands)

Balance at beginning of period $ 64,518 23,993 78,415 —
Fair value of acquired loans — — — 25,439
Net reductions for payments, foreclosures, and accretion (6,785 ) (3,406 ) (20,682 ) (4,852 )
Balance at end of period $ 57,733 20,587 57,733 20,587


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
	(In thousands)
Balance at beginning of period	$	47,328			71,030			49,899			78,415
Net reductions for payments, foreclosures, and accretion		(3,736	)		(6,512	)		(6,307	)		(13,897	)
Balance at end of period	$	43,592			64,518			43,592			64,518

The following table presents changes in the value of the accretable yield for PCI loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~September~~2018:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
	(In thousands)
Accretable yield, beginning of period	$	20,171			15,745			19,908			12,536
Accretion and interest income		(1,262	)		(1,224	)		(2,575	)		(2,556	)
Reclassification from nonaccretable balance, net^(a)		238			207			712			3,403
Other changes, net^(b)		170			(58	)		1,272			1,287
Accretable yield, end of period	$	19,317			14,670			19,317			14,670

(a) Reclassifications from the nonaccretable balance in the three and six months ended June 30, ~~2017:~~2019 were driven by improvement in credit quality, primarily delinquencies.

For the Three Months Ended
September 30, For the Nine Months Ended
September 30,
2018 2017 2018 2017
(In thousands)

Accretable yield, beginning of period $ 14,670 4,542 12,536 —
Additions — — — 4,995
Accretion (1,138 ) (322 ) (3,694 ) (775 )
Reclassification from nonaccretable balance, net 433 — 3,836 —
Other changes, net 180 — 1,467 —
Accretable yield, end of period $ 14,145 4,220 14,145 4,220

(b) Other changes, net include the impact of changes in expectations of cash flows, which may vary from period to period due to the impact of modifications and changes to prepayment assumptions, as well as the impact of changes in interest rates on variable rate loans.

2322

The composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows:

At September 30, At December 31,
2018 2017
(Dollars in thousands)

Variable rate loans $ 916,240 37.28 % 807,748 34.82 %
Fixed rate loans 1,541,224 62.72 % 1,511,780 65.18 %
Total loans outstanding $ 2,457,464 100.00 % 2,319,528 100.00 %


	At June 30,				At December 31,
	2019				2018
	(Dollars in thousands)
Variable rate loans	$	999,568	37.70	%		942,348	37.33	%
Fixed rate loans		1,651,668	62.30	%		1,581,988	62.67	%
Total loans outstanding	$	2,651,236	100.00	%		2,524,336	100.00	%

The following table presents activity in the allowance for loan losses for the period indicated. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


																							For the Three Months Ended June 30, 2019
																							Loans Secured by Real Estate
																							One-to-						Commercial			Construction
																							four			Home			real			and						Commercial
																							family			equity			estate			development			Consumer			business			Unallocated		Total
Allowance for loan losses:	For the Three Months Ended September 30, 2018																						(In thousands)
Balance, beginning of period																							$	3,526			225			5,160			2,091			350			3,297			372		15,021
Provision for loan losses - non PCI loans																								65			16			312			(151	)		(11	)		324			98		653
Provision for loan losses - PCI loans																								(46	)		—			84			(11	)		—			—			—		27
Charge-offs																								(93	)		(7	)		(32	)		(7	)		(36	)		(44	)		—		(219	)
Recoveries																								133			2			14			139			75			22			—		385
Balance, end of period																							$	3,585			236			5,538			2,061			378			3,599			470		15,867

																							For the Three Months Ended June 30, 2018
	Loans Secured by Real Estate																						Loans Secured by Real Estate
	One-to-					Commercial		Construction															One-to-						Commercial			Construction
	four			Home		real		and						Commercial									four			Home			real			and						Commercial
	family			equity		estate		development			Consumer			business			Unallocated			Total			family			equity			estate			development			Consumer			business			Unallocated		Total
	(In thousands)																						(In thousands)
Balance, beginning of period	$	3,110			202		4,339		2,082			117			2,543			594			12,987		$	3,010			226			4,144			2,032			75			2,873			348		12,708
Provision for loan losses		402			15		352		4			255			(13	)		(265	)		750
Provision for loan losses - non PCI loans																								240			(24	)		205			49			153			(309	)		246		559
Charge-offs		(79	)		—		—		(23	)		(117	)		(20	)		—			(239	)		(147	)		—			(52	)		—			(129	)		(27	)		—		(355	)
Recoveries		3			1		22		—			12			79			—			117			7			—			42			1			18			6			—		74
Balance, end of period	$	3,436			218		4,713		2,063			267			2,589			329			13,615		$	3,110			202			4,339			2,082			117			2,543			594		12,987


	For the Six Months Ended June 30, 2019
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated		Total
Allowance for loan losses	(In thousands)
Balance, beginning of period	$	3,540			203			5,097			1,969			352			2,940			362		14,463
Provision for loan losses - non PCI loans		35			104			366			(36	)		28			585			108		1,190
Provision for loan losses - PCI loans		20			—			84			—			2			84			—		190
Charge-offs		(148	)		(78	)		(32	)		(16	)		(100	)		(62	)		—		(436	)
Recoveries		138			7			23			144			96			52			—		460
Balance, end of period	$	3,585			236			5,538			2,061			378			3,599			470		15,867

	For the Six Months Ended June 30, 2018
	Loans Secured by Real Estate
	One-to-						Commercial			Construction
	four			Home			real			and						Commercial
	family			equity			estate			development			Consumer			business			Unallocated		Total
	(In thousands)
Balance, beginning of period	$	2,719			168			3,986			1,201			79			2,840			485		11,478
Provision for loan losses - non PCI loans		526			26			392			(155	)		118			(456	)		109		559
Charge-offs		(147	)		—			(86	)		(1	)		(138	)		(116	)		—		(488	)
Recoveries		12			8			47			1,037			58			275			—		1,437
Balance, end of period	$	3,110			202			4,339			2,082			117			2,543			594		12,987

For the Three Months Ended September 30, 2017
Loans Secured by Real Estate
One-to- Commercial Construction
four Home real and Commercial
family equity estate development Consumer business Unallocated Total
(In thousands)
Balance, beginning of period $ 2,725 218 3,331 948 101 2,901 526 10,750
Provision for loan losses (125 ) 18 243 181 (36 ) (342 ) 61 —
Charge-offs (127 ) — — — (5 ) — — (132 )
Recoveries 2 — — — 16 26 — 44
Balance, end of period $ 2,475 236 3,574 1,129 76 2,585 587 10,662

Allowance for loan losses: For the Nine Months Ended September 30, 2018
Loans Secured by Real Estate
One-to- Commercial Construction
four Home real and Commercial
family equity estate development Consumer business Unallocated Total
(In thousands)
Balance, beginning of period $ 2,719 168 3,986 1,201 79 2,840 485 11,478
Provision for loan losses 928 41 744 (152 ) 373 (469 ) (156 ) 1,309
Charge-offs (226 ) — (86 ) (24 ) (255 ) (136 ) — (727 )
Recoveries 15 9 69 1,038 70 354 — 1,555
Balance, end of period $ 3,436 218 4,713 2,063 267 2,589 329 13,615

For the Nine Months Ended September 30, 2017
Loans Secured by Real Estate
One-to- Commercial Construction
four Home real and Commercial
family equity estate development Consumer business Unallocated Total
(In thousands)
Balance, beginning of period $ 2,636 197 3,344 1,132 80 2,805 494 10,688
Provision for loan losses (2 ) 39 204 (5 ) (16 ) (313 ) 93 —
Charge-offs (162 ) — — — (16 ) — — (178 )
Recoveries 3 — 26 2 28 93 — 152
Balance, end of period $ 2,475 236 3,574 1,129 76 2,585 587 10,662

The following table disaggregates our allowance for loan losses and recorded investment in loans by impairment methodology.


	Loans Secured by Real Estate
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
	family		equity		estate		development		Consumer		business		Unallocated		Total
	(In thousands)
At June 30, 2019:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	90		9		273		323		—		84		—		779
Collectively evaluated for impairment		3,475		227		5,181		1,738		376		3,431		470		14,898
Purchased credit impaired		20		—		84		—		2		84		—		190
Total allowance for loan losses	$	3,585		236		5,538		2,061		378		3,599		470		15,867

Loans receivable ending balances:
Individually evaluated for impairment	$	5,218		33		7,701		2,059		74		2,696		—		17,781
Collectively evaluated for impairment		721,555		77,320		1,061,922		312,282		23,440		393,344		—		2,589,863
Purchased credit impaired loans		7,879		22		25,131		2,694		40		7,826		—		43,592
Total loans receivable	$	734,652		77,375		1,094,754		317,035		23,554		403,866		—		2,651,236

At December 31, 2018:
Allowance for loan losses ending balances:
Individually evaluated for impairment	$	176		—		145		515		—		24		—		860
Collectively evaluated for impairment		3,364		203		4,952		1,454		352		2,916		362		13,603
Total allowance for loan losses	$	3,540		203		5,097		1,969		352		2,940		362		14,463

Loans receivable ending balances:
Individually evaluated for impairment	$	4,687		249		5,105		1,866		31		2,853		—		14,791
Collectively evaluated for impairment		718,953		83,468		999,316		285,807		23,761		348,341		—		2,459,646
Purchased credit impaired loans		9,077		53		29,696		2,821		53		8,199		—		49,899
Total loans receivable	$	732,717		83,770		1,034,117		290,494		23,845		359,393		—		2,524,336

Loans Secured by Real Estate
One-to- Commercial Construction
four Home real and Commercial
family equity estate development Consumer business Unallocated Total
(In thousands)
At September 30, 2018:
Allowance for loan losses ending balances:
Individually evaluated for impairment $ 116 — 91 515 — 10 — 732
Collectively evaluated for impairment 3,320 218 4,622 1,548 267 2,579 329 12,883
$ 3,436 218 4,713 2,063 267 2,589 329 13,615

Loans receivable ending balances:
Individually evaluated for impairment $ 4,160 196 4,688 1,830 34 2,808 — 13,716
Collectively evaluated for impairment 707,704 85,212 940,077 306,580 20,527 325,915 — 2,386,015
Purchased Credit-Impaired Loans 9,146 75 36,367 3,662 66 8,417 — 57,733
Total loans receivable $ 721,010 85,483 981,132 312,072 20,627 337,140 — 2,457,464

At December 31, 2017:
Allowance for loan losses ending balances:
Individually evaluated for impairment $ 64 29 — — — 16 — 109
Collectively evaluated for impairment 2,655 139 3,986 1,201 79 2,824 485 11,369
$ 2,719 168 3,986 1,201 79 2,840 485 11,478

Loans receivable ending balances:
Individually evaluated for impairment $ 3,435 108 4,811 318 26 285 — 8,983
Collectively evaluated for impairment 651,162 89,853 886,658 287,119 19,869 297,469 — 2,232,130
Purchased Credit-Impaired Loans 11,177 180 42,351 7,356 95 17,256 — 78,415
Total loans receivable $ 665,774 90,141 933,820 294,793 19,990 315,010 — 2,319,528

2625

The following table presents impaired loans individually evaluated for impairment in the segmented portfolio categories and the corresponding allowance for loan losses as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. The recorded investment is defined as the original amount of the loan, net of any deferred costs and fees, less any principal reductions and direct charge-offs. Unpaid principal balance includes amounts previously included in charge-offs.

At September 30, 2018 At December 31, 2017
Unpaid Unpaid
Recorded Principal Related Recorded Principal Related
Investment Balance Allowance Investment Balance Allowance
(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family $ 2,961 3,119 — 2,725 2,846 —
Home equity 196 196 — — — —
Commercial real estate 3,006 3,065 — 3,370 3,370 —
Construction and development 267 267 — 318 318 —
Consumer loans 34 35 — 26 26 —
Commercial business loans 2,658 2,659 — 113 114 —
9,122 9,341 — 6,552 6,674 —

With an allowance recorded:
Loans secured by real estate:
One-to-four family 1,199 1,260 116 710 710 64
Home equity — — — 108 108 29
Commercial real estate 1,682 1,682 91 1,441 1,441 —
Construction and development 1,563 1,563 515 — — —
Consumer loans — — — — — —
Commercial business loans 150 150 10 172 172 16
4,594 4,655 732 2,431 2,431 109

Total:
Loans secured by real estate:
One-to-four family 4,160 4,379 116 3,435 3,556 64
Home equity 196 196 — 108 108 29
Commercial real estate 4,688 4,747 91 4,811 4,811 —
Construction and development 1,830 1,830 515 318 318 —
Consumer loans 34 35 — 26 26 —
Commercial business loans 2,808 2,809 10 285 286 16
Commercial business loans $ 13,716 13,996 732 8,983 9,105 109

	At June 30, 2019						At December 31, 2018
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	4,314		4,412		—		3,083		3,241		—
Home equity		—		—		—		249		249		—
Commercial real estate		4,148		4,148		—		2,679		2,694		—
Construction and development		691		691		—		323		323		—
Consumer loans		74		85		—		31		31		—
Commercial business loans		2,345		2,345		—		2,697		2,698		—
		11,572		11,681		—		9,062		9,236		—

With an allowance recorded:
Loans secured by real estate:
One-to-four family		904		904		90		1,604		1,665		176
Home equity		33		33		9		—		—		—
Commercial real estate		3,553		3,553		273		2,426		2,426		145
Construction and development		1,368		1,368		323		1,543		1,543		515
Consumer loans		—		—		—		—		—		—
Commercial business loans		351		366		84		156		156		24
		6,209		6,224		779		5,729		5,790		860

Total:
Loans secured by real estate:
One-to-four family		5,218		5,316		90		4,687		4,906		176
Home equity		33		33		9		249		249		—
Commercial real estate		7,701		7,701		273		5,105		5,120		145
Construction and development		2,059		2,059		323		1,866		1,866		515
Consumer loans		74		85		—		31		31		—
Commercial business loans		2,696		2,711		84		2,853		2,854		24
	$	17,781		17,905		779		14,791		15,026		860

2726

The following table presents the average recorded investment and interest income recognized on impaired loans individually evaluated for impairment in the segmented portfolio categories for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2018 2017 2018 2017
Average Interest Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income Recorded Income
Investment Recognized Investment Recognized Investment Recognized Investment Recognized
(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family $ 2,115 25 2,686 13 2,220 27 2,757 34
Home equity 17 3 347 6 55 4 290 18
Commercial real estate 3,108 37 3,552 (13 ) 3,087 86 3,543 85
Construction and development 267 4 158 6 267 13 182 14
Consumer loans 20 1 19 — 21 1 19 —
Commercial business loans 155 104 32 — 426 118 32 1
5,682 174 6,794 12 6,076 249 6,823 152

With an allowance recorded:
Loans secured by real estate:
One-to-four family 1,293 7 775 6 1,278 23 748 14
Home equity — — 274 — — — 246 (1 )
Commercial real estate 1,702 16 1,472 62 1,679 55 1,472 62
Construction and development 1,447 — — — 1,137 (4 ) — —
Consumer loans — — — — — — — —
Commercial business loans 160 2 193 2 160 7 192 8
4,602 25 2,714 70 4,254 81 2,658 83

Total:
Loans secured by real estate:
One-to-four family 3,408 32 3,461 19 3,498 50 3,505 48
Home equity 17 3 621 6 55 4 536 17
Commercial real estate 4,810 53 5,024 49 4,766 141 5,015 147
Construction and development 1,714 4 158 6 1,404 9 182 14
Consumer loans 20 1 19 — 21 1 19 —
Commercial business loans 315 106 225 2 586 125 224 9
$ 10,284 199 9,508 82 10,330 330 9,481 235


	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2019				2018					2019				2018
	Average		Interest		Average		Interest			Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income			Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized			Investment		Recognized		Investment		Recognized
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	4,009		23		2,199		(14	)		4,018		41		2,107		2
Home equity		—		—		17		—			52		—		8		1
Commercial real estate		4,183		25		2,971		(31	)		3,899		57		3,012		49
Construction and development		697		5		267		5			631		5		267		9
Consumer loans		61		3		20		—			49		3		21		—
Commercial business loans		2,542		33		183		9			2,253		66		103		14
		11,492		89		5,657		(31	)		10,902		172		5,518		75

With an allowance recorded:
Loans secured by real estate:
One-to-four family		1,382		6		1,481		5			1,223		14		1,489		16
Home equity		8		—		88		(3	)		4		—		96		—
Commercial real estate		3,810		27		1,839		18			3,461		46		1,793		39
Construction and development		717		—		1,447		—			1,114		—		922		(4	)
Consumer loans		—		—		—		—			—		—		—		—
Commercial business loans		88		—		159		2			47		—		164		5
		6,005		33		5,014		22			5,849		60		4,464		56

Total:
Loans secured by real estate:
One-to-four family		5,391		29		3,680		(9	)		5,241		55		3,596		18
Home equity		8		—		105		(3	)		56		—		104		1
Commercial real estate		7,993		52		4,810		(13	)		7,360		103		4,805		88
Construction and development		1,414		5		1,714		5			1,745		5		1,189		5
Consumer loans		61		3		20		—			49		3		21		—
Commercial business loans		2,630		33		342		11			2,300		66		267		19
	$	17,497		122		10,671		(9	)		16,751		232		9,982		131

2827

A loan is considered past due if the required principal and interest payment has not been received as of the due date. The following schedule is an aging of past due loans receivable by portfolio segment as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~ 2018.

At September 30, 2018
Real Estate Loans
One-to- Commercial Construction
four Home real and Commercial
All Loans: family equity estate development Consumer business Total
(In thousands)
30-59 days past due $ 1,089 399 139 396 210 714 2,947
60-89 days past due 1,452 130 — 150 45 130 1,907
90 days or more past due 3,394 245 3,191 122 56 558 7,566
Total past due 5,935 774 3,330 668 311 1,402 12,420
Current 715,075 84,709 977,802 311,404 20,316 335,738 2,445,044
Total loans receivable $ 721,010 85,483 981,132 312,072 20,627 337,140 2,457,464

At September 30, 2018
Purchased Non-Credit Real Estate Loans
Impaired Loans One-to- Commercial Construction
(ASC 310-20) and four Home real and Commercial
Nonacquired Loans: family equity estate development Consumer business Total
(In thousands)
30-59 days past due $ 974 388 139 386 210 714 2,811
60-89 days past due 1,411 130 — 1 9 129 1,680
90 days or more past due 2,681 245 3,033 66 55 558 6,638
Total past due 5,066 763 3,172 453 274 1,401 11,129
Current 706,798 84,645 941,593 307,957 20,287 327,322 2,388,602
Total loans receivable $ 711,864 85,408 944,765 308,410 20,561 328,723 2,399,731

At September 30, 2018
Real Estate Loans
One-to- Commercial Construction
Purchased Credit Impaired four Home real and Commercial
Loans (ASC 310-30): family equity estate development Consumer business Total
(In thousands)
30-59 days past due $ 115 11 — 10 — — 136
60-89 days past due 41 — — 149 36 1 227
90 days or more past due 713 — 158 56 1 — 928
Total past due 869 11 158 215 37 1 1,291
Current 8,277 64 36,209 3,447 29 8,416 56,442
Total loans receivable $ 9,146 75 36,367 3,662 66 8,417 57,733


	At June 30, 2019
	Real Estate Loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
All Loans:	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	729		368		—		75		177		541		1,890
60-89 days past due		1,860		—		—		35		8		97		2,000
90 days or more past due		3,132		—		2,905		798		77		548		7,460
Total past due		5,721		368		2,905		908		262		1,186		11,350
Current		728,931		77,007		1,091,849		316,127		23,292		402,680		2,639,886
Total loans receivable	$	734,652		77,375		1,094,754		317,035		23,554		403,866		2,651,236

	At June 30, 2019
Purchased Non-Credit	Real Estate Loans
Impaired Loans	One-to-				Commercial		Construction
(ASC 310-20) and	four		Home		real		and				Commercial
Nonacquired Loans:	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	703		368		—		68		177		518		1,834
60-89 days past due		1,739		—		—		35		8		97		1,879
90 days or more past due		2,831		—		2,705		73		77		548		6,234
Total past due		5,273		368		2,705		176		262		1,163		9,947
Current		721,500		76,985		1,066,918		314,165		23,252		394,877		2,597,697
Total loans receivable	$	726,773		77,353		1,069,623		314,341		23,514		396,040		2,607,644

	At June 30, 2019
	Real Estate Loans
	One-to-				Commercial		Construction
Purchased Credit Impaired	four		Home		real		and				Commercial
Loans (ASC 310-30):	family		equity		estate		development		Consumer		business		Total
	(In thousands)
30-59 days past due	$	26		—		—		7		—		23		56
60-89 days past due		121		—		—		—		—		—		121
90 days or more past due		312		—		202		725		—		—		1,239
Total past due		459		—		202		732		—		23		1,416
Current		7,420		22		24,929		1,962		40		7,803		42,176
Total loans receivable	$	7,879		22		25,131		2,694		40		7,826		43,592

2928


	At December 31, 2017														At December 31, 2018
	Real Estate Loans														Real Estate Loans
	One-to-				Commercial		Construction								One-to-				Commercial		Construction
	four		Home		real		and				Commercial				four		Home		real		and				Commercial
All Loans:	family		equity		estate		development		Consumer		business		Total		family		equity		estate		development		Consumer		business		Total
	(In thousands)														(In thousands)
30-59 days past due	$	8,139		1,350		1,358		2,328		108		366		13,649	$	503		723		1,780		180		296		793		4,275
60-89 days past due		1,025		109		421		—		129		185		1,869		1,677		213		120		588		31		632		3,261
90 days or more past due		2,580		117		689		2,482		21		59		5,948		4,133		373		3,054		105		117		602		8,384
Total past due		11,744		1,576		2,468		4,810		258		610		21,466		6,313		1,309		4,954		873		444		2,027		15,920
Current		654,030		88,565		931,352		289,983		19,732		314,400		2,298,062		726,404		82,461		1,029,163		289,621		23,401		357,366		2,508,416
Total loans receivable	$	665,774		90,141		933,820		294,793		19,990		315,010		2,319,528	$	732,717		83,770		1,034,117		290,494		23,845		359,393		2,524,336

	At December 31, 2017														At December 31, 2018
Purchased Non-Credit	Real Estate Loans														Real Estate Loans
Impaired Loans	One-to-				Commercial		Construction								One-to-				Commercial		Construction
(ASC 310-20) and	four		Home		real		and				Commercial				four		Home		real		and				Commercial
Nonpurchased Loans:	family		equity		estate		development		Consumer		business		Total		family		equity		estate		development		Consumer		business		Total
	(In thousands)														(In thousands)
30-59 days past due	$	7,874		1,319		1,112		2,315		108		366		13,094	$	378		720		1,037		172		296		793		3,396
60-89 days past due		1,000		109		421		—		129		185		1,844		1,313		213		120		559		31		632		2,868
90 days or more past due		1,894		108		689		1,297		21		59		4,068		3,686		373		2,895		106		117		602		7,779
Total past due		10,768		1,536		2,222		3,612		258		610		19,006		5,377		1,306		4,052		837		444		2,027		14,043
Current		643,829		88,425		889,247		283,825		19,637		297,144		2,222,107		718,264		82,411		1,000,368		286,836		23,348		349,167		2,460,394
Total loans receivable	$	654,597		89,961		891,469		287,437		19,895		297,754		2,241,113	$	723,641		83,717		1,004,420		287,673		23,792		351,194		2,474,437

	At December 31, 2017														At December 31, 2018
	Real Estate Loans														Real Estate Loans
	One-to-				Commercial		Construction								One-to-				Commercial		Construction
Purchased Credit Impaired	four		Home		real		and				Commercial				four		Home		real		and				Commercial
Loans (ASC 310-30):	family		equity		estate		development		Consumer		business		Total		family		equity		estate		development		Consumer		business		Total
	(In thousands)														(In thousands)
30-59 days past due	$	265		31		246		13		—		—		555	$	126		3		743		7		—		—		879
60-89 days past due		25		—		—		—		—		—		25		364		—		—		30		—		—		394
90 days or more past due		686		9		—		1,185		—		—		1,880		447		—		158		—		—		—		605
Total past due		976		40		246		1,198		—		—		2,460		937		3		901		37		—		—		1,878
Current		10,201		140		42,105		6,158		95		17,256		75,955		8,140		50		28,795		2,784		53		8,199		48,021
Total loans receivable	$	11,177		180		42,351		7,356		95		17,256		78,415	$	9,077		53		29,696		2,821		53		8,199		49,899

Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest payments received while the loan is on nonaccrual are applied to the principal balance. No interest income was recognized on impaired loans subsequent to the nonaccrual status designation. A loan is returned to accrual status when the borrower makes consistent payments according to contractual terms and future payments are reasonably assured.

3029

The following is a schedule of loans receivable, by portfolio segment, on nonaccrual at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~

At September 30, At December 31,
2018 2017
(In thousands)
Loans secured by real estate:
One-to-four family $ 3,707 1,927
Home equity 349 108
Commercial real estate 3,535 1,540
Construction and development 1,659 51
Consumer loans 116 22
Commercial business loans 1,135 313
$ 10,501 3,961

2018.

	At June 30,		At December 31,
	2019		2018
	(In thousands)
Loans secured by real estate:
One-to-four family	$	4,309		4,471
Home equity		32		454
Commercial real estate		5,970		3,663
Construction and development		1,823		1,675
Consumer loans		79		107
Commercial business loans		954		1,351
	$	13,167		11,721

There were no non-PCI loans past due 90 days and still accruing at June 30, 2019 and one non-PCI loan past due 90 days and still accruing for $20,000 at December 31, 2018.

The Company uses several metrics as credit quality indicators of current or potential risks as part of the ongoing monitoring of credit quality of its loan portfolio. The credit quality indicators are periodically reviewed and updated on a case-by-case basis. The Company uses the following definitions for the internal risk rating grades, listed from the least risk to the highest risk.

Pass:These loans range from minimal credit risk to average, however, still acceptable credit risk.

Special mention: A special mention loan has potential weaknesses that deserve ~~management’s~~management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the ~~institution’s~~institution's credit position at some future date.

Substandard:A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful:A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

The Company uses the following definitions in the tables below:

Nonperforming:Loans on nonaccrual status plus loans greater than 90 days past due still accruing interest.

Performing:All current accrual loans plus loans less than 90 days past due.

The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of June 30, 2019 and December 31, 2018.


	At June 30, 2019
	Real Estate Loans
	One-to-				Commercial		Construction
	four		Home		real		and				Commercial
Total Loans:	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	728,432		77,211		1,073,621		312,254		23,362		398,976		2,613,856
Special Mention		336		130		10,285		2,195		102		1,457		14,505
Substandard		5,884		34		10,848		2,586		90		3,433		22,875
Total loans receivable	$	734,652		77,375		1,094,754		317,035		23,554		403,866		2,651,236

Performing	$	730,031		77,343		1,088,582		314,487		23,475		402,912		2,636,830
Nonperforming:
90 days past due still accruing		312		—		202		725		—		—		1,239
Nonaccrual		4,309		32		5,970		1,823		79		954		13,167
Total nonperforming		4,621		32		6,172		2,548		79		954		14,406
Total loans receivable	$	734,652		77,375		1,094,754		317,035		23,554		403,866		2,651,236

	At June 30, 2019
Purchased Non-Credit	Real Estate Loans
Impaired Loans	One-to-				Commercial		Construction
(ASC 310-20) and	four		Home		real		and				Commercial
Nonacquired Loans:	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	721,310		77,189		1,056,749		310,744		23,327		391,840		2,581,159
Special Mention		209		130		6,249		1,771		102		1,305		9,766
Substandard		5,254		34		6,625		1,826		85		2,895		16,719
Total loans receivable	$	726,773		77,353		1,069,623		314,341		23,514		396,040		2,607,644

Performing	$	722,464		77,321		1,063,653		312,518		23,435		395,086		2,594,477
Nonperforming:
90 days past due still accruing		—		—		—		—		—		—		—
Nonaccrual		4,309		32		5,970		1,823		79		954		13,167
Total nonperforming		4,309		32		5,970		1,823		79		954		13,167
Total loans receivable	$	726,773		77,353		1,069,623		314,341		23,514		396,040		2,607,644

~~The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of September 30, 2018 and December 31, 2017.~~


															At June 30, 2019
															Real Estate Loans
															One-to-				Commercial		Construction
Purchased Credit Impaired															four		Home		real		and				Commercial
Loans (ASC 310-30):															family		equity		estate		development		Consumer		business		Total
															(In thousands)
Internal Risk Rating Grades:
Pass															$	7,122		22		16,872		1,510		35		7,136		32,697
Special Mention																127		—		4,036		424		—		152		4,739
Substandard																630		—		4,223		760		5		538		6,156
Total loans receivable															$	7,879		22		25,131		2,694		40		7,826		43,592

Performing															$	7,567		22		24,929		1,969		40		7,826		42,353
Nonperforming:
90 days past due still accruing																312		—		202		725		—		—		1,239
Nonaccrual																—		—		—		—		—		—		—
Total nonperforming																312		—		202		725		—		—		1,239
Total loans receivable															$	7,879		22		25,131		2,694		40		7,826		43,592

	At September 30, 2018														At December 31, 2018
	Real Estate Loans														Real Estate Loans
	One-to-				Commercial		Construction								One-to-				Commercial		Construction
	four		Home		real		and				Commercial				four		Home		real		and				Commercial
Total Loans:	family		equity		estate		development		Consumer		business		Total		family		equity		estate		development		Consumer		business		Total
	(In thousands)														(In thousands)
Internal Risk Rating Grades:
Pass	$	714,628		85,164		958,384		308,610		20,410		327,351		2,414,547	$	727,921		83,382		1,016,064		287,559		23,613		353,742		2,492,281
Special Mention		334		—		16,145		1,578		95		8,030		26,182		417		—		9,914		534		103		2,166		13,134
Substandard		6,048		319		6,603		1,884		122		1,759		16,735		4,379		388		8,139		2,401		129		3,485		18,921
Total loans receivable	$	721,010		85,483		981,132		312,072		20,627		337,140		2,457,464	$	732,717		83,770		1,034,117		290,494		23,845		359,393		2,524,336

Performing	$	716,590		85,134		977,439		310,357		20,478		336,005		2,446,003	$	727,799		83,316		1,030,296		288,819		23,718		358,042		2,511,990
Nonperforming:
90 days past due still accruing		713		—		158		56		33		—		960		447		—		158		—		20		—		625
Nonaccrual		3,707		349		3,535		1,659		116		1,135		10,501		4,471		454		3,663		1,675		107		1,351		11,721
Total nonperforming		4,420		349		3,693		1,715		149		1,135		11,461		4,918		454		3,821		1,675		127		1,351		12,346
Total loans receivable	$	721,010		85,483		981,132		312,072		20,627		337,140		2,457,464	$	732,717		83,770		1,034,117		290,494		23,845		359,393		2,524,336

At September 30, 2018
Purchased Non-Credit Real Estate Loans
Impaired Loans One-to- Commercial Construction
(ASC 310-20) and four Home real and Commercial
Nonacquired Loans: family equity estate development Consumer business Total
(In thousands)
Internal Risk Rating Grades:
Pass $ 706,752 85,106 935,300 306,680 20,344 323,244 2,377,426
Special Mention — — 5,181 72 95 3,845 9,193
Substandard 5,112 302 4,284 1,658 122 1,634 13,112
Total loans receivable $ 711,864 85,408 944,765 308,410 20,561 328,723 2,399,731

Performing $ 708,157 85,059 941,230 306,751 20,413 327,588 2,389,198
Nonperforming:
90 days past due still accruing — — — — 32 — 32
Nonaccrual 3,707 349 3,535 1,659 116 1,135 10,501
Total nonperforming 3,707 349 3,535 1,659 148 1,135 10,533
Total loans receivable $ 711,864 85,408 944,765 308,410 20,561 328,723 2,399,731

At September 30, 2018
Real Estate Loans
One-to- Commercial Construction
Purchased Credit Impaired four Home real and Commercial
Loans (ASC 310-30): family equity estate development Consumer business Total
(In thousands)
Internal Risk Rating Grades:
Pass $ 7,876 58 23,084 1,930 66 4,107 37,121
Special Mention 334 — 10,964 1,506 — 4,185 16,989
Substandard 936 17 2,319 226 — 125 3,623
Total loans receivable $ 9,146 75 36,367 3,662 66 8,417 57,733

Performing $ 8,433 75 36,209 3,606 65 8,417 56,805
Nonperforming:
90 days past due still accruing 713 — 158 56 1 — 928
Nonaccrual — — — — — — —
Total nonperforming 713 — 158 56 1 — 928
Total loans receivable $ 9,146 75 36,367 3,662 66 8,417 57,733

At December 31, 2017
Real Estate Loans
One-to- Commercial Construction
four Home real and Commercial
Total Loans: family equity estate development Consumer business Total
(In thousands)
Internal Risk Rating Grades:
Pass $ 658,031 89,919 898,328 287,491 19,817 296,038 2,249,624
Special Mention 4,086 30 28,670 4,201 35 12,339 49,361
Substandard 3,657 192 6,822 3,101 138 6,633 20,543
Total loans receivable $ 665,774 90,141 933,820 294,793 19,990 315,010 2,319,528

Performing $ 663,161 90,024 932,280 293,557 19,968 314,697 2,313,687
Nonperforming:
90 days past due still accruing 686 9 — 1,185 — — 1,880
Nonaccrual 1,927 108 1,540 51 22 313 3,961
Total nonperforming 2,613 117 1,540 1,236 22 313 5,841
Total loans receivable $ 665,774 90,141 933,820 294,793 19,990 315,010 2,319,528


	At December 31, 2018
Purchased Non-Credit	Real Estate Loans
Impaired Loans	One-to-				Commercial		Construction
(ASC 310-20) and	four		Home		real		and				Commercial
Nonpurchased Loans:	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	720,177		83,336		995,319		285,927		23,571		346,487		2,454,817
Special Mention		—		—		5,524		71		103		1,379		7,077
Substandard		3,464		381		3,577		1,675		118		3,328		12,543
Total loans receivable	$	723,641		83,717		1,004,420		287,673		23,792		351,194		2,474,437

Performing	$	719,170		83,263		1,000,757		285,998		23,665		349,843		2,462,696
Nonperforming:
90 days past due still accruing		—		—		—		—		20		—		20
Nonaccrual		4,471		454		3,663		1,675		107		1,351		11,721
Total nonperforming		4,471		454		3,663		1,675		127		1,351		11,741
Total loans receivable	$	723,641		83,717		1,004,420		287,673		23,792		351,194		2,474,437


	At December 31, 2018
	Real Estate Loans
	One-to-				Commercial		Construction
Purchased Credit Impaired	four		Home		real		and				Commercial
Loans (ASC 310-30):	family		equity		estate		development		Consumer		business		Total
	(In thousands)
Internal Risk Rating Grades:
Pass	$	7,745		45		20,745		1,632		42		7,255		37,464
Special Mention		418		—		4,390		463		—		787		6,058
Substandard		914		8		4,561		726		11		157		6,377
Total loans receivable	$	9,077		53		29,696		2,821		53		8,199		49,899

Performing	$	8,630		53		29,538		2,821		53		8,199		49,294
Nonperforming:
90 days past due still accruing		447		—		158		—		—		—		605
Nonaccrual		—		—		—		—		—		—		—
Total nonperforming		447		—		158		—		—		—		605
Total loans receivable	$	9,077		53		29,696		2,821		53		8,199		49,899

At December 31, 2017
Purchased Non-Credit Real Estate Loans
Impaired Loans One-to- Commercial Construction
(ASC 310-20) and four Home real and Commercial
Nonpurchased Loans: family equity estate development Consumer business Total
(In thousands)
Internal Risk Rating Grades:
Pass $ 652,508 89,853 887,458 286,857 19,785 295,470 2,231,931
Special Mention — — 2,526 79 — 2,067 4,672
Substandard 2,089 108 1,485 501 110 217 4,510
Total loans receivable $ 654,597 89,961 891,469 287,437 19,895 297,754 2,241,113

Performing $ 652,670 89,853 889,929 287,386 19,873 297,441 2,237,152
Nonperforming:
90 days past due still accruing — — — — — — —
Nonaccrual 1,927 108 1,540 51 22 313 3,961
Total nonperforming 1,927 108 1,540 51 22 313 3,961
Total loans receivable $ 654,597 89,961 891,469 287,437 19,895 297,754 2,241,113

At December 31, 2017
Real Estate Loans
One-to- Commercial Construction
Purchased Credit Impaired four Home real and Commercial
Loans (ASC 310-30): family equity estate development Consumer business Total
(In thousands)
Internal Risk Rating Grades:
Pass $ 5,523 66 10,870 634 32 568 17,693
Special Mention 4,086 30 26,144 4,122 35 10,272 44,689
Substandard 1,568 84 5,337 2,600 28 6,416 16,033
Total loans receivable $ 11,177 180 42,351 7,356 95 17,256 78,415

Performing $ 10,491 171 42,351 6,171 95 17,256 76,535
Nonperforming:
90 days past due still accruing 686 9 — 1,185 — — 1,880
Nonaccrual — — — — — — —
Total nonperforming 686 9 — 1,185 — — 1,880
Total loans receivable $ 11,177 180 42,351 7,356 95 17,256 78,415

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

Troubled Debt Restructurings

At ~~September~~June 30, ~~2018,~~2019, there were ~~$6.2~~$8.4 million in loans designated as troubled debt restructurings of which ~~$4.1~~$3.1 million were accruing. At ~~September~~June 30, ~~2017,~~2018, there were ~~$6.5~~$6.3 million in loans designated as troubled debt restructurings of which ~~$5.5~~$5.0 million were accruing. At December 31, ~~2017,~~2018, there were ~~$6.5~~$6.4 million in loans designated as troubled debt restructurings of which ~~$5.3~~$3.3 million were accruing.

There were no loans identified as troubled debt restructurings during the three months ended June 30, 2019 and June 30, 2018.

There was one one-to-four family loan ~~with a premodification~~ and ~~post modification balance of $135,000 identified~~four commercial real estate loans designated as a troubled debt restructuring during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019. All loans were designated as a troubled debt restructuring due to a payment structure change. The pre-modification and post-modification recorded investment were $2.7 million.

There was one commercial real estate loan and one construction and development loan designated as a troubled debt restructuring during the six months ended June 30, 2018. All loans were designated as a troubled debt restructuring due to an interest rate change. ~~There~~The pre-modification and post-modification recorded investment were ~~two~~$1.7 million.

Four commercial real estate loans ~~with a premodification and post modification balance of $608,000 identified as troubled debt restructurings during the nine months ended September 30, 2017 due to payment structure changes.~~

~~No loans previously~~ restructured in the twelve months prior to ~~September~~June 30, ~~2018 and 2017~~2019 totaling $2.7 million in principal went into default during the three and ~~nine~~six months ended ~~September~~June 30, 2019. No loans restructured in the twelve months prior to June 30, 2018 went into default during the three and ~~2017.~~six months ended June 30, 2018.

NOTE 6 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE

The following presents summarized activity in real estate acquired through foreclosure for the periods ended ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~

At September 30, At December 31,
2018 2017
(In thousands)
Balance at beginning of period $ 3,106 1,179
Additions 268 2,554
Sales (1,647 ) (627 )
Write downs (126 ) —
Balance at end of period $ 1,601 3,106

2018:

~~A summary of the composition of real estate acquired through foreclosure follows:~~

At September 30, �� At December 31,
2018 2017
(In thousands)
Real estate loans:
One-to-four family $ 204 709
Commercial real estate 115 —
Construction and development 1,282 2,397
$ 1,601 $ 3,106


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(In thousands)
Balance at beginning of period	$	1,335			1,963			1,534			3,106
Additions		248			74			614			91
Sales		(365	)		(185	)		(930	)		(1,345	)
Write downs		—			(126	)		—			(126	)
Balance at end of period	$	1,218			1,726			1,218			1,726

3534

A summary of the composition of real estate acquired through foreclosure follows:

	At June 30,		At December 31,
	2019		2018
	(In thousands)
Real estate loans:
One-to-four family	$	189		204
Commercial real estate		248		—
Construction and development		781		1,330
	$	1,218		1,534

As of June 30, 2019, the Company had approximately $5.2 million of loans in the process of foreclosure. At December 31, 2018, the Company had approximately $4.5 million of loans in the process of foreclosure.

NOTE 7 - DEPOSITS

Deposits outstanding by type of account at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are summarized as follows:

At September 30, At December 31,
2018 2017
(In thousands)
Noninterest-bearing demand accounts $ 567,394 525,615
Interest-bearing demand accounts 579,522 551,308
Savings accounts 190,946 213,142
Money market accounts 453,957 452,734
Certificates of deposit:
Less than $250,000 863,290 755,887
$250,000 or more 104,514 106,243
Total certificates of deposit 967,804 862,130
Total deposits $ 2,759,623 2,604,929

	At June 30,		At December 31,
	2019		2018
	(In thousands)
Noninterest-bearing demand accounts	$	616,823		547,022
Interest-bearing demand accounts		561,094		566,527
Savings accounts		184,764		192,322
Money market accounts		437,716		431,246
Certificates of deposit:
Less than $250,000		921,309		875,749
$250,000 or more		84,403		105,327
Total certificates of deposit		1,005,712		981,076
Total deposits	$	2,806,109		2,718,193

The aggregate amount of brokered certificates of deposit was ~~$162.4~~$182.1 million and ~~$99.2~~$174.1 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Brokered certificates of deposit are included in the table above under certificates of deposit less than $250,000. The aggregate amount of institutional certificates of deposit was ~~$48.8~~$44.1 million and ~~$39.1~~$39.4 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

NOTE 8 – ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting literature requires disclosures about the fair value of all financial instruments whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized through immediate settlement of the instrument.

The fair value of a financial instrument is an amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced sale. Fair values are estimated at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the 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.

The Company has used ~~management’s~~management's best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented.

The Company determines the fair value of its financial instruments based on the fair value hierarchy established under ASC 820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial ~~instrument’s~~instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the financial ~~instrument’s~~instrument's fair value measurement in its entirety. There are three levels of inputs that may be used to measure fair value. The three levels of inputs of the valuation hierarchy are defined below:

Level 1

Quoted prices (unadjusted) in active markets for identical assets and liabilities for the instrument or security to be valued. Level 1 assets include marketable equity securities as well as U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or model-based valuation techniques for which all significant assumptions are derived principally from or corroborated by observable market data. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined by using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. U.S. Government sponsored agency securities, mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies, obligations of states and municipalities, collateralized mortgage obligations issued by U.S. Government sponsored enterprises, and mortgage loans held-for-sale are generally included in this category. Certain private equity investments that invest in publicly traded companies are also considered Level 2 assets.

Level 3

Unobservable inputs that are supported by little, if any, market activity for the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow models and similar techniques, and may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. These methods of valuation may result in a significant portion of the fair value being derived from unobservable assumptions that reflect The ~~Company’s~~Company's own estimates for assumptions that market participants would use in pricing the asset or liability. This category primarily includes collateral-dependent impaired loans, other real estate, certain equity investments, and certain private equity investments.

~~The following is a description of the fair value methodologies used for financial assets and liabilities.~~

Assets and liabilities measured at fair value on a recurring basis are as follows as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

	Quoted market		Significant other		Significant other
	price in active		observable inputs		unobservable inputs
	markets (Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2019
Available-for-sale investment securities:
Municipal securities	$	—		181,005		—
US government agencies		—		10,422		—
Collateralized loan obligations		—		233,314		—
Corporate securities		—		6,962		—
Mortgage-backed securities:
Agency		—		180,734		—
Non-agency		—		167,515		—
Trust preferred securities		—		11,199		—
Loans held for sale		—		28,521		—
Derivative assets:
Non-hedging derivatives:
Interest rate swaps		279		—		—
Mortgage loan interest rate lock commitments		—		1,590		—
Mortgage loan forward sales commitments		—		530		—
Derivative liabilities:
Cash flow hedges
Interest rate swaps		574		—		—
Non-hedging derivatives:
Interest rate swaps		2,886		—		—
Mortgage-backed securities forward sales commitments		—		450		—

December 31, 2018
Available-for-sale investment securities:
Municipal securities	$	—		213,714		—
US government agencies		—		25,277		—
Collateralized loan obligations		—		230,699		—
Corporate securities		—		6,960		—
Mortgage-backed securities:
Agency		—		197,520		—
Non-agency		—		157,531		—
Trust preferred securities		—		11,100		—
Loans held for sale		—		16,972		—
Derivative assets:
Cash flow hedges:
Interest rate swaps		1,232		—		—
Non-hedging derivatives:
Interest rate swaps		1,198		—		—
Mortgage loan interest rate lock commitments		—		1,199		—
Mortgage loan forward sales commitments		—		403		—
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps		937		—		—
Mortgage-backed securities forward sales commitments		—		295		—

Quoted market Significant other Significant other
price in active observable inputs unobservable inputs
markets (Level 1) (Level 2) (Level 3)
(In thousands)
September 30, 2018
Available-for-sale investment securities:
Municipal securities $ — 213,714 —
US government agencies — 24,550 —
Collateralized loan obligations — 198,924 —
Corporate securities — 6,979 —
Mortgage-backed securities:
Agency — 203,527 —
Non-agency — 158,519 —
Trust preferred securities — 11,532 —
Loans held for sale — 25,356 —
Derivative assets:
Cash flow hedges:
Interest rate swaps 2,338 — —
Non-hedging derivatives:
Interest rate swaps 2,562 — —
Mortgage loan interest rate lock commitments — 783 —
Mortgage loan forward sales commitments — 178 —
Mortgage-backed securities forward sales commitments — 290 —
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps — — —
Mortgage-backed securities forward sales commitments — — —
Total $ 4,900 844,352 —

December 31, 2017
Available-for-sale investment securities:
Municipal securities $ — 247,350 —
US government agencies — 12,008 —
Collateralized loan obligations — 128,643 —
Corporate securities — 7,006 —
Mortgage-backed securities:
Agency — 243,595 —
Non-agency — 95,125 —
Trust preferred securities — — 9,512
Loans held for sale — 35,292 —
Derivative assets:
Cash flow hedges:
Interest rate swaps 644 — —
Non-hedging derivatives:
Interest rate swaps 964 — —
Mortgage loan interest rate lock commitments — 890 —
Mortgage loan forward sales commitments — 305 —
Mortgage-backed securities forward sales commitments — — —
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps 95 — —
Mortgage-backed securities forward sales commitments — 61 —
Total $ 1,703 770,275 9,512

Securities Available-for-Sale

Fair values for investment securities available-for-sale are measured on a recurring basis upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018 the ~~Company’s~~Company's investment securities available-for-sale are recurring Level 2.

Mortgage Loans Held for Sale

Mortgage loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value on an individual loan basis on a recurring basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair value is derived from observable current market prices, when available, and includes loan servicing value. When observable market prices are not available, the Company uses judgment and estimates fair value using internal models, in which the Company uses its best estimates of assumptions it believes would be used by market participants in estimating fair value. Mortgage loans held for sale are classified within Level 2 of the valuation hierarchy.

Derivative Assets and Liabilities

Fair values for derivative assets and liabilities are measured on a recurring basis. The primary use of derivative instruments is related to the mortgage banking activities of the Company. The ~~Company’s~~Company's wholesale mortgage banking subsidiary enters into interest rate lock commitments related to expected funding of residential mortgage loans at specified times in the future. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative instruments under applicable accounting guidance. As such, the Company records its interest rate lock commitments and forward loan sales commitments at fair value, determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, the mortgage subsidiary enters into contractual interest rate lock commitments to extend credit, if approved, at a fixed interest rate and with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage banking subsidiary. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage banking subsidiary enters into best efforts forward sales contracts with third party investors. The forward sales contracts lock in a price for the sale of loans similar to the specific interest rate lock commitments. Both the interest rate lock commitments to the borrowers and the forward sales contracts to the investors that extend through to the date the loan may close are derivatives, and accordingly, are marked to fair value through earnings. In estimating the fair value of an interest rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. The fair value of the interest rate lock commitment is also derived from inputs that include guarantee fees negotiated with the agencies and private investors, buy-up and buy-down values provided by the agencies and private investors, and interest rate spreads for the difference between retail and wholesale mortgage rates. The Company also applies fall-out ratio assumptions for those interest rate lock commitments for which we do not close a mortgage loan. The fall-out ratio assumptions are based on the mortgage ~~subsidiary’s~~subsidiary's historical experience, conversion ratios for similar loan commitments, and market conditions. While fall-out tendencies are not exact predictions of which loans will or will not close, historical performance review of loan-level data provides the basis for determining the appropriate hedge ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock fall-out experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices. The expected fall-out ratios (or conversely the “pull-through” percentages) are applied to the determined fair value of the unclosed mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The fair value of the forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.

3938

Derivative instruments not related to mortgage banking activities include interest rate swap agreements. Fair values for these instruments are based on quoted market prices, when available. As such, the fair value adjustments for derivatives with fair values based on quoted market prices in an active market are recurring Level 1.

Assets measured at fair value on a nonrecurring basis are as follows as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

	Quoted market price		Significant other		Significant other
	in active markets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
	(In thousands)
~~September~~June 30, ~~2018~~
~~Impaired loans:~~
~~Loans secured by real estate:~~
~~One-to-four family~~	$	—		—		~~4,044~~
~~Home equity~~		—		—		~~196~~
~~Commercial real estate~~		—		—		~~4,597~~
~~Construction and development~~		—		—		~~1,315~~
~~Consumer loans~~		—		—		34
~~Commercial business loans~~		—		—		~~2,798~~
~~Real estate owned:~~
~~One-to-four family~~		—		—		~~204~~
~~Commercial real estate~~		—		—		~~115~~
~~Construction and development~~		—		—		~~1,282~~
~~Mortgage servicing rights~~		—		—		~~45,070~~
~~Total~~	$	—		—		~~59,655~~

~~December 31, 2017~~2019
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		~~3,371~~5,128
Home equity		—		—		7924
Commercial real estate		—		—		~~4,811~~7,428
Construction and development		—		—		~~318~~1,736
Consumer loans		—		—		2674
Commercial business loans		—		—		~~269~~2,612
Real estate owned:
One-to-four family		—		—		~~709~~189
Commercial real estate		—		—		—248
Construction and development		—		—		~~2,397~~781
Mortgage servicing rights		—		—		~~26,255~~34,210
~~Total~~	$	—		—		~~38,235~~
December 31, 2018
Impaired loans:
Loans secured by real estate:
One-to-four family	$	—		—		4,511
Home equity		—		—		249
Commercial real estate		—		—		4,960
Construction and development		—		—		1,351
Consumer loans		—		—		31
Commercial business loans		—		—		2,829
Real estate owned:
One-to-four family		—		—		204
Construction and development		—		—		1,330
Mortgage servicing rights		—		—		40,880

4039

For Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the significant unobservable inputs used in the fair value measurements were as follows:

	~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018
		Significant	Significant Unobservable
	Valuation Technique	Observable Inputs	Inputs
Impaired ~~Loans~~loans	Appraisal ~~Value~~value	Appraisals and or sales of comparable properties	Appraisals discounted 10% to 20% for
		~~comparable properties~~	sales commissions and other holding costs

Real estate owned	Appraisal ~~Value/~~value/ Comparison sales	Appraisals and or sales of comparable properties	Appraisals discounted 10% to 20% for
	~~Comparison Sales~~	~~comparable properties~~	sales commissions and other holding costs

Mortgage servicing rights
~~Mortgage Servicing Rights~~	Discounted cash flows	Comparable sales	~~Discount~~Weighted average discount rates ~~averaging 11.5% - 13%~~
			averaging 10% - 12%in ~~each period presented~~2019
			~~Prepayment~~Weighted average discount rates
			averaging ~~5.5% -9.0%~~12% - 13% in 2018
			~~Prepayment~~Weighted average prepayment rates
			averaging 9%11% - ~~10%~~13% in ~~2017~~2019
			Weighted average prepayment rates
			averaging 6% -7% in 2018

Impaired Loans

Loans that are considered impaired are recorded at fair value on a nonrecurring basis. Once a loan is considered impaired, the fair value is measured using one of several methods, including collateral liquidation value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific charge against the allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.

Other Real Estate Owned (“OREO”)

OREO is carried at the lower of carrying value or fair value on a nonrecurring basis. Fair value is based upon independent appraisals or ~~management’s~~management's estimation of the collateral and is considered a Level 3 measurement. When the OREO value is based upon a current appraisal or when a current appraisal is not available or there is estimated further impairment, the measurement is considered a Level 3 measurement.

Mortgage Servicing Rights

A mortgage servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“mortgage servicing rights”) at fair value, if practicable. For subsequent measurement purposes, the Company measures servicing assets and liabilities based on the lower of cost or market on a quarterly basis on a nonrecurring basis. The quarterly determination of fair value of servicing rights is provided by a third party and is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

The Company recorded a $1.3 million temporary impairment of mortgage servicing rights in the second quarter of 2019, primarily in the 2018 tranche. The Company does not hedge the mortgage servicing rights positions and the impact of falling long-term interest rates increased prepayment speed assumptions reducing the value of the MSR asset.

The carrying amount and estimated fair value of the ~~Company’s~~Company's financial instruments at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are as follows:


	At June 30, 2019
	Carrying		Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	34,614		34,614		34,614		—		—
Interest-bearing cash		33,804		33,804		33,804		—		—
Securities available-for-sale		791,151		791,151		—		791,151		—
Federal Home Loan Bank stock		19,900		19,900		—		—		19,900
Other investments		3,501		3,501		—		—		3,501
Derivative assets		2,399		2,399		279		2,120		—
Loans held for sale		28,521		28,521		—		28,521		—
Loans receivable, net		2,635,369		2,632,656		—		—		2,632,656
Accrued interest receivable		12,920		12,920		—		12,920		—
Real estate acquired through foreclosure		1,218		1,218		—		—		1,218
Mortgage servicing rights		29,640		34,210		—		—		34,210

Financial liabilities:
Deposits		2,806,109		2,808,158		—		2,808,158		—
Short-term borrowed funds		370,500		370,472		—		370,472		—
Long-term debt		46,525		48,252		—		48,252		—
Derivative liabilities		3,910		3,910		3,460		450		—
Drafts outstanding		13,908		13,908		—		13,908		—
Advances from borrowers for insurance and taxes		6,515		6,515		—		6,515		—
Accrued interest payable		2,450		2,450		—		2,450		—
Dividends payable to stockholders		2,007		2,007		—		2,007		—


											At December 31, 2018
	At September 30, 2018										Carrying		Fair Value
	Carrying		Fair Value								Amount		Total		Level 1		Level 2		Level 3
	Amount		Total		Level 1		Level 2		Level 3		(In thousands)
Financial assets:	(In thousands)
Cash and due from banks	$	37,930		37,930		37,930		—		—	$	28,857		28,857		28,857		—		—
Interest-bearing cash		38,017		38,017		38,017		—		—		33,276		33,276		33,276		—		—
Securities available-for-sale		817,745		817,745		—		817,745		—		842,801		842,801		—		842,801		—
Federal Home Loan Bank stock		17,446		17,446		—		—		17,446		21,696		21,696		—		—		21,696
Other investments		3,428		3,428		—		—		3,428		3,450		3,450		—		—		3,450
Derivative assets		6,151		6,151		4,900		1,251		—		4,032		4,032		2,430		1,602		—
Loans held for sale		25,356		25,356		—		25,356		—		16,972		16,972		—		16,972		—
Loans receivable, net		2,443,849		2,440,321		—		—		2,440,321		2,509,873		2,506,384		—		—		2,506,384
Accrued interest receivable		13,390		13,390		—		13,390		—		13,494		13,494		—		13,494		—
Real estate acquired through foreclosure		1,601		1,601		—		—		1,601		1,534		1,534		—		—		1,534
Mortgage servicing rights		32,995		45,070		—		—		45,070		32,933		40,880		—		—		40,880

Financial liabilities:
Deposits		2,759,623		2,766,185		—		2,766,185		—		2,718,193		2,721,885		—		2,721,885		—
Short-term borrowed funds		320,500		320,566				320,566				405,500		405,532		—		405,532		—
Long-term debt		44,391		44,091				44,091				59,436		61,922		—		61,922		—
Derivative liabilities		—		—		—		—		—		1,232		1,232		937		295		—
Drafts outstanding		8,593		8,593		—		8,593		—		8,129		8,129		—		8,129		—
Advances from borrowers for insurance and taxes		5,435		5,435		—		5,435		—		4,100		4,100		—		4,100		—
Accrued interest payable		1,793		1,793		—		1,793		—		1,591		1,591		—		1,591		—
Dividends payable to stockholders		1,580		1,580		—		1,580		—		1,576		1,576		—		1,576		—

At December 31, 2017
Carrying Fair Value
Amount Total Level 1 Level 2 Level 3
Financial assets: (In thousands)
Cash and due from banks $ 25,254 25,254 25,254 — —
Interest-bearing cash 55,998 55,998 55,998 — —
Securities available-for-sale 743,239 743,239 — 733,727 9,512
Federal Home Loan Bank stock 19,065 19,065 — — 19,065
Other investments 3,446 3,446 — — 3,446
Derivative assets 2,803 2,803 1,608 1,195 —
Loans held for sale 35,292 35,292 — 35,292 —
Loans receivable, net 2,308,050 2,311,088 — — 2,311,088
Accrued interest receivable 11,992 11,992 11,992
Real estate acquired through foreclosure 3,106 3,106 — — 3,106
Mortgage servicing rights 21,003 26,255 — — 26,255

Financial liabilities:
Deposits 2,604,929 2,597,526 — 2,597,526 —
Short-term borrowed funds 340,500 339,870 — 339,870 —
Long-term debt 72,259 71,859 — 71,859 —
Derivative liabilities 156 156 95 61 —
Drafts outstanding 7,324 7,324 — 7,324 —
Advances from borrowers for insurance and taxes 3,005 3,005 — 3,005 —
Accrued interest payable 1,126 1,126 — 1,126 —
Dividends payable to stockholders 1,051 1,051 — 1,051 —

At September 30, 2018 At December 31, 2017
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
Off-Balance Sheet Financial Instruments: (In thousands)
Commitments to extend credit $ 382,466 — 422,065 —
Standby letters of credit 13,922 — 4,449 —

At June 30, 2019

At December 31, 2018

Notional

Estimated

Notional

Estimated

Amount

Fair Value

Amount

Fair Value

(In thousands)

Off-Balance Sheet Financial Instruments:

Commitments to extend credit

439,088

—

379,170

—

Standby letters of credit

22,107

—

13,797

—

In determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

Cash and due from banks

The carrying amounts of these financial instruments approximate fair value. All mature within 90 days and present no anticipated credit concerns.

Interest-bearing cash

The carrying amount of these financial instruments approximates fair value.

FHLB stock and other investments

The carrying amount of these financial instruments approximates fair value.

Loans receivable

During the first quarter of 2018, the Company adopted ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Liabilities.” The amendments included within this standard, which ~~are~~were applied prospectively, require the Company to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using an exit price notion. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets.

~~As of September 30, 2018, the~~ The technique used byprior to adopting the ~~Company to estimate~~amendments included in the ~~exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017,~~standard, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. The fair value of the ~~Company’s~~Company's loan portfolio has always included a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The ~~Company’s~~Company's loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the ~~Company’s~~Company's loan portfolio.

For ~~variable-rate~~variable rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

As of December 31, 2017, the fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price as of December 31, 2017. Loans receivable are classified within Level 3 of the valuation hierarchy.

Accrued interest receivable

The carrying value approximates the fair value.

Deposits

The estimated fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The estimated fair value of fixed maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

Short-term borrowed funds

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Estimated fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the ~~Company’s~~Company's current incremental borrowing rates for similar types of borrowing arrangements.

Long-term debt

The estimated fair values of the ~~Company’s~~Company's long-term debt are estimated using discounted cash flow analyses based on the ~~Company’s~~Company's current incremental borrowing rates for similar types of borrowing arrangements.

Drafts outstanding, advances from borrowers for insurance and taxes and dividends payable to stockholders

The carrying value approximates the fair value.

Accrued interest payable

The fair value approximates the carrying value.

Commitments to extend credit

The carrying amounts of these commitments are considered to be a reasonable estimate of fair value because the commitments underlying interest rates are generally based upon current market rates.

Off-balance sheet financial instruments

Contract values and fair values for off-balance sheet, credit-related financial instruments are based on estimated fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and ~~counterparties’~~counterparties' credit standing.

NOTE 9 - EARNINGS PER SHARE

Basic earnings per common share ~~(“EPS”) represents~~are calculated by dividing net income ~~available to common stockholders divided~~ by the ~~weighted-average~~weighted average number of common shares outstanding during the period. Basic earnings per common share exclude the effect of nonvested restricted stock. Diluted earnings per common share ~~reflects~~is calculated by dividing net income by the weighted average number of common shares outstanding plus the weighted average number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. ~~Potential shares that may be~~Diluted earnings per common share include the effects of outstanding stock options and restricted stock issued by the Company, ~~relate solely to~~if dilutive. The number of additional shares is calculated by assuming that outstanding stock options ~~restricted~~were exercised and that the proceeds from such exercises and vesting were used to acquire shares of common stock (non-vested shares), restricted stock units (“RSUs”) and warrants, and are determined using the treasury stock method. Under the treasury stock method, the number of incremental shares is determined by assuming the issuance of stock for the outstanding stock options, unvested restricted stock and RSUs, and warrants, reduced by the number of shares assumed to be repurchased from the issuance proceeds, usingat the average market price during the reporting period.

All share, earnings per share, and per share data have been retroactively adjusted to reflect stock splits for ~~the period of the Company’s stock.~~all periods presented in accordance with generally accepted accounting principles.

The following is a summary of the reconciliation of ~~weighted~~ average shares outstanding for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017:~~

For the Three Months Ended September 30,
2018 2017
Basic Diluted Basic Diluted

Weighted average shares outstanding 22,678,681 22,678,681 16,029,332 16,029,332
Effect of dilutive securities — 220,302 — 158,537
Weighted average shares outstanding 22,678,681 22,898,983 16,029,332 16,187,869

For the Nine Months Ended September 30,
2018 2017
Basic Diluted Basic Diluted

Weighted average shares outstanding 21,616,485 21,616,485 14,980,349 14,980,349
Effect of dilutive securities — 226,284 — 166,623
Weighted average shares outstanding 21,616,485 21,842,769 14,980,349 15,146,972

2018:


	For the Three Months Ended June 30,
	2019				2018
	Basic		Diluted		Basic		Diluted
Weighted average shares outstanding		22,189,508		22,189,508		21,243,094		21,243,094
Effect of dilutive securities		—		182,765		—		210,945
Weighted average shares outstanding		22,189,508		22,372,273		21,243,094		21,454,039


	For the Six Months Ended June 30,
	2019				2018
	Basic		Diluted		Basic		Diluted

Weighted average shares outstanding		22,191,673		22,191,673		20,961,182		20,961,182
Effect of dilutive securities		—		182,861		—		213,754
Weighted average shares outstanding		22,191,673		22,374,534		20,961,182		21,174,936

The following is a summary of the reconciliation of shares issued and outstanding and unvested restricted stock awards as of ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 used to calculate book value per share:


	As of September 30,						As of June 30,
	2018			2017			2019			2018

Issued and outstanding shares		22,570,445			16,159,309			22,284,981			22,570,182
Less nonvested restricted stock awards		(135,045	)		(99,639	)		(109,728	)		(137,345	)
Period end dilutive shares		22,435,400			16,059,670			22,175,253			22,432,837

NOTE 10 – ~~SUPPLEMENTAL SEGMENT INFORMATION~~LEASES

The Company has entered into agreements to lease certain office facilities, including buildings and land, and equipment under non-cancellable operating lease agreements. Our leases have remaining lease terms of 1 year to 40 years, which include options to extend or terminate the lease. These options to extend or terminate the lease are included in the lease term when it is reasonably certain that the options will be exercised.

In addition to the package of practical expedients, the Company has also elected the practical expedient which allows lessees to make an accounting policy election by underlying class of asset to not separate nonlease components from the associated lease component, and instead account for them all together as part of the applicable lease component.

Operating lease expense was $0.7 million for the three months ended June 30, 2019, and $1.3 million for the six months ended June 30, 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $0.7 million for the three months ended June 30, 2019, and $1.3 million for the six months ended June 30, 2019. We do not apply the recognition requirements of ASC 842 to short-term leases and recognize the lease payments on a straight-line basis over the lease term. The rate implicit in the lease is not readily determinable for the Company's leases. Accordingly, the incremental borrowing rate, giving consideration to the FHLB borrowing rate, is based on the information available at commencement date and is used to determine the present value of lease payments.

Supplemental balance sheet information related to operating leases follows:

	At June 30, 2019
Right of use operating lease asset (in millions)	$	17.5
Right of use operating lease liability (in millions)	$	17.8

Weighted average remaining lease term (years)		15.4
Weighted average discount rate		3.4	%

Future minimum lease payments (in thousands), by year and in the aggregate, under non-cancellable operating leases with initial or remaining terms in excess of one year as of June 30, 2019 are as follows:

	At June 30, 2019
Year 1	$	2,490
Year 2		2,177
Year 3		1,909
Year 4		1,890
Year 5		1,563
After Year 5		13,463
Total undiscounted payments		23,492
Less: imputed interest		(5,685	)
Present value of lease payments (ROU operating lease liability)	$	17,807

As of June 30, 2019, the Company has an additional operating lease for a building that has not yet commenced of approximately $0.7 million. This operating lease is expected to commence in the third quarter of 2019 with a lease term of 7 years.

NOTE 11 – SUPPLEMENTAL SEGMENT INFORMATION

The Company has three reportable segments: community banking, wholesale mortgage banking (“mortgage banking”) and other. The community banking segment ~~includes~~provides traditional banking services offered through ~~the Bank as well as the managerial and operational support provided by Carolina Services.~~CresCom Bank. The mortgage banking segment provides ~~wholesale~~ mortgage loan origination and servicing offered through Crescent ~~Mortgage Company.~~Mortgage. The other segment ~~includes parent company financial information~~provides managerial and ~~represents an overhead function rather than an operating segment. The parent company’s most significant assets are its net investments in its subsidiaries.~~operational support to the other business segments through Carolina Services and Carolina Financial.

The accounting policies of the segments are the same as those described in the summary of significant accounting ~~policies in Note 1.~~policies. The Company evaluates performance based on net income.

The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is, at current market prices.

The ~~Company’s~~Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment has different types and levels of credit and interest rate risk.

The following tables present selected financial information for the ~~Company’s~~Company's reportable business segments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017:~~2018:

Community Mortgage
For the Three Months Ended September 30, 2018 Banking Banking Other Eliminations Total
(In thousands)
Interest income $ 40,588 472 14 (89 ) 40,985
Interest expense 6,582 113 520 (113 ) 7,102
Net interest income (expense) 34,006 359 (506 ) 24 33,883
Provision for loan losses 750 — — — 750
Noninterest income from external customers 5,060 5,240 — — 10,300
Intersegment noninterest income 242 36 — (278 ) —
Noninterest expense 19,041 4,674 287 — 24,002
Intersegment noninterest expense — 242 — (242 ) —
Income (loss) before income taxes 19,517 719 (793 ) (12 ) 19,431
Income tax expense (benefit) 4,254 164 (187 ) (4 ) 4,227
Net income (loss) $ 15,263 555 (606 ) (8 ) 15,204

Community Mortgage
For the Three Months Ended September 30, 2017 Banking Banking Other Eliminations Total
(In thousands)
Interest income $ 22,460 480 8 (22 ) 22,926
Interest expense 3,086 65 291 (65 ) 3,377
Net interest income (expense) 19,374 415 (283 ) 43 19,549
Provision for loan losses — — — — —
Noninterest income from external customers 3,097 4,778 — — 7,875
Intersegment noninterest income 242 — — (242 ) —
Noninterest expense 10,999 4,234 223 — 15,456
Intersegment noninterest expense — 240 2 (242 ) —
Income (loss) before income taxes 11,714 719 (508 ) 43 11,968
Income tax expense (benefit) 3,877 270 (188 ) 16 3,975
Net income (loss) $ 7,837 449 (320 ) 27 7,993

	Community		Mortgage
For the Three Months Ended June 30, 2019	Banking		Banking			Other			Eliminations			Total
	(In thousands)
Interest income	$	43,781		469			15			(130	)		44,135
Interest expense		9,303		153			551			(155	)		9,852
Net interest income (expense)		34,478		316			(536	)		25			34,283
Provision for loan losses		700		(20	)		—			—			680
Noninterest income from external customers		5,299		5,921			11			—			11,231
Intersegment noninterest income		242		—			—			(242	)		—
Noninterest expense		19,020		6,126			332			—			25,478
Intersegment noninterest expense		—		240			2			(242	)		—
Income (loss) before income taxes		20,299		(109	)		(859	)		25			19,356
Income tax expense (benefit)		4,495		(17	)		(202	)		6			4,282
Net income (loss)	$	15,804		(92	)		(657	)		19			15,074

	Community		Mortgage										Community		Mortgage
For the Nine Months Ended September 30, 2018	Banking		Banking		Other			Eliminations			Total
For the Three Months Ended June 30, 2018													Banking		Banking		Other			Eliminations			Total
	(In thousands)												(In thousands)
Interest income	$	116,905		1,361		41			(169	)		118,138	$	39,060		458		14			(55	)		39,477
Interest expense		17,732		244		1,488			(244	)		19,220		6,066		77		506			(77	)		6,572
Net interest income (expense)		99,173		1,117		(1,447	)		75			98,918		32,994		381		(492	)		22			32,905
Provision for loan losses		1,284		25		—			—			1,309		534		25		—			—			559
Noninterest income from external customers		15,690		15,599		88			—			31,377		5,570		5,434		23			—			11,027
Intersegment noninterest income		724		64		—			(788	)		—		242		9		—			(251	)		—
Noninterest expense		71,318		13,809		845			—			85,972		19,348		4,748		275			—			24,371
Intersegment noninterest expense		—		725		—			(725	)		—		—		240		2			(242	)		—
Income (loss) before income taxes		42,985		2,221		(2,204	)		12			43,014		18,924		811		(746	)		13			19,002
Income tax expense (benefit)		8,810		505		(532	)		5			8,788		3,996		213		(178	)		5			4,036
Net income (loss)	$	34,175		1,716		(1,672	)		7			34,226	$	14,928		598		(568	)		8			14,966

	Community		Mortgage
For the Nine Months September 30, 2017	Banking		Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	61,409		1,302		21			(14	)		62,718
Interest expense		8,051		119		750			(119	)		8,801
Net interest income (expense)		53,358		1,183		(729	)		105			53,917
Provision for loan losses		—		—		—			—			—
Noninterest income from external customers		9,011		14,899		—			—			23,910
Intersegment noninterest income		725		64		—			(789	)		—
Noninterest expense		33,773		12,448		711			—			46,932
Intersegment noninterest expense		—		720		5			(725	)		—
Income (loss) before income taxes		29,321		2,978		(1,445	)		41			30,895
Income tax expense (benefit)		8,533		645		(535	)		16			8,659
Net income (loss)	$	20,788		2,333		(910	)		25			22,236

	Community		Mortgage
For the Six Months Ended June 30, 2019	Banking		Banking			Other			Eliminations			Total
	(In thousands)
Interest income	$	86,257		859			30			(230	)		86,916
Interest expense		18,060		281			1,106			(284	)		19,163
Net interest income (expense)		68,197		578			(1,076	)		54			67,753
Provision for loan losses		1,400		(20	)		—			—			1,380
Noninterest income from external customers		9,855		11,217			31			—			21,103
Intersegment noninterest income		484		18			—			(502	)		—
Noninterest expense		38,010		10,972			643			—			49,625
Intersegment noninterest expense		—		480			4			(484	)		—
Income (loss) before income taxes		39,126		381			(1,692	)		36			37,851
Income tax expense (benefit)		8,540		83			(398	)		7			8,232
Net income (loss)	$	30,586		298			(1,294	)		29			29,619


	Community		Mortgage
For the Six Months Ended June 30, 2018	Banking		Banking		Other			Eliminations			Total
	(In thousands)
Interest income	$	76,317		889		27			(79	)		77,154
Interest expense		11,150		130		968			(130	)		12,118
Net interest income (expense)		65,167		759		(941	)		51			65,036
Provision for loan losses		534		25		—			—			559
Noninterest income from external customers		10,630		10,358		88			—			21,076
Intersegment noninterest income		483		26		—			(509	)		—
Noninterest expense		52,278		9,137		554			1			61,970
Intersegment noninterest expense		—		480		3			(483	)		—
Income (loss) before income taxes		23,468		1,501		(1,410	)		24			23,583
Income tax expense (benefit)		4,556		341		(345	)		9			4,561
Net income (loss)	$	18,912		1,160		(1,065	)		15			19,022

The following tables present selected financial information for the ~~Company’s~~Company's reportable business segments for ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~ 2018:

Community Mortgage
At September 30, 2018 Banking Banking Other Eliminations Total
(In thousands)
Assets $ 3,719,057 90,622 598,680 (686,874 ) 3,721,485
Loans receivable, net 2,434,816 30,500 — (21,467 ) 2,443,849
Loans held for sale 2,794 22,562 — — 25,356
Deposits 2,768,711 — — (9,088 ) 2,759,623
Borrowed funds 332,500 21,007 32,391 (21,007 ) 364,891


	Community		Mortgage									Community		Mortgage
At December 31, 2017	Banking		Banking		Other		Eliminations			Total
At June 30, 2019												Banking		Banking		Other		Eliminations			Total
	(In thousands)											(In thousands)
Assets	$	3,516,551		81,681		503,144		(582,359	)		3,519,017	$	3,885,045		87,893		631,784		(716,648	)		3,888,074
Loans receivable, net		2,295,316		28,206		—		(15,472	)		2,308,050		2,626,687		26,867		—		(18,185	)		2,635,369
Loans held for sale		5,999		29,293		—		—			35,292		4,035		24,486		—		—			28,521
Deposits		2,611,106		—		—		(6,177	)		2,604,929		2,815,416		—		—		(9,307	)		2,806,109
Borrowed funds		380,500		15,000		32,259		(15,000	)		412,759		384,500		17,746		32,525		(17,746	)		417,025

	Community		Mortgage
At December 31, 2018	Banking		Banking		Other		Eliminations			Total
	(In thousands)
Assets	$	3,786,360		84,335		610,167		(690,114	)		3,790,748
Loans receivable, net		2,494,421		30,879		—		(15,427	)		2,509,873
Loans held for sale		1,450		15,522		—		—			16,972
Deposits		2,724,920		—		—		(6,727	)		2,718,193
Borrowed funds		432,500		14,951		32,436		(14,951	)		464,936

Item 2. ~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion reviews our results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 as compared to the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and assesses our financial condition as of ~~September~~June 30, ~~2018~~2019 as compared to December 31, ~~2017.~~2018. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, ~~2017~~2018 included in our Form 10-K for that period. Results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018~~2019 or any future period.

Cautionary Warning Regarding Forward-Looking Statements

This report, including information included or incorporated by reference in this report, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. 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. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, the following:

our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;

examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets or otherwise impose restrictions or conditions on our operations, including, but not limited to, our ability to acquire or be acquired;

changes in economic conditions, either nationally or regionally and especially in our primary market areas, resulting in, among other things, a deterioration in credit quality;

changes in interest rates, or changes in regulatory environment resulting in a decline in our mortgage production and a decrease in the profitability of our mortgage banking operations;

greater than expected losses due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including, but not limited to, declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

greater than expected losses due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the South Carolina, ~~eastern~~ North Carolina and national real estate markets;

the rate of delinquencies and amount of loans charged-off;

the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

the rate of loan growth in recent or future years;

our ability to attract and retain key personnel;

our ability to retain our existing customers, including our deposit relationships;

significant increases in competitive pressure in the banking and financial services industries;

adverse changes in asset quality and resulting credit risk-related losses and expenses;

changes in the interest rate environment which could reduce anticipated or actual margins;

changes in political conditions or the legislative or regulatory environment, including, but not limited to, the Dodd-Frank Act and regulations adopted thereunder, changes in federal or state tax laws or interpretations thereof by taxing authorities and other governmental initiatives affecting the banking, mortgage banking, and financial service industries;

changes occurring in business conditions and inflation;

increased funding costs due to market illiquidity, increased competition for funding, or increased regulatory requirements with regard to funding;

	·	discontinuation of a published LIBOR rate after 2021 and the impact to our assets and liabilities;
	·	the impact of ~~recent and future~~ hurricanes and other natural disasters on our loan portfolio and the economic prospects of our coastal markets;
	·	our business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, business and a negative impact on results of operations;

changes in deposit flows;

changes in technology;

changes in monetary and tax policies;

changes in accounting policies, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board (“PCAOB”) and the FASB;

loss of consumer confidence and economic disruptions resulting from terrorist activities or other military actions;

our expectations regarding our operating revenues, expenses, effective tax rates and other results of operations;

our anticipated capital expenditures and our estimates regarding our capital requirements;

our liquidity and working capital requirements;

competitive pressures among depository and other financial institutions;

the growth rates of the markets in which we compete;

our anticipated strategies for growth and sources of new operating revenues;

our current and future products, services, applications and functionality and plans to promote them;

anticipated trends and challenges in our business and in the markets in which we operate;

the evolution of technology affecting our products, services and markets;

our ability to retain and hire necessary employees and to staff our operations appropriately;

management compensation and the methodology for its determination;

	·	our ability to compete in our industry and innovation by our competitors;
	·	increased cybersecurity risk, including potential business disruptions or financial losses;

acquisition integration risks, including potential deposit attrition, higher than expected costs, customer loss and business disruption, including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration related matters, and the inability to identify and successfully negotiate and complete additional combinations with potential merger or acquisition partners or to successfully integrate such businesses into the Company, including the ability to realize the benefits and cost savings from, and limit any unexpected liabilities associated with, any such business combinations;

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business; and

estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices and stock-based compensation.

If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements prove to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q and our other reports filed pursuant to the Securities Exchange Act of 1934. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed, implied or projected by us in the forward-looking statements.

Company Overview

Carolina Financial Corporation is a Delaware corporation that was organized in February 1997 to serve as a bank holding company. In 2017, it applied for, and received, financial holding company status from the Federal Reserve. The Company operates principally through its wholly-owned subsidiary, CresCom Bank, a South Carolina state-chartered bank. CresCom Bank operates Crescent Mortgage Company, Carolina ~~Service~~Services Corporation of Charleston, ~~CresCom Insurance,~~ LLC (“Carolina Services”), DTFS, Inc., and CresCom Leasing, LLC, ~~and DTFS Inc.,~~ as wholly-owned subsidiaries of CresCom Bank. Except where the context otherwise requires, the “Company”, “we”, “us” and “our” refer to Carolina Financial Corporation and its consolidated subsidiaries and the “Bank” refers to CresCom Bank.

CresCom Bank provides a full range of commercial and retail banking financial services designed to meet the financial needs of our customers through its branch network in South Carolina and North Carolina. Crescent Mortgage Company, headquartered in Atlanta, Georgia, is a correspondent/wholesale mortgage company approved to originate loans in 48 states partnering with community banks, credit unions and mortgage brokers.

Like most community banks, we derive a significant portion of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, both interest-bearing and noninterest-bearing. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowed funds. In order to maximize our net interest income, we must not only manage the volume of these balance sheet items, but also the yields that we earn on our interest-earning assets and the rates that we pay on interest-bearing liabilities.

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings.

In addition to earning interest on our loans and investments, we derive a portion of our income from Crescent Mortgage Company through mortgage banking income as well as servicing income. We also earn income through fees that we charge to our customers. Likewise, we incur other operating expenses as well.

Economic conditions, competition, and the monetary and fiscal policies of the federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions as well as client preferences, interest rate conditions and prevailing market rates on competing products in our market areas.

Pending Acquisition of Carolina Trust BancShares, Inc.

On July 15, 2019, the Company announced the execution of an agreement and plan of merger and reorganization, by and between the Company and Carolina Trust BancShares, Inc. (“Carolina Trust”), pursuant to which, subject to the terms and conditions set forth therein, Carolina Trust will merge with and into the Company, with the Company as the surviving corporation of the merger. The agreement provides that as soon as practicable following the merger, Carolina Trust's wholly-owned subsidiary, Carolina Trust Bank, will merge with and into the Bank, with the Bank as the surviving entity. The Company anticipates closing the merger during the first quarter of 2020. Pursuant to the merger agreement, each share of Carolina Trust common stock will be converted into the right to receive 0.3000 shares of the Company's common stock, or $10.57 in cash for each share of the Company's common stock outstanding, subject to election and proration such that the aggregate consideration will consist of 90% Carolina Financial stock and 10% cash. Cash will also be paid in lieu of fractional shares. The aggregate merger consideration equals $100.1 million as of July 12, 2019, based on closing price of a share of the Company's common stock as of that date.

Executive Summary of Operating Results

The following is a summary of the ~~Company’s~~Company's financial highlights and significant events in ~~third~~the second quarter of ~~2018:~~2019:

Net income for ~~the third quarter 2018~~Q2 2019 increased ~~90.2%~~0.7% to ~~$15.2~~$15.1 million, or ~~$0.66~~$0.67 per diluted share, from ~~$8.0~~$15.0 million, or ~~$0.49~~$0.70 per diluted share for ~~the third quarter of 2017.~~Q2 2018.

·o

Accretion income from acquired loans for Q2 2019 was $1.5 million compared to $1.9 million for Q2 2018.

Operating earnings for ~~the third quarter of 2018,~~Q2 2019, which exclude certain non-operating income and expenses, increased ~~94.7~~%4.2% to ~~$15.4~~$16.3 million, or ~~$0.67~~$0.73 per diluted share, from ~~$7.9~~$15.6 million, or ~~$0.49~~$0.73 per diluted share, for ~~the third quarter of 2017.~~Q2 2018.

Operating earnings for ~~Q3 2018~~Q2 2019 have been adjusted to eliminate the following significant items:

The fair value ~~gain~~loss on interest rate swaps of ~~$628,000.~~

$2.2 million due to the continued impact of falling long-term interest rates during the quarter on the valuation of longer-duration derivatives that do not meet hedge accounting requirements. The ~~loss on sale~~balance sheet fair value of securities increased $6.0 million at the end of ~~$849,000.~~

~~Performance ratios for Q3 2018~~Q2 2019 compared to ~~Q3 2017:~~

~~Return on average assets was 1.66~~%~~compared to 1.43%.~~

~~Operating return on average assets was 1.68~~%~~compared to 1.42%.~~Q1 2019.

The gain on sale of securities of $1.9 million.

The loss on early extinguishment of debt of approximately $31,000.

The temporary impairment of our mortgage servicing rights (MSR) of $1.3 million due to increased prepayment speed assumptions in the portfolio resulting from the continued impact of falling interest rates.

Performance ratios for Q2 2019 compared to Q2 2018:

Return on average assets was 1.55% compared to 1.65%.

Operating return on average assets was 1.68% compared to 1.72%.

Return on average tangible equity was ~~14.68~~%13.24% compared to ~~13.24%~~17.02%.

Operating return on average tangible equity was ~~14.85~~%14.28% compared to ~~13.08%~~17.74%.

Loans receivable, gross grew ~~$137.9~~$60.6 million from March 31, 2019, or at an annualized rate of 9.4%, and grew $126.9 million, or at an annualized rate of ~~7.9~~%10.0% since December 31, ~~2017.~~2018.

~~Nonperforming assets to total assets were 0.32%at September 30, 2018 compared to 0.20% at December 31, 2017.~~

Total deposits decreased $11.0 million from March 31, 2019 and increased ~~$154.7~~$87.9 million since December 31, ~~2017. Core deposits increased $49.0~~2018.

On December 3, 2018, the Company announced that the Board of Directors had approved a plan to repurchase up to $25 million in shares of the Company's common stock through open market and privately negotiated transactions over the next three years. The Company began stock repurchases on December 4, 2018. During the second quarter of 2019, the Company repurchased approximately 30,000 shares at an average price of $34.33. Cumulatively since December ~~31, 2017.~~4, 2018 through June 30, 2019, the Company repurchased approximately 334,000 shares at an average price of $31.62.

~~Hurricane Florence Update~~

On September 14, 2018, Hurricane Florence made landfall near Wilmington, NC. As a result of Florence, our markets’ business activities were significantly impacted along the Eastern and Coastal regions of the Carolinas. The impact of Florence on our third quarter results is difficult to quantify. However, we believe the hurricane adversely impacted our operating earnings in the following areas:

~~Limited mortgage banking activities in Eastern and Coastal markets during most of September 2018.~~

~~Delayed closings on mortgage loans, in which we provided free extensions to customers, reducing margin.~~

~~Costs related to relocating employees, repairs of facilities, compensation costs and contributions to relief efforts.~~

~~Refunds of foreign ATM fees to customers affected by the storm.~~

~~Delayed closings on commercial loans and limited business activity for most of September in the impacted areas.~~

~~Increased provision for loan losses for unknown impacts of Florence~~.

The aggregate financial effects of these items was a reduction in income and an increase in expense of approximately $500,000 to $600,000 pretax for the quarter. We are continuing to assess the impact of Florence on the economic prospects of our markets affected by it in future periods.

Non-GAAP Financial Measures

Statements included in this ~~management’s~~management's discussion and analysis include non-GAAP financial measures and should be read along with the accompanying tables which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The ~~Company’s~~Company's management uses these non-GAAP financial measures, ~~including: (i) operating earnings; (ii) operating earnings per common share (iii) operating return on average assets, (iv) operating return on average tangible equity, (v)~~including but not limited to, core deposits, ~~(vi)~~ tangible book value, ~~and (vii)~~operating earnings, allowance for loan losses to non-acquired ~~loans.~~loans, net interest margin-core and yield on loans receivable-core to evaluate and compare the Company's operating results from period to period in a meaningful manner.

Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company without regard to transactional activities. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the ~~Company’s~~Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the ~~Company’s~~Company's results or financial condition as reported under GAAP.

The following is a summary of the ~~Company’s~~Company's performance measures:

At or for the Three At or for the Nine
Months Ended Months Ended
September 30,
2018 September 30,
2017 September 30,
2018 September 30,
2017

Performance Ratios (annualized):
Return on average equity 10.87 % 11.16 % 8.91 % 11.49 %
Return on average assets 1.66 % 1.43 % 1.27 % 1.44 %
Return on average tangible equity (Non-GAAP) 14.68 % 13.24 % 12.46 % 13.25 %
Average earning assets to average total assets 89.59 % 91.09 % 89.57 % 91.18 %
Average loans receivable to average deposits 87.82 % 85.59 % 88.74 % 87.53 %
Average stockholders’ equity to average assets 15.27 % 12.85 % 14.21 % 12.56 %
Net interest margin-tax equivalent (1) 4.15 % 3.94 % 4.15 % 3.97 %
Net charge-offs (recoveries) to average loans receivable 0.02 % 0.02 % (0.05 )% 0.00 %
Nonperforming assets to period end loans receivable 0.49 % 0.44 % 0.49 % 0.44 %
Nonperforming assets to total assets 0.32 % 0.29 % 0.32 % 0.29 %
Nonperforming loans to total loans 0.43 % 0.33 % 0.43 % 0.33 %
Allowance for loan losses as a percentage of loans receivable (end of period) 0.55 % 0.72 % 0.55 % 0.72 %
Allowance for loan losses as a percentage of non-acquired loans receivable (Non-GAAP) 0.80 % 0.87 % 0.80 % 0.87 %
Allowance for loan losses as a percentage of nonperforming loans 129.26 % 216.53 % 129.26 % 216.53 %

	At or for the Three						At or for the Six
	Months Ended						Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018

Performance Ratios (annualized):
Return on average stockholders' equity		10.08	%		12.03	%		10.05	%		7.80	%
Return on average assets		1.55	%		1.65	%		1.54	%		1.06	%
Return on average tangible equity (Non-GAAP)		13.24	%		17.02	%		13.28	%		11.15	%
Average earning assets to average total assets		89.83	%		89.70	%		89.76	%		89.50	%
Average loans receivable to average deposits		93.81	%		89.70	%		92.98	%		89.22	%
Average stockholders' equity to average assets		15.42	%		13.72	%		15.30	%		13.64	%
Net interest margin-tax equivalent (1)		3.99	%		4.11	%		4.00	%		4.15	%
Net (recoveries) charge-offs to average loans receivable		(0.03	)%		0.05	%		—			(0.08	)%
Nonperforming assets to period end loans receivable		0.54	%		0.42	%		0.54	%		0.42	%
Nonperforming assets to total assets		0.37	%		0.28	%		0.37	%		0.28	%
Nonperforming loans to total loans		0.50	%		0.35	%		0.50	%		0.35	%
Allowance for loan losses as a percentage of loans receivable (end of period)		0.60	%		0.54	%		0.60	%		0.54	%
Allowance for loan losses as a percentage of non-acquired loans receivable (Non-GAAP)		0.77	%		0.80	%		0.77	%		0.80	%
Allowance for loan losses as a percentage of nonperforming loans		120.51	%		153.84	%		120.51	%		153.84	%

(1) Net interest margin-tax equivalent reflects tax-exempt income on a tax-equivalent basis.

The following ~~table presents~~tables present a reconciliation of Non-GAAP performance measures for consolidated operating earnings and corresponding ratios:

For the Three Months Ended
September 30,
2018 June 30,
2018 March 31,
2018 December 31,
2017 September 30,
2017
As Reported:
Income before income taxes $ 19,431 19,002 4,581 10,630 11,968
Tax expense 4,227 4,036 525 4,302 3,975
Net Income $ 15,204 14,966 4,056 6,328 7,993

Average equity $ 559,401 $ 497,694 $ 477,830 $ 380,529 $ 286,524
Average tangible equity (Non-GAAP) $ 414,205 $ 351,703 $ 331,047 $ 288,156 $ 241,489
Average assets $ 3,663,915 $ 3,627,401 $ 3,522,407 $ 3,048,214 $ 2,230,586

Return on average assets 1.66 % 1.65 % 0.46 % 0.83 % 1.43 %
Return on average equity 10.87 % 12.03 % 3.40 % 6.65 % 11.16 %
Return on average tangible equity (Non-GAAP) 14.68 % 17.02 % 4.90 % 8.78 % 13.24 %
Tangible equity to tangible assets 11.72 % 11.45 % 9.65 % 9.73 % 11.09 %

Weighted average common shares outstanding:
Basic 22,678,681 21,243,094 20,908,225 19,207,307 16,029,332
Diluted 22,898,983 21,454,039 21,119,316 19,443,353 16,187,869
Earnings per common share:
Basic $ 0.67 $ 0.70 $ 0.19 $ 0.33 $ 0.50
Diluted $ 0.66 $ 0.70 $ 0.19 $ 0.33 $ 0.49

Operating Earnings and Performance Ratios:
Income before income taxes $ 19,431 19,002 4,581 10,630 11,968
(Gain)/loss on sale of securities 849 746 697 242 (368 )
Fair value adjustments on interest rate swaps (628 ) (451 ) (803 ) (419 ) (90 )
Merger related expenses — 506 14,710 6,391 311
Operating earnings before income taxes 19,652 19,803 19,185 16,844 11,821
Tax expense (1) 4,279 4,205 4,242 5,721 3,926
Operating earnings (Non-GAAP) $ 15,373 15,598 14,943 11,123 7,895

Average equity $ 559,401 497,694 477,830 380,529 286,524
Less average intangible assets (145,196 ) (145,991 ) (146,783 ) (92,373 ) (45,035 )
Average tangible common equity (Non-GAAP) $ 414,205 351,703 331,047 288,156 241,489

Average assets $ 3,663,915 3,627,401 3,522,407 3,048,214 2,230,586
Less average intangible assets (145,196 ) (145,991 ) (146,783 ) (92,373 ) (45,035 )
Average tangible assets (Non-GAAP) $ 3,518,719 3,481,410 3,375,624 2,955,841 2,185,551

Operating return on average assets (Non-GAAP) 1.68 % 1.72 % 1.70 % 1.46 % 1.42 %
Operating return on average equity (Non-GAAP) 10.99 % 12.54 % 12.51 % 11.69 % 11.02 %
Operating return on average tangible assets (Non-GAAP) 1.75 % 1.79 % 1.77 % 1.51 % 1.44 %
Operating return on average tangible equity (Non-GAAP) 14.85 % 17.74 % 18.06 % 15.44 % 13.08 %

Weighted average common shares outstanding:
Basic 22,678,681 21,243,094 20,908,225 19,207,307 16,029,332
Diluted 22,898,983 21,454,039 21,119,316 19,443,353 16,187,869
Operating earnings per common share:
Basic (Non-GAAP) $ 0.68 $ 0.73 $ 0.71 $ 0.58 $ 0.49
Diluted (Non-GAAP) $ 0.67 $ 0.73 $ 0.71 $ 0.57 $ 0.49

	For the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2019			2019			2018			2018			2018
				(In thousands, except share data)
As Reported:
Income before income taxes	$	19,356			18,495			19,425			19,431			19,002
Tax expense		4,282			3,950			3,981			4,227			4,036
Net Income	$	15,074			14,545			15,444			15,204			14,966

Net interest margin-tax equivalent (2)	$	34,661			33,899			35,349			34,298			33,320
Purchased loan accretion and early payoff charges and deferred fees		(1,521	)		(1,617	)		(3,283	)		(2,831	)		(2,226	)
Net interest margin - core (3) (Non-GAAP)	$	33,140			32,282			32,066			31,467			31,094

Loans receivable interest income	$	36,325			34,813			34,969			33,357			32,497
Purchased loan accretion and early payoff charges and deferred fees		(1,521	)		(1,617	)		(3,283	)		(2,831	)		(2,226	)
Loans receivable interest income - core (3) (Non-GAAP)	$	34,804			33,196			31,686			30,526			30,271

Average equity	$	598,196			580,300			569,528			559,401			497,694
Average tangible equity (Non-GAAP)		455,270			436,630			425,105			414,205			351,703
Average assets		3,878,269			3,826,116			3,700,795			3,663,915			3,627,402
Average loans receivable		2,610,394			2,535,192			2,428,603			2,402,075			2,401,075
Average interest earning assets		3,483,713			3,432,818			3,322,894			3,282,426			3,253,708

Return on average assets		1.55	%		1.52	%		1.67	%		1.66	%		1.65	%
Return on average equity		10.08	%		10.03	%		10.85	%		10.87	%		12.03	%
Return on average tangible equity (Non-GAAP)		13.24	%		13.32	%		14.53	%		14.68	%		17.02	%
Tangible equity to tangible assets		12.36	%		12.05	%		11.83	%		11.72	%		11.45	%
Net interest margin-tax equivalent (2)		3.99	%		4.00	%		4.23	%		4.15	%		4.11	%
Net interest margin-core (3) (Non-GAAP)		3.82	%		3.81	%		3.84	%		3.80	%		3.83	%
Yield on loans receivable-core (3) (Non-GAAP)		5.35	%		5.31	%		5.18	%		5.04	%		5.06	%

Weighted average common shares outstanding:
Basic		22,189,508			22,193,861			22,416,190			22,678,681			21,243,094
Diluted		22,372,273			22,381,809			22,587,466			22,898,983			21,454,039
Earnings per common share:
Basic	$	0.68			0.66			0.69			0.67			0.70
Diluted	$	0.67			0.65			0.68			0.66			0.70

Continued

	For the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2019			2019			2018			2018			2018
				(In thousands, except share data)
Operating Earnings and Performance Ratios:
Income before income taxes	$	19,356			18,495			19,425			19,431			19,002
(Gain)/loss on sale of securities		(1,941	)		(1,194	)		(346	)		849			746
Fair value adjustments on interest rate swaps		2,164			1,371			2,222			(628	)		(451	)
Merger related expenses		—			—			—			—			506
Loss on extinguishment of debt		31			—			—			—			—
Impairment of mortgage servicing rights		1,300			—			—			—			—
Operating earnings before income taxes		20,910			18,672			21,301			19,652			19,803
Tax expense (1)		4,653			4,001			4,379			4,279			4,205
Operating earnings (Non-GAAP)	$	16,257			14,671			16,922			15,373			15,598

Average equity	$	598,196			580,300			569,528			559,401			497,694
Less average intangible assets		(142,926	)		(143,670	)		(144,423	)		(145,196	)		(145,991	)
Average tangible common equity (Non-GAAP)	$	455,270			436,630			425,105			414,205			351,703

Average assets	$	3,878,269			3,826,116			3,700,795			3,663,915			3,627,402
Less average intangible assets		(142,926	)		(143,670	)		(144,423	)		(145,196	)		(145,991	)
Average tangible assets (Non-GAAP)	$	3,735,343			3,682,446			3,556,372			3,518,719			3,481,411

Operating return on average assets (Non-GAAP)		1.68	%		1.53	%		1.83	%		1.68	%		1.72	%
Operating return on average equity (Non-GAAP)		10.87	%		10.11	%		11.88	%		10.99	%		12.54	%
Operating return on average tangible assets (Non-GAAP)		1.74	%		1.59	%		1.90	%		1.75	%		1.79	%
Operating return on average tangible equity (Non-GAAP)		14.28	%		13.44	%		15.92	%		14.85	%		17.74	%

Weighted average common shares outstanding:
Basic		22,189,508			22,193,861			22,416,190			22,678,681			21,243,094
Diluted		22,372,273			22,381,809			22,587,466			22,898,983			21,454,039
Operating earnings per common share:
Basic (Non-GAAP)	$	0.73			0.66			0.75			0.68			0.73
Diluted (Non-GAAP)	$	0.73			0.66			0.75			0.67			0.73

(1) Tax expense is determined using the effective tax rate adjusted to eliminate the impact of the non-operating items.

At the Month Ended
September 30, June 30, March 31, December 31, September 30,
2018 2018 2018 2017 2017

Core deposits:
Noninterest-bearing demand accounts $ 567,394 577,568 547,744 525,615 333,267
Interest-bearing demand accounts 579,522 584,719 558,942 551,308 309,241
Savings accounts 190,946 198,571 212,249 213,142 69,552
Money market accounts 453,957 458,558 463,676 452,734 377,754
Total core deposits (Non-GAAP) 1,791,819 1,819,416 1,782,611 1,742,799 1,089,814

Certificates of deposit:
Less than $250,000 863,290 788,693 791,789 755,887 567,483
$250,000 or more 104,514 100,689 102,569 106,243 50,357
Total certificates of deposit 967,804 889,382 894,358 862,130 617,840
Total deposits $ 2,759,623 2,708,798 2,676,969 2,604,929 1,707,654

(2) Net interest margin-tax equivalent reflects tax-exempt income on a tax-equivalent basis.

(3) Net interest margin-core and yield on loans - core excludes the impact of purchase accounting accretion, loan payoff charges and related deferred fees recognized related to early loan repayments.

At the Month Ended
September 30, June 30, March 31, December 31, September 30,
2018 2018 2018 2017 2017

Tangible book value per share:
Total stockholders’ equity $ 564,027 551,784 475,046 475,381 290,224
Less intangible assets (144,817 ) (145,595 ) (146,387 ) (147,193 ) (44,953 )
Tangible common equity (Non-GAAP) $ 419,210 406,189 328,659 328,188 245,271

Issued and outstanding shares 22,570,445 22,570,182 21,057,539 21,022,202 16,159,309
Less nonvested restricted stock awards (135,045 ) (137,345 ) (136,395 ) (134,302 ) (99,639 )
Period end dilutive shares 22,435,400 22,432,837 20,921,144 20,887,900 16,059,670

Total stockholders’ equity $ 564,027 $ 551,784 $ 475,046 $ 475,381 $ 290,224
Divided by period end dilutive shares 22,435,400 22,432,837 20,921,144 20,887,900 16,059,670
Common book value per share $ 25.14 $ 24.60 $ 22.71 $ 22.76 $ 18.07

Tangible common equity (Non-GAAP) $ 419,210 $ 406,189 $ 328,659 $ 328,188 $ 245,271
Divided by period end dilutive shares 22,435,400 22,432,837 20,921,144 20,887,900 16,059,670
Tangible common book value per share (Non-GAAP) $ 18.69 $ 18.11 $ 15.71 $ 15.71 $ 15.27

At the Month Ended
September 30, June 30, March 31, December 31, September 30,
2018 2018 2018 2017 2017
Acquired and non-acquired loans:
Acquired loans receivable $ 749,442 813,688 877,012 952,220 257,461
Non-acquired gross loans receivable 1,708,022 1,613,533 1,503,006 1,367,308 1,227,000
Total gross loans receivable $ 2,457,464 2,427,221 2,380,018 2,319,528 1,484,461
% Acquired 30.50 % 33.52 % 36.85 % 41.05 % 17.34 %

Non-acquired loans $ 1,708,022 1,613,533 1,503,006 1,367,308 1,227,000
Allowance for loan losses 13,615 12,987 12,708 11,478 10,662
Allowance for loan losses to non-acquired loans (Non-GAAP) 0.80 % 0.80 % 0.85 % 0.84 % 0.87 %

Total gross loans receivable $ 2,457,464 2,427,221 2,380,018 2,319,528 1,484,461
Allowance for loan losses 13,615 12,987 12,708 11,478 10,662
Allowance for loan losses to total gross loans receivable 0.55 % 0.54 % 0.53 % 0.49 % 0.72 %

	At the Month Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2019			2019			2018			2018			2018
				(In thousands, except share data)
Core deposits:
Noninterest-bearing demand accounts	$	616,823			575,990			547,022			567,394			577,568
Interest-bearing demand accounts		561,094			581,424			566,527			579,522			584,719
Savings accounts		184,764			188,725			192,322			190,946			198,571
Money market accounts		437,716			458,575			431,246			453,957			458,558
Total core deposits (Non-GAAP)		1,800,397			1,804,714			1,737,117			1,791,819			1,819,416

Certificates of deposit:
Less than $250,000		921,309			923,709			875,749			863,290			788,693
$250,000 or more		84,403			88,647			105,327			104,514			100,689
Total certificates of deposit		1,005,712			1,012,356			981,076			967,804			889,382
Total deposits	$	2,806,109			2,817,070			2,718,193			2,759,623			2,708,798

Tangible book value per share:
Total stockholders' equity	$	605,579			589,150			575,285			564,027			551,784
Less intangible assets		(142,570	)		(143,305	)		(144,054	)		(144,817	)		(145,595	)
Tangible common equity (Non-GAAP)	$	463,009			445,845			431,231			419,210			406,189

Issued and outstanding shares		22,284,981			22,296,372			22,387,009			22,570,445			22,570,182
Less nonvested restricted stock awards		(109,728	)		(111,578	)		(117,966	)		(135,045	)		(137,345	)
Period end dilutive shares		22,175,253			22,184,794			22,269,043			22,435,400			22,432,837

Total stockholders' equity	$	605,579			589,150			575,285			564,027			551,784
Divided by period end dilutive shares		22,175,253			22,184,794			22,269,043			22,435,400			22,432,837
Common book value per share	$	27.31			26.56			25.83			25.14			24.60

Tangible common equity (Non-GAAP)	$	463,009			445,845			431,231			419,210			406,189
Divided by period end dilutive shares		22,175,253			22,184,794			22,269,043			22,435,400			22,432,837
Tangible common book value per share (Non-GAAP)	$	20.88			20.10			19.36			18.69			18.11

Acquired and non-acquired loans:
Acquired loans receivable	$	601,193			644,461			686,401			749,442			813,688
Non-acquired gross loans receivable		2,050,043			1,946,149			1,837,935			1,708,022			1,613,533
Total gross loans receivable	$	2,651,236			2,590,610			2,524,336			2,457,464			2,427,221
% Acquired		22.68	%		24.88	%		27.19	%		30.50	%		33.52	%

Non-acquired loans	$	2,050,043			1,946,149			1,837,935			1,708,022			1,613,533
Allowance for loan losses		15,867			15,021			14,463			13,615			12,987
Allowance for loan losses to non-acquired loans (Non-GAAP)		0.77	%		0.77	%		0.79	%		0.80	%		0.80	%

Total gross loans receivable	$	2,651,236			2,590,610			2,524,336			2,457,464			2,427,221
Allowance for loan losses		15,867			15,021			14,463			13,615			12,987
Allowance for loan losses to total gross loans receivable		0.60	%		0.58	%		0.57	%		0.55	%		0.54	%

Critical Accounting Policies

There have been no significant changes to our critical accounting policies from those disclosed in our ~~2017~~2018 Annual Report on Form 10-K, except as ~~reflected below.~~disclosed in Note 1 - Summary of Significant Accounting Policies in the accompanying financial statements. Refer to the notes to our consolidated financial statements in our ~~2017~~2018 Annual Report on Form 10-K for a full disclosure of all critical accounting policies.

Results of Operations

Summary

The Company reported an increase in net income for the three months ended ~~September~~June 30, ~~2018~~2019 to ~~$0.66~~$15.1 million, or $0.67 per diluted share, as compared to ~~$0.49~~$15.0 million, or $0.70 per diluted share, for the three months ended ~~September~~June 30, ~~2017.~~2018. Included in net income for Q2 2019 and Q2 2018 was purchased loan accretion of $1.5 million and $1.9 million, respectively. The Company reported an increase in net income for the six months ended June 30, 2019 to $29.6 million, or $1.32 per diluted share, as compared to $19.0 million, or $0.90 per diluted share, for the six months ended June 30, 2018. Included in net income for the ~~three~~six months ended ~~September~~2019 and 2018 was purchased loan accretion of $3.0 million and $4.8 million, respectively. Provision for loan losses during the six months ended June 30, ~~2017 were pretax merger-related~~2019 and 2018 was $1.4 million and $0.6 million, respectively. Merger-related expenses ~~of $0.3 million. The Company reported increased net income~~ for the ~~nine~~six months ended ~~September~~June 30, 2018 of $34.2 million, or $1.57 per diluted share, as compared to $22.2 million, or $1.47 per diluted share, for the nine months ended September 30, 2017. Included in net income for the nine months ended September 30, 2018 and 2017 were ~~pretax merger-related expenses of~~ $15.2 ~~million and $1.9 million, respectively.~~million.

Net Interest Income and Margin

Net interest income is a significant component of our net income. Net interest income is the difference between income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is determined by the yields earned on interest-earning assets, rates paid on interest-bearing liabilities, the relative balances of interest-earning assets and interest-bearing liabilities, the degree of mismatch, and the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities.

Net interest income increased to ~~$33.9~~$34.3 million for the three months ended ~~September~~June 30, ~~2018~~2019 from ~~$19.5~~$32.9 million for the three months ended ~~September~~June 30, ~~2017.~~2018. Net interest income increased to ~~$98.9~~$67.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 from ~~$53.9~~$65.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The increase in net interest income is a result of the increase in average interest-earning assets balances, ~~as well as an increase in the net interest margin on a tax equivalent yield basis of 21 basis points over the comparable prior year quarter. The increase in~~primarily due to increased average ~~earnings assets for the three and nine month periods ended September 30, 2018 over the comparable prior year periods is primarily the result of increased~~ balances of ~~loans receivable and~~ securities available for ~~sale. Net interest margin on a tax equivalent yield basis was 18 basis points higher than the comparable prior year nine month period.~~

~~The growth in loan balances was primarily the result of strong organic growth in both commercial~~sale and ~~residential lending as well as two acquisitions. On March 18, 2017, the Company acquired approximately $194.7 million of~~ loans net of purchase accounting adjustments, as part of the acquisition of Greer. In addition, on November 1, 2017, the Company acquired approximately $759.2 million of loans, net of purchase accounting adjustments, as part of the acquisition of First South.receivable.

The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the periods ~~indicated (dollars in thousands).~~indicated. We derived these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. Nonaccrual loans are included in earning assets in the following tables. Loan yields reflect the negative impact on our earnings of loans on nonaccrual status. The net capitalized loan costs and fees, which are considered immaterial, are amortized into interest income on loans.

For The Three Months Ended September 30,
2018 2017
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate

Interest-earning assets:
Loans held for sale $ 23,692 266 4.45 % 27,282 269 3.91 %
Loans receivable, net (1) 2,402,075 33,357 5.51 % 1,463,771 18,691 5.07 %
Interest-bearing cash 21,419 107 1.98 % 16,533 52 1.25 %
Securities available for sale 815,612 6,912 3.39 % 511,564 3,757 2.87 %
Dividends from non-equitable securities 16,181 313 7.67 % 10,005 135 5.35 %
Other investments 3,447 30 3.45 % 2,629 22 3.32 %
Total interest-earning assets 3,282,426 40,985 4.95 % 2,031,784 22,926 4.48 %
Non-earning assets 381,489 198,802

Total assets $ 3,663,915 2,230,586

Interest-bearing liabilities:
Demand accounts 573,875 601 0.42 % 297,163 228 0.30 %
Money market accounts 459,141 890 0.77 % 381,711 500 0.52 %
Savings accounts 193,010 191 0.39 % 69,233 36 0.21 %
Certificates of deposit 927,395 3,347 1.43 % 607,532 1,658 1.08 %
Short-term borrowed funds 292,217 1,529 2.08 % 146,670 441 1.19 %
Long-term debt 46,261 544 4.67 % 64,855 514 3.14 %
Total interest-bearing liabilities 2,491,899 7,102 1.13 % 1,567,164 3,377 0.85 %
Noninterest-bearing deposits 581,925 354,624
Other liabilities 30,689 22,274
Stockholders’ equity 559,401 286,524

Total liabilities and Stockholders’ equity $ 3,663,914 2,230,586

Net interest spread 3.82 % 3.63 %
Net interest margin 4.10 % 3.82 %

Net interest margin (tax-equivalent) (2) 4.15 % 3.94 %
Net interest income $ 33,883 19,549

	For The Three Months Ended June 30,
	2019								2018
				Interest		Average						Interest		Average
	Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans held for sale	$	21,905			246		4.50	%		23,137			256		4.44	%
Loans receivable, net (1)		2,610,394			36,325		5.58	%		2,401,075			32,497		5.43	%
Interest-bearing cash		15,712			92		2.35	%		16,413			73		1.79	%
Securities available for sale		811,212			7,108		3.50	%		789,490			6,359		3.22	%
Federal Home Loan Bank stock		21,012			331		6.32	%		20,135			263		5.24	%
Other investments		3,477			33		3.81	%		3,458			29		3.36	%
Total interest-earning assets		3,483,712			44,135		5.08	%		3,253,708			39,477		4.87	%
Non-earning assets		394,556								373,694
Total assets	$	3,878,268								3,627,402

Interest-bearing liabilities:
Demand accounts		556,268			619		0.45	%		567,079			503		0.36	%
Money market accounts		441,134			1,228		1.12	%		463,163			743		0.64	%
Savings accounts		185,739			279		0.60	%		205,586			150		0.29	%
Certificates of deposit		992,967			4,670		1.89	%		887,078			2,852		1.29	%
Short-term borrowed funds		392,064			2,429		2.48	%		362,874			1,705		1.88	%
Long-term debt		50,514			627		4.98	%		66,863			619		3.71	%
Total interest-bearing liabilities		2,618,686			9,852		1.51	%		2,552,643			6,572		1.03	%
Noninterest-bearing deposits		606,468								554,495
Other liabilities		54,918								22,569
Stockholders' equity		598,196								497,694
Total liabilities and stockholders' equity	$	3,878,268								3,627,402

Net interest spread							3.57	%							3.84	%
Net interest margin		3.95	%							4.06	%

Net interest margin (tax-equivalent) (2)		3.99	%							4.11	%
Net interest income				$	34,283								32,905

(1) Average balances of loans receivable, net include nonaccrual loans.

(2) The tax-equivalent net interest margin reflects tax-exempt income on a tax-equivalent basis.

Our net interest margin was ~~4.10%~~3.95%, or ~~4.15%~~3.99% on a tax-equivalent basis, for the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~3.82%~~4.06%, or ~~3.94%~~4.11% on a tax equivalent basis, for the three months ended ~~September~~June 30, 2017. The increase in margin from period to period is the result of an increase in yield on securities available for sale and loans receivable net of the increase in cost of funds. The yield on loans receivable during the quarter ended September 30, 2018 and 2017 reflects2018. Q2 2019 included accretion income from acquired loans ~~purchased~~of $1.5 million (17 bps to NIM) and early payoff fees of $46,000 (1 bps to NIM) compared to Q2 2018 accretion income from acquired loans of $1.9 million (24 bps to NIM) and early payoff fees of $300,000 (4 bps to NIM). Excluding accretion income from acquired loans and early payoff fees, Q2 net interest margin-core (Non-GAAP) was 3.82% compared to 3.83% in ~~acquisitions of $2.2 million and $601,000 respectively.~~Q2 2018.

Our net interest spread, which is not on a tax-equivalent basis, was ~~3.82%~~3.57% for the three months ended ~~September~~June 30, ~~2018~~2019 as compared to ~~3.63%~~3.84% for the same period in ~~2017.~~2018. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 1927 basis point ~~increase~~decrease in net interest spread is a result of the 4721 basis point increase in yield on interest-earning assets net of a 2848 basis point increase in rates paid on interest-bearing liabilities. The increase in the rate realized on loans is primarily the result of variable rate ~~and maturing fixed rate~~ loans repricing ~~as a result~~because of the increases in the prime ~~rate.~~rate partially offset by the impact of lower accretion income from acquired loans and lower fees on early payoffs. The increase in rates paid on interest-bearing liabilities is primarily due to repricing because of the increase in the prime rate in addition to increased competition in our markets for deposits. During the period between March 31, 2018 and June 30, 2019, the prime rate increased from 4.75% to 5.50%.

For The Nine Months Ended September 30,
2018 2017
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate

Interest-earning assets:
Loans held for sale $ 22,832 726 4.25 % 22,507 657 3.90 %
Loans receivable, net (1) 2,375,461 97,311 5.48 % 1,363,830 51,550 5.05 %
Interest-bearing cash 22,889 285 1.66 % 15,160 117 1.03 %
Securities available for sale 785,782 18,979 3.22 % 458,266 9,966 2.87 %
Dividends from non-equitable securities 18,303 751 5.49 % 10,342 351 4.54 %
Other investments 3,967 86 2.90 % 3,855 77 2.63 %
Total interest-earning assets 3,229,234 118,138 4.89 % 1,873,960 62,718 4.47 %
Non-earning assets 376,198 181,277

Total assets $ 3,605,432 2,055,237

Interest-bearing liabilities:
Demand accounts 555,802 1,446 0.35 % 253,735 540 0.28 %
Money market accounts 462,250 2,263 0.65 % 355,049 1,202 0.45 %
Savings accounts 203,815 451 0.30 % 63,678 91 0.19 %
Certificates of deposit 896,569 8,759 1.31 % 563,688 4,379 1.04 %
Short-term borrowed funds 328,388 4,488 1.83 % 165,610 1,225 0.99 %
Long-term debt 61,569 1,813 3.94 % 52,108 1,364 3.51 %
Total interest-bearing liabilities 2,508,393 19,220 1.02 % 1,453,868 8,801 0.81 %
Noninterest-bearing deposits 558,453 321,894
Other liabilities 26,318 21,374
Stockholders’ equity 512,268 258,101

Total liabilities and Stockholders’ equity $ 3,605,432 2,055,237

Net interest spread 3.87 % 3.66 %
Net interest margin 4.10 % 3.85 %

Net interest margin (tax-equivalent) (2) 4.15 % 3.97 %
Net interest income 98,918 53,917

	For The Six Months Ended June 30,
	2019								2018
				Interest		Average						Interest		Average
	Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans held for sale	$	17,852			409		4.62	%		22,395			460		4.14	%
Loans receivable, net (1)		2,573,001			71,139		5.58	%		2,361,933			63,956		5.46	%
Interest-bearing cash		20,786			244		2.37	%		21,676			178		1.66	%
Securities available for sale		822,106			14,464		3.52	%		770,620			12,066		3.13	%
Federal Home Loan Bank stock		20,806			593		5.75	%		19,382			438		4.56	%
Other investments		3,466			67		3.90	%		3,442			56		3.24	%
Total interest-earning assets		3,458,017			86,916		5.07	%		3,199,448			77,154		4.86	%
Non-earning assets		394,319								375,469

Total assets	$	3,852,336								3,574,917

Interest-bearing liabilities:
Demand accounts		563,304			1,201		0.43	%		546,616			845		0.31	%
Money market accounts		443,209			2,424		1.10	%		463,831			1,374		0.60	%
Savings accounts		187,164			549		0.59	%		209,306			260		0.25	%
Certificates of deposit		990,615			8,926		1.82	%		880,900			5,412		1.24	%
Short-term borrowed funds		386,097			4,745		2.48	%		346,773			2,958		1.72	%
Long-term debt		54,962			1,318		4.84	%		69,350			1,269		3.69	%
Total interest-bearing liabilities		2,625,351			19,163		1.47	%		2,516,776			12,118		0.97	%
Noninterest-bearing deposits		582,842								546,523
Other liabilities		54,846								24,097
Stockholders' equity		589,297								487,521

Total liabilities and Stockholders' equity	$	3,852,336								3,574,917

Net interest spread							3.60	%							3.89	%
Net interest margin		3.95	%							4.10	%

Net interest margin (tax-equivalent) (2)		4.00	%							4.15	%
Net interest income					67,753								65,036

(1) Average balances of loans receivable, net include nonaccrual loans.

(2) The tax-equivalent net interest margin reflects tax-exempt income on a tax-equivalent basis.

Our net interest margin was ~~4.10%~~3.95%, or ~~4.15%~~4.00% on a tax-equivalent basis, for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~3.85%~~4.10%, or ~~3.97%~~4.15% on a tax equivalent basis, for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The yield on loans receivable during the six months ended June 30, 2019 and 2018 reflects accretion income from acquired loans of $3.0 million (18 bps to NIM) and $4.8 million (31 bps to NIM), respectively. Also reflected in the yield are early payoff fees of $145,000 (1 bps to NIM) and $553,000 (4 bps to NIM) for the six months ended June 30, 2019 and 2018, respectively. Excluding accretion income from acquired loans and early payoff fees, net interest margin-core (Non-GAAP) was $3.82% compared to 3.81% for the six months ends 2019 and 2018. The increase in ~~margin~~net interest margin-core from period to period is the result of ~~a shift to higher yielding earning assets as well as~~ an increase in yield on securities available for sale and loans receivable, net of the increase in cost of funds. Average loans receivable comprised 73.6% of earnings assets for the nine months ended September 30, 2018 compared to 72.8% for the nine months ended September 30, 2017. The yield on loans receivable during the nine months ended September 30, 2018 and 2017 reflects accretion income from loans purchased in acquisitions of $7.0 million and $2.1 million, respectively.receivable.

Our net interest spread, which is not on a tax-equivalent basis, was ~~3.87%~~3.60% for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 as compared to ~~3.66%~~3.89% for the same period in ~~2017.~~2018. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 2129 basis point ~~increase~~decrease in net interest spread is a result of the 4221 basis point increase in yield on interest-earning assets ~~as well as~~net of a 2150 basis point increase in rates paid on interest-bearing liabilities. The increase in the rate realized on loans is primarily the result of variable rate loans repricing ~~as a result~~because of the increases in the prime ~~rate.~~rate partially offset by the impact of lower accretion income from acquired loans and lower fees on early payoffs. The increase in rates paid on interest-bearing liabilities is primarily due to repricing because of the increase in the prime rate in addition to increased competition in our markets for deposits.

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of operations. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion below under “Allowance for Loan Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

Following is a summary of the activity in the allowance for loan losses during the periods ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2018 2017 2018 2017
(Dollars in thousands)
Balance, beginning of period $ 12,987 10,750 11,478 10,688
Provision for loan losses 750 — 1,309 —
Loan charge-offs (239 ) (132 ) (727 ) (178 )
Loan recoveries 117 44 1,555 152
Balance, end of period $ 13,615 10,662 13,615 10,662

2018.

~~The Company experienced net chargeoffs of $122,000 for the three months ended September 30, 2018 and net chargeoffs of $88,000 for the three months ended September 30, 2017.~~

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Balance, beginning of period	$	15,021			12,708			14,463			11,478
Provision for loan losses		680			559			1,380			559
Loan charge-offs		(219	)		(355	)		(436	)		(488	)
Loan recoveries		385			74			460			1,437
Balance, end of period	$	15,867			12,987			15,867			12,987

The Company experienced net recoveries of ~~$828,000~~$166,000 and net charge-offs of $281,000 for three months ended June 30, 2019 and 2018. The Company experienced net recoveries of $24,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and net ~~chargeoffs~~recoveries of ~~$26,000~~$949,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. Asset quality has remained relatively consistent since December 31, ~~2017,~~2018, with nonperforming assets to total assets of ~~0.32%~~0.37% as of ~~September~~June 30, ~~2018 and 0.20%~~2019 as compared to 0.35% as of December 31, ~~2017.~~2018. Provision for loan ~~losses~~loss of ~~$750,000 was recorded in the third quarter of 2018 primarily driven by organic loan growth and unknown storm related impacts. No provision expense for loan losses~~$1.4 million was recorded during the first ~~nine~~six months of ~~2017 primarily due~~2019 compared to provision for loan losses of $0.6 million during the ~~net recoveries experienced and asset quality.~~first six months of 2018.

Provision expense is recorded based on our assessment of general loan loss risk as well as asset quality. The allowance for loan losses is ~~management’s~~management's estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. Management determines the allowance based on an ongoing evaluation. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on non-impaired loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. For further discussion regarding the calculation of the allowance, see the “Allowance for Loan Losses” discussion below.

Noninterest Income and Expense

Noninterest income provides us with additional revenues that are significant sources of income. In Q2 2019 and Q2 2018, noninterest income comprised 20.2% and 21.8%, respectively, of total interest and noninterest income. The major components of noninterest income for the ~~three and nine months ended September 30, 2018 and 2017~~Company are ~~presented~~listed below:

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2018 2017 2018 2017
(In thousands)
Noninterest income:
Mortgage banking income $ 3,685 3,625 11,701 11,522
Deposit service charges 2,084 1,072 6,096 2,928
Net gain (loss) on sale of securities (849 ) 368 (2,292 ) 1,174
Fair value adjustments on interest rate swaps 628 90 1,883 (37 )
Net increase in cash value life insurance 378 267 1,153 759
Mortgage loan servicing income 2,313 1,652 6,428 4,822
Debit card income, net 1,086 459 3,562 1,346
Other 975 342 2,846 1,396
Total noninterest income $ 10,300 7,875 31,377 23,910

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2019			2018			2019			2018
	(In thousands)
Noninterest income:
Mortgage banking income	$	4,318			4,215			7,736			8,017
Deposit service charges		1,678			1,988			3,346			4,012
Net loss on extinguishment of debt		(31	)		—			(31	)		—
Net gain (loss) on sale of securities		1,941			(746	)		3,135			(1,443	)
Fair value adjustments on interest rate swaps		(2,164	)		451			(3,535	)		1,255
Net increase in cash value life insurance		398			385			796			775
Mortgage loan servicing income		2,566			2,090			5,204			4,114
Debit card income, net		1,215			1,267			2,191			2,194
Other		1,310			1,377			2,261			2,152
Total noninterest income	$	11,231			11,027			21,103			21,076

Noninterest income increased $0.2 million to ~~$10.3~~$11.2 million for the three months ended ~~September~~June 30, ~~2018~~2019 from ~~$7.9~~$11.0 million for the three months ended ~~September~~June 30, ~~2017.~~2018. Noninterest income increased ~~to $31.4~~by $0.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 from ~~$23.9~~$21.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The increase in noninterest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018 over the comparable periods in 2017~~2019 primarily relates to ~~an increase in~~the gain on sale of securities and mortgage loan servicing income ~~deposit service charges,~~partially offset by fair value adjustments on interest rate swaps and ~~increases in other noninterest income.~~lower deposit service charges.

~~The following table provides a break out of mortgage banking:~~

For the Three Months Ended September 30,
Loan Originations Mortgage Banking Income Margin
2018 2017 2018 2017 2018 2017
Additional segment information:
Community banking $ 27,563 20,342 541 500 1.96 % 2.46 %
Wholesale mortgage banking 190,142 217,014 3,144 3,125 1.65 % 1.44 %
Total $ 217,705 237,356 3,685 3,625 1.69 % 1.53 %

For the Nine Months Ended September 30,
Loan Originations Mortgage Banking Income Margin
2018 2017 2018 2017 2018 2017
Additional segment information:
Community banking $ 91,786 59,511 1,843 1,441 2.01 % 2.42 %
Wholesale mortgage banking 576,205 611,597 9,858 10,081 1.71 % 1.65 %
Total $ 667,991 671,108 11,701 11,522 1.75 % 1.72 %

Mortgage loan servicing income increased ~~$661,000~~$0.5 million for the three months ended ~~September~~June 30, ~~2018~~2019 compared to the three months ended ~~September~~June 30, ~~2017.~~2018. Mortgage loan servicing income increased ~~$1.6~~$1.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The increase in mortgage loan servicing income was primarily driven by an increase in loans serviced for the comparative periods.

The fair value adjustment on interest rate swaps increased noninterest income by $538,000 for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The fair value adjustment on interest rate swaps increased noninterest income by $1.9 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The change in fair value adjustment on interest rate swaps relates to the change in interest rates from period to period. The Company uses standalone interest rate swaps to more closely match the interest rate characteristicsfollowing table provides a break out of ~~assets and liabilities and to mitigate the risks arising from timing mismatches between assets and liabilities including duration mismatches.~~mortgage banking:

	Loan Originations				Mortgage Banking Income				Margin
	For the Three Months Ended June 30,
	2019		2018		2019		2018		2019			2018
Additional segment information:	(Dollars in thousands)
Community banking	$	29,308		32,796		765		648		2.61	%		1.98	%
Wholesale mortgage banking		189,245		205,569		3,553		3,567		1.88	%		1.74	%
Total	$	218,553		238,365		4,318		4,215		1.98	%		1.77	%

	Loan Originations				Mortgage Banking Income				Margin
	For the Six Months Ended June 30,
	2019		2018		2019		2018		2019			2018
Additional segment information:	(Dollars in thousands)
Community banking	$	49,746		64,223		1,324		1,302		2.66	%		2.03	%
Wholesale mortgage banking		329,496		386,063		6,412		6,715		1.95	%		1.74	%
Total	$	379,242		450,286		7,736		8,017		2.04	%		1.78	%

The following table sets forth for the periods indicated the primary components of noninterest expense:

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2018 2017 2018 2017
(In thousands)
Noninterest expense:
Salaries and employee benefits $ 13,451 8,623 40,660 26,487
Occupancy and equipment 4,113 2,508 11,860 7,129
Marketing and public relations 312 385 1,011 1,182
FDIC insurance 285 205 805 380
Recovery of mortgage loan repurchase losses (150 ) (225 ) (450 ) (675 )
Legal expense 94 157 327 373
Other real estate (income) expense, net (13 ) (5 ) (2 ) 40
Mortgage subservicing expense 640 494 1,772 1,485
Amortization of mortgage servicing rights 1,099 748 2,967 2,083
Amortization of core deposit intangible 778 170 2,375 472
Merger-related expenses — 311 15,216 1,910
Other 3,393 2,085 9,431 6,066
Total noninterest expense $ 24,002 15,456 85,972 46,932

~~Noninterest expense represents the largest expense category for the Company.~~

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2019			2018			2019			2018
	(In thousands)
Noninterest expense:
Salaries and employee benefits	$	13,159			13,541			26,630			27,210
Occupancy and equipment		4,116			4,094			8,237			7,747
Marketing and public relations		448			322			874			698
FDIC insurance		247			265			502			520
Recovery of mortgage loan repurchase losses		(100	)		(150	)		(200	)		(300	)
Legal expense		127			157			213			233
Other real estate expense, net		106			105			294			11
Mortgage subservicing expense		770			568			1,474			1,132
Amortization of mortgage servicing rights		1,342			889			2,578			1,868
Impairment of mortgage servicing rights		1,300			—			1,300			—
Amortization of core deposit intangible		735			849			1,484			1,598
Merger-related expenses		—			506			—			15,216
Other		3,228			3,225			6,239			6,037
Total noninterest expense	$	25,478			24,371			49,625			61,970

Noninterest expense increased to ~~$24.0~~$25.5 million for the three months ended ~~September~~June 30, ~~2018~~2019 from ~~$15.5~~$24.4 million for the three months ended ~~September~~June 30, ~~2017. Noninterest expense increased to $86.0 million for the nine months ended September 30, 2018 from $46.9 million for the nine months ended September 30, 2017.~~2018. The increase in noninterest expense is primarily the result of a temporary impairment of mortgage servicing rights recorded in the second quarter of 2019 as well as an increase in the amortization of mortgage servicing rights partially offset by lower salaries and employee benefits and ~~occupancy and equipment as well as merger related~~the impact of merger-related expenses for the three months ended June 30, 2018.

Noninterest expense decreased to $49.6 million for the six months ended June 30, 2019 from $62.0 million for the six months ended June 30, 2018. The decrease in noninterest expense is primarily the result of merger-related expenses recognized for the six months ending June 30, 2018 of $15.2 million related to the acquisition of First South Bank. ~~Merger~~Excluding the impact of merger related expenses, ~~totaled $15.2~~noninterest expenses increased $2.9 million ~~for~~due to the ~~nine months ended September 30, 2018 as compared to $1.9 million for~~MSR impairment, an increase in occupancy and equipment expense and an increase in the ~~nine months ended September 30, 2017.~~amortization of mortgage servicing rights.

Income Tax Expense

Our effective tax rate was 22.1% for the three months ended June 30, 2019, compared to 21.2% for the three months ended June 30, 2018. Our effective tax rate was 21.7% for ~~three month period~~the six months ended ~~September~~June 30, ~~2018,~~2019, compared to ~~33.2%~~19.3% for the ~~three month period~~six months ended ~~September~~June 30, ~~2017. Our effective tax rate was 20.4%~~2018. The Company incurred no merger related expenses for ~~nine month period ended September~~the six months ending June 30, ~~2018,~~2019 compared to ~~28.0%~~$15.2 million of merger related expenses for the ~~nine month period~~six months ended ~~September~~June 30, ~~2017.~~2018. The ~~decrease in the effective~~Company's tax rate from period to period reflects a reduction in the federal income tax rate from 35% to 21% as enacted in the 2017 Tax Cuts Jobs Act on December 22, 2017. In addition to the lower federal tax rate, the decrease in the effective tax rate from period to period reflects an increase in interest income on municipal securities during 2018 andrates also reflect tax benefits related to excess stock-based compensation.

6263

Balance Sheet Review

~~Securities~~

Securities

Our primary objective in managing the investment portfolio is to maintain a portfolio of high quality, ~~highly~~ liquid investments yielding competitive returns. We are required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. We maintain investment balances based on a continuing assessment of cash flows, the level of current and expected loan production, current interest rate risk strategies and the assessment of the potential future direction of market interest rate changes. Investment securities differ in terms of default, interest rate, liquidity and expected rate of return risk.

At ~~September~~June 30, ~~2018,~~2019, our securities portfolio, excluding FHLB stock and other investments, was ~~$817.7~~$791.1 million or approximately ~~22.0%~~20.3% of our assets. Our available-for-sale securities portfolio included municipal securities, US agency ~~securities, municipal~~ securities, collateralized loan obligations, corporate securities, mortgage-backed securities (agency and non-agency), and trust preferred securities with a fair value of ~~$817.7~~$791.1 million and an amortized cost of ~~$823.5~~$780.1 million resulting in a net unrealized ~~loss~~gain of ~~$5.7~~$11.0 million.

As securities are purchased, they are designated as held-to-maturity or available-for-sale based upon our intent, which incorporates liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. We do not currently hold, nor have we ever held, any securities that are designated as trading securities.

The increase in securities from period to period is attributable to an increase in mortgage-backed securities and collateralized loan obligations partially offset by a decrease in municipal securities in line with the Company’s asset and liability management objectives.

Loans by Type

Since loans typically provide higher interest yields than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Gross loans receivable at ~~September~~June 30, ~~2018~~2019 and December ~~2017~~2018 were $2.6 billion and $2.5 billion, ~~and $2.3 billion,~~ respectively.

Our loan portfolio consists primarily of loans secured by real estate mortgages. As of ~~September~~June 30, ~~2018,~~2019, our loan portfolio included ~~$2.1~~$2.2 billion, or ~~85.4%~~83.9%, of gross loans secured by real estate. As of December 31, ~~2017,~~2018, our loan portfolio included ~~$2.0~~$2.1 billion, or ~~85.6%~~84.8%, of gross loans secured by real estate. Substantially all of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types.

As shown in the table below, gross loans receivable increased ~~$137.9~~$126.9 million since December 31, ~~2017.~~2018. The growth in loan balances was primarily the result of strong organic growth in ~~both~~ commercial ~~and residential~~ lending.

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The following table summarizes loans by type and percent of total at the end of the periods indicated:

	At September 30,					At December 31,					At June 30,					At December 31,
	2018					2017					2019					2018
			% of Total					% of Total					% of Total					% of Total
All Loans:	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
	(Dollars in thousands)					(Dollars in thousands)					(Dollars in thousands)
Loans secured by real estate:
One-to-four family	$	721,010		29.34	%		665,774		28.70	%	$	734,652		27.71	%		732,717		29.03	%
Home equity		85,483		3.48	%		90,141		3.89	%		77,375		2.92	%		83,770		3.32	%
Commercial real estate		981,132		39.92	%		933,820		40.26	%		1,094,754		41.29	%		1,034,117		40.96	%
Construction and development		312,072		12.70	%		294,793		12.71	%		317,035		11.96	%		290,494		11.51	%
Consumer loans		20,627		0.84	%		19,990		0.86	%		23,554		0.89	%		23,845		0.94	%
Commercial business loans		337,140		13.72	%		315,010		13.58	%		403,866		15.23	%		359,393		14.24	%
Total gross loans receivable		2,457,464		100.00	%		2,319,528		100.00	%		2,651,236		100.00	%		2,524,336		100.00	%
Less:
Allowance for loan losses		13,615					11,478					15,867					14,463
Total loans receivable, net	$	2,443,849				$	2,308,050				$	2,635,369					2,509,873

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following table is based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.

The following table summarizes the loan maturity distribution by type and related interest rate characteristics.

At September 30, 2018
After one
One Year but within After five
or Less five years years Total
(In thousands)
Loans secured by real estate:
One-to-four family $ 26,554 136,882 557,574 721,010
Home equity 10,949 21,296 53,238 85,483
Commercial real estate 95,291 621,964 263,877 981,132
Construction and development 98,073 181,369 32,630 312,072
Consumer loans 1,195 11,231 8,201 20,627
Commercial business loans 59,206 163,376 114,558 337,140
Total gross loans receivable $ 291,268 1,136,118 1,030,078 2,457,464

Loans maturing - after one year
Variable rate loans $ 733,815
Fixed rate loans 1,432,381
$ 2,166,196

	At June 30, 2019
			After one
	One Year		but within		After five
	or Less		five years		years		Total
			(In thousands)
Loans secured by real estate:
One-to-four family	$	26,514		144,213		563,925		734,652
Home equity		12,133		17,403		47,839		77,375
Commercial real estate		125,805		740,785		228,164		1,094,754
Construction and development		90,135		184,030		42,870		317,035
Consumer loans		2,073		8,684		12,797		23,554
Commercial business loans		42,239		266,518		95,109		403,866
Total gross loans receivable	$	298,899		1,361,633		990,704		2,651,236

Loans maturing - after one year
Variable rate loans							$	808,011
Fixed rate loans								1,544,326
							$	2,352,337

Nonperforming and Problem Assets

Nonperforming assets include loans on which interest is not being accrued, accruing loans that are 90 days or more delinquent and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of a ~~borrower’s~~borrower's loan default. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the ~~borrower’s~~borrower's financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction of principal when received. In general, a nonaccrual loan may be placed back onto accruing status once the borrower has made a minimum of ~~nine~~six consecutive payments in accordance with the loan terms. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. As of ~~September~~June 30, 2019 and December 31, 2018, the Company had ~~$0.9~~$1.2 million and $0.6 million, respectively, of PCI loans that were 90 days past due and accruing. ~~At December 31, 2017, the Company had $1.9 million of PCI loans that were 90 days past due and still accruing.~~

Troubled Debt Restructurings (“TDRs”)

The Company designates loan modifications as TDRs when, for economic or legal reasons related to the ~~borrower’s~~borrower's financial difficulties, it grants a concession to the borrower that it would not otherwise consider. Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of modification are initially classified as accruing TDRs at the date of modification, if the note is reasonably assured of repayment and performance is in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the modification date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are returned to accrual status when there is economic substance to the restructuring, there is well documented credit evaluation of the ~~borrower’s~~borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated repayment performance in accordance with the modified terms for a reasonable period of time, generally a minimum of ~~nine~~six months.

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The following table summarizes nonperforming and problem assets, excluding purchased credit impaired loans, at the end of the periods indicated.

	At June 30,		At December 31,
	2019		2018
	(In thousands)
Loans receivable:
90 days and still accruing	$	—		20
Nonaccrual loans-renegotiated loans		5,300		3,086
Nonaccrual loans-other		7,867		8,635
Real estate acquired through foreclosure, net		1,218		1,534
Total Non-Performing Assets	$	14,385		13,275

Problem Assets not included in Non-Performing Assets:
Accruing renegotiated loans outstanding	$	3,108		3,327

At September 30, At December 31,
2018 2017
(In thousands)
Loans receivable:
90 days and still accruing $ 32 —
Nonaccrual loans-renegotiated loans 1,285 1,140
Nonaccrual loans-other 9,216 2,793
Real estate acquired through foreclosure, net 1,601 3,106
Total Non-Performing Assets $ 12,134 7,039

Problem Assets not included in Non-Performing Assets-Accruing renegotiated loans outstanding $ 4,935 5,324

At ~~September~~June 30, ~~2018,~~2019, nonperforming assets (non-PCI) were ~~$12.1~~$14.4 million, or ~~0.32%~~0.37% of total assets. Comparatively, nonperforming assets (non-PCI) were ~~$7.0~~$13.3 million, or ~~0.20%~~0.35% of total assets, at December 31, ~~2017.~~2018. Nonperforming loans were ~~0.43%~~0.50% and ~~0.17%~~0.47% of gross loans receivable at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Potential problem loans, which are not included in nonperforming loans, amounted to approximately ~~$4.9~~$3.1 million at ~~September~~June 30, ~~2018,~~2019, compared to ~~$5.3~~$3.3 million at December 31, ~~2017.~~2018. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the ~~borrower’s~~borrower's ability to comply with present repayment terms.

Substantially all of the nonaccrual loans, accruing loans 90 days or more delinquent and accruing renegotiated loans at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are collateralized by real estate. The Bank utilizes third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require the Bank to obtain updated appraisals on loans greater than ~~$100,000 on an annual basis,~~$250,000 at a minimum of every 18 months, either through a new external appraisal or an internal appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement. Management believes based on information known and available currently, the probable losses related to problem assets are adequately reserved in the allowance for loan losses.

Credit quality indicators continue to show favorable metrics. The Company can make no assurances that nonperforming assets will continue to remain low in future periods. The Company continues to monitor the loan portfolio and foreclosed assets carefully and is continually working to reduce its problem assets.

Allowance for Loan Losses

The allowance for loan losses is ~~management’s~~management's estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. Management determines the allowance based on an ongoing evaluation. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on non-impaired loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The allowance consists of specific and general components.

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The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by major loan category and is based on the actual loss history trends for the previous 20 quarters. The actual loss experience is supplemented with internal and external qualitative factors as considered necessary at each period and given the facts at the time. These qualitative factors adjust the 20 quarter historical loss rate to recognize the most recent loss results and changes in the economic conditions to ensure the estimated losses in the portfolio are recognized in the period incurred and that the allowance at each balance sheet date is adequate and appropriate in accordance with GAAP. Qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries for the most recent twelve quarters; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. Impaired loans are evaluated for impairment using the discounted cash flow methodology or based on the net realizable value of the underlying collateral. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. See additional discussion in section “Nonperforming and Problem Assets.”

While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. To the extent actual outcomes differ from ~~management’s~~management's estimates, additional provisions for loan losses could be required that could adversely affect the ~~Bank’s~~Bank's earnings or financial position in future periods.

The allowance for loan losses was ~~$13.6~~$15.9 million, or ~~0.80%~~0.77% of non-acquired loans, at ~~September~~June 30, ~~2018,~~2019, compared to ~~$11.5~~$14.5 million, or ~~0.85%~~0.79% of total non-acquired loans, at December 31, ~~2017.~~2018. Loans acquired in business combinations were ~~$749.4~~$601.1 million and ~~$952.2~~$686.4 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, acquired non-credit impaired loans had a purchase discount remaining of ~~$12.1~~$9.1 million and ~~$17.7~~$10.9 million, respectively.

The table below shows a reconciliation of acquired and non-acquired loans and allowance for loan losses to non-acquired ~~loans:~~loans (dollars in thousands):

At the Month Ended
September 30, June 30, March 31, December 31, September 30,
2018 2018 2018 2017 2017
Acquired and non-acquired loans:
Acquired loans receivable $ 749,442 813,688 877,012 952,220 257,461
Non-acquired gross loans receivable 1,708,022 1,613,533 1,503,006 1,367,308 1,227,000
Total gross loans receivable $ 2,457,464 2,427,221 2,380,018 2,319,528 1,484,461
% Acquired 30.50 % 33.52 % 36.85 % 41.05 % 17.34 %

Non-acquired loans $ 1,708,022 1,613,533 1,503,006 1,367,308 1,227,000
Allowance for loan losses 13,615 12,987 12,708 11,478 10,662
Allowance for loan losses to non-acquired loans (Non-GAAP) 0.80 % 0.80 % 0.85 % 0.84 % 0.87 %

Total gross loans receivable $ 2,457,464 2,427,221 2,380,018 2,319,528 1,484,461
Allowance for loan losses 13,615 12,987 12,708 11,478 10,662
Allowance for loan losses to total gross loans receivable 0.55 % 0.54 % 0.53 % 0.49 % 0.72 %

	At the Month Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2019			2019			2018			2018			2018
Acquired and non-acquired loans:
Acquired loans receivable	$	601,193			644,461			686,401			749,442			813,688
Non-acquired gross loans receivable		2,050,043			1,946,149			1,837,935			1,708,022			1,613,533
Total gross loans receivable	$	2,651,236			2,590,610			2,524,336			2,457,464			2,427,221
% Acquired		22.68	%		24.88	%		27.19	%		30.50	%		33.52	%

Non-acquired loans	$	2,050,043			1,946,149			1,837,935			1,708,022			1,613,533
Allowance for loan losses		15,867			15,021			14,463			13,615			12,987
Allowance for loan losses to non-acquired loans (Non-GAAP)		0.77	%		0.77	%		0.79	%		0.80	%		0.80	%

Total gross loans receivable	$	2,651,236			2,590,610			2,524,336			2,457,464			2,427,221
Allowance for loan losses		15,867			15,021			14,463			13,615			12,987
Allowance for loan losses to total gross loans receivable		0.60	%		0.58	%		0.57	%		0.55	%		0.54	%

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~~The Company experienced net chargeoffs of $122,000 for the three months ended September 30, 2018 and net chargeoffs of $88,000 for the three months ended September 30, 2017.~~ The Company experienced net recoveries of ~~$828,000~~$166,000 and net charge-offs of $281,000 for three months ended June 30, 2019 and 2018. The Company experienced net recoveries of $24,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and net ~~chargeoffs~~recoveries of ~~$26,000~~$949,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. Asset quality has remained relatively consistent since December 31, ~~2017,~~2018, with nonperforming assets to total assets of ~~0.32%~~0.37% as of ~~September~~June 30, ~~2018 and 0.20%~~2019 as compared to 0.35% as of December 31, ~~2017.~~2018.

The following table summarizes the activity related to our allowance for loan losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2018 2017 2018 2017
(Dollars in thousands)
Balance, beginning of period $ 12,987 10,750 11,478 10,688
Provision for loan losses 750 — 1,309 —
Loan charge-offs:
Loans secured by real estate:
One-to-four family (79 ) (127 ) (226 ) (162 )
Home equity — — — —
Commercial real estate — — (86 ) —
Construction and development (23 ) — (24 ) —
Consumer loans (117 ) (5 ) (255 ) (16 )
Commercial business loans (20 ) — (136 ) —
Total loan charge-offs (239 ) (132 ) (727 ) (178 )
Loan recoveries:
Loans secured by real estate:
One-to-four family 3 2 15 3
Home equity 1 — 9 —
Commercial real estate 22 — 69 26
Construction and development — — 1,038 2
Consumer loans 12 16 70 28
Commercial business loans 79 26 354 93
Total loan recoveries 117 44 1,555 152
Net loan (charge-offs) recoveries (122 ) (88 ) 828 (26 )
Balance, end of period $ 13,615 10,662 13,615 10,662

Allowance for loan losses as a percentage of loans receivable (end of period) 0.55 % 0.72 % 0.55 % 0.72 %
Net charge-offs (recoveries) to average loans receivable (annualized) 0.02 % 0.02 % (0.05 )% (0.00 )%

2018.


	For the Three Months						For the Six Months
	Ended June 30						Ended June 30
	2019			2018			2019			2018
	(Dollars in thousands)
Balance, beginning of period	$	15,021			12,708			14,463			11,478
Provision for loan losses		680			559			1,380			559
Loan charge-offs:
Loans secured by real estate:
One-to-four family		(93	)		(147	)		(148	)		(147	)
Home equity		(7	)		—			(78	)		—
Commercial real estate		(32	)		(52	)		(32	)		(86	)
Construction and development		(7	)		—			(16	)		(1	)
Consumer loans		(36	)		(129	)		(100	)		(138	)
Commercial business loans		(44	)		(27	)		(62	)		(116	)
Total loan charge-offs		(219	)		(355	)		(436	)		(488	)
Loan recoveries:
Loans secured by real estate:
One-to-four family		133			7			138			12
Home equity		2			—			7			8
Commercial real estate		14			42			23			47
Construction and development		139			1			144			1,037
Consumer loans		75			18			96			58
Commercial business loans		22			6			52			275
Total loan recoveries		385			74			460			1,437
Net loan recoveries (charge-offs)		166			(281	)		24			949
Balance, end of period	$	15,867			12,987			15,867			12,987

Allowance for loan losses as a percentage of loans receivable (end of period)		0.60	%		0.54	%		0.60	%		0.54	%
Net (recoveries) charge-offs to average loans receivable (annualized)		(0.03	)%		0.05	%		—			(0.08	)%

Mortgage Operations

Mortgage Activities and Servicing

Our wholesale mortgage banking operations are conducted through our mortgage origination subsidiary, Crescent Mortgage Company. Mortgage activities involve the purchase of mortgage loans and table funded originations for the purpose of generating gains on sales of loans and fee income on the origination of loans and is included in mortgage banking income in the accompanying consolidated statements of operations. While the Company originates residential one-to-four family loans that are held in its loan portfolio, the majority of new loans are generally sold pursuant to secondary market guidelines through Crescent Mortgage Company. Generally, residential mortgage loans are sold and, depending on the pricing in the marketplace, servicing rights are either sold or retained. The level of loan sale activity and its contribution to the ~~Company’s~~Company's profitability depends on maintaining a sufficient volume of loan originations and margin. Changes in the level of interest rates and the local economy affect the volume of loans originated by the Company and the amount of loan sales and loan fees earned. Discussion related to the impact and changes within the mortgage operations is provided in “Results of Operations – Noninterest Income and Expense”. Additional segment information is provided in Note ~~10 “Supplemental~~11 - Supplemental Segment ~~Information”~~Information in the accompanying financial statements.

Loan Servicing

We retain the rights to service a portion of the loans we sell on the secondary market, as part of our mortgage banking activities, for which we receive service fee income. These rights are known as mortgage servicing rights, or MSRs, where the owner of the MSR acts on behalf of the mortgage loan owner and has the contractual right to receive a stream of cash flows in exchange for performing specified mortgage servicing functions. These duties typically include, but are not limited to, performing loan administration, collection, and default activities, including the collection and remittance of loan payments, responding to customer inquiries, accounting for principal and interest, holding custodial (impound) funds for the payment of property taxes and insurance premiums, counseling delinquent mortgagors, modifying loans and supervising foreclosures and property dispositions. We subservice the duties and responsibilities obligated to the owner of the MSR to a third party provider for which we pay a fee.

We recognize the rights to service mortgage loans for others as an asset. We initially record the MSR at fair value and subsequently account for the asset at lower of cost or market using the amortization method. Servicing assets are amortized in proportion to, and over the period of, the estimated net servicing income and are carried at amortized cost. A valuation is performed by an independent third party on a quarterly basis to assess the servicing assets for impairment based on the fair value at each reporting date. The fair value of servicing assets is determined by calculating the present value of the estimated net future cash flows consistent with contractually specified servicing fees. This valuation is performed on a disaggregated basis, based on loan type and year of production. Generally, loan servicing becomes more valuable when interest rates rise (as prepayments typically decrease) and less valuable when interest rates decline (as prepayments typically increase). As discussed in detail in notes to the consolidated financial statements, we use an appropriate weighted average constant prepayment rate, discount rate, and other defined assumptions to model the respective cash flows and determine the fair value of the servicing asset at each reporting date.

The Company was servicing ~~$4.0~~$3.8 billion loans for others at ~~September~~June 30, ~~2018~~2019 and ~~$2.9~~$4.0 billion at December 31, ~~2017.~~2018. Mortgage servicing rights asset had a balance of ~~$33.0~~$29.6 million and ~~$21.0~~$32.9 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The midpoint economic estimated fair value range of the mortgage servicing rights was ~~$45.1~~$34.2 million and ~~$26.3~~$40.9 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Amortization expense related to the mortgage servicing rights was ~~$1.1~~$1.3 million and ~~$0.7~~$0.9 million during the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Amortization expense related to the mortgage servicing rights was ~~$3.0~~$2.6 million and ~~$2.1~~$1.9 million during the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~ respectively.

Below is a roll-forward of activity in the balance of the servicing assets for the three and ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 along with the activity in the related valuation allowance.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2019			2018			2019			2018
	(In thousands)
MSR beginning balance	$	32,033			21,719			32,933			21,003
Amount capitalized		249			1,657			585			3,352
Purchased servicing		—			1,139			—			1,139
Amount amortized		(1,342	)		(889	)		(2,578	)		(1,868	)
MSR impairment		(1,300	)		—			(1,300	)		—
MSR ending balance	$	29,640			23,626			29,640			23,626

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2019			2018			2019			2018
	(In thousands)
MSR valuation allowance beginning balance	$	—			—			—			—
Increase (reduction)		1,300			—			1,300			—
MSR valuation allowance ending balance	$	1,300			—			1,300			—

The Company recorded a $1.3 million temporary impairment of mortgage servicing rights in the second quarter of 2019. The Company does not hedge the mortgage servicing rights positions and ~~2017.~~the impact of falling long-term interest rates increased prepayment speed assumptions reducing the value of the MSR asset.

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2018 2017 2018 2017
(In thousands)
MSR beginning balance $ 23,626 16,692 21,003 15,032
Amount capitalized 1,637 1,500 4,989 4,495
Purchased servicing 8,831 — 9,970 —
Amount amortized (1,099 ) (748 ) (2,967 ) (2,083 )
MSR ending balance $ 32,995 17,444 32,995 17,444

Reserve ~~For~~for Mortgage Repurchase Losses

Loans held for sale have primarily been fixed-rate single-family residential mortgage loans under contracts to be sold in the secondary market. In most cases, loans in this category are sold within 30 days of closing. Buyers generally have recourse to return a purchased loan to the Company under limited circumstances. An estimation of mortgage repurchase losses is reviewed on a quarterly basis. The representations and warranties in our loan sale agreements provide that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. Some of these conditions include underwriting errors or omissions, fraud or material misstatements by the borrower in the loan application or invalid market value on the collateral property due to deficiencies in the appraisal. In addition to these representations and warranties, our loan sale contracts define a condition in which the borrower defaults during a short period of time, typically 120 days to one year, as an early payment default, or EPD. In the event of an EPD, we are required to return the premium paid by the investor for the loan as well as certain administrative fees, and in some cases repurchase the loan or indemnify the investor. Because the level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.

The following table ~~demonstrates~~summarizes the activity for the reserve for mortgage repurchase losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

	For the Three Months						For the Nine Months						For the Three Months						For the Six Months
	Ended September 30,						Ended September 30,						Ended June 30,						Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(In thousands)															(In thousands)
Beginning Balance	$	1,592			2,354			1,892			2,880		$	1,192			1,742			1,292			1,892
Losses paid		—			—			—			(76	)
Provision for mortgage repurchase losses		(150	)		(225	)		(450	)		(675	)
Recovery of mortgage loan repurchase losses														(100	)		(150	)		(200	)		(300	)
Ending balance	$	1,442			2,129			1,442			2,129		$	1,092			1,592			1,092			1,592

For the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, the Company recorded a recovery of mortgage repurchase losses of ~~$150,000~~$100,000 and ~~$225,000,~~$150,000, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, the Company recorded a recovery of mortgage repurchase losses of ~~$450,000~~$200,000 and ~~$675,000,~~$300,000, respectively. The ~~recovery of~~reduction in the reserve for mortgage loan repurchase losses is related to several factors. The Company sells mortgage loans to various third parties, including government-sponsored entities (“GSEs”), under contractual provisions that include various representations and warranties as previously stated. The Company establishes the reserve for mortgage loan repurchase losses based on a combination of factors, including estimated levels of defects on internal quality assurance, default expectations, historical investor repurchase demand and appeals success rates, reimbursement by correspondent and other third party originators, and projected loss severity. As a result of the ~~Company’s~~Company's analysis of its reserve for mortgage loan repurchase losses, the reserve was reduced accordingly.

~~Deposits~~

Deposits

We provide a range of deposit services, including noninterest-bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and ~~management’s~~management's desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source. At ~~September~~June 30, ~~2018,~~2019, deposits totaled $2.8 billion, an increase of $87.9 million from deposits of ~~$2.6~~$2.7 billion at December 31, ~~2017.~~2018. The increase in deposits since December 31, ~~2017~~2018 relates to continued efforts to increase our core deposits through business ~~development and seasonal increases in markets affected by tourism.~~development.

7073

The following table ~~shows~~summarizes the average balance amounts and the average rates paid on deposits held by us.

For the Nine Months
Ended September 30,
2018 2017
Average Average Average Average
Balance Rate Balance Rate
(Dollars in thousands)

Interest-bearing demand accounts $ 555,802 0.35 % 253,735 0.28 %
Money market accounts 462,250 0.65 % 355,049 0.45 %
Savings accounts 203,815 0.30 % 63,678 0.19 %
Certificates of deposit less than $100,000 439,849 1.20 % 291,856 0.94 %
Certificates of deposit of $100,000 or more 456,720 1.38 % 271,832 1.14 %
Total interest-bearing average deposits 2,118,436 1,236,150

Noninterest-bearing deposits 558,453 321,894
Total average deposits $ 2,676,889 1,558,044

	For the Six Months
	Ended June 30,
	2019					2018
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(Dollars in thousands)
Interest-bearing demand accounts	$	563,304		0.43	%		546,616		0.31	%
Money market accounts		443,209		1.10	%		463,831		0.60	%
Savings accounts		187,164		0.59	%		209,306		0.25	%
Certificates of deposit less than $100,000		516,247		1.80	%		428,812		1.16	%
Certificates of deposit of $100,000 or more		474,368		1.83	%		452,088		1.31	%
Total interest-bearing average deposits		2,184,292					2,100,653

Noninterest-bearing deposits		582,842					546,523
Total average deposits	$	2,767,134					2,647,176

The maturity distribution of our time deposits of $100,000 or more is as follows:

At September 30,
2018
(In thousands)

Three months or less $ 67,578
Over three through nine months 124,460
Over six through twelve months 113,632
Over twelve months 165,012
Total certificates of deposits $ 470,682

~~Borrowings~~

	At June 30, 2019
	(In thousands)
Three months or less	$	89,377
Over three through six months		118,750
Over six through twelve months		90,190
Over twelve months		182,735
Total certificates of deposits	$	481,052

Borrowings

The followings table outlines our various sources of short-term borrowed funds during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 and the amounts outstanding at the end of each period, the maximum amount for each component during the periods, the average amounts for each period, and the average interest rate that we paid for each borrowings source. The maximum month-end balance represents the high indebtedness for each component of borrowed funds at any time during each of the periods shown. Stated period end rates are contractual rates. The average for the period rates reflect the impact of purchase accounting.

7174

Maximum Average for the
Contractual Month Period including
Ending Period End End Fair Value Amortization
Balance Rate Balance Balance Rate
At or for the three months ended September 30, 2018 (Dollars in thousands)
Short-term borrowed funds
Short-term FHLB advances $ 320,500 1.05%-2.32 % 408,500 292,217 2.02 %

Long-term borrowed funds
Long-term FHLB advances, due 2019 through 2021 12,000 1.72%-2.35 % 35,000 13,891 1.79 %
Subordinated debentures, due 2032 through 2037 32,391 4.07%-5.50 % 32,391 32,370 6.37 %

Maximum Average for the
Contractual Month Period including
Ending Period End End Fair Value Amortization
Balance Rate Balance Balance Rate
At or for the three months ended September 30, 2017 (Dollars in thousands)
Short-term borrowed funds
Short-term FHLB advances $ 180,000 0.83% - 2.70 % 180,000 146,670 1.19 %

Long-term borrowed funds
Long-term FHLB advances, due 2017 through 2021 31,000 1.20% - 1.22 % 52,000 41,516 2.14 %
Subordinated debentures, due 2032 through 2034 23,351 3.04% - 4.75 % 23,355 23,339 4.98 %

						Maximum		Average for the									Maximum		Average for the
			Contractual			Month		Period including							Contractual		Month		Period including
	Ending		Period End			End		Fair Value Amortization					Ending		Period End		End		Fair Value Amortization
	Balance		Rate			Balance		Balance		Rate			Balance		Rate		Balance		Balance		Rate
At or for the nine months ended September 30, 2018	(Dollars in thousands)
At or for the three months ended June 30, 2019													(Dollars in thousands)
Short-term borrowed funds
Short-term FHLB advances													$	370,500		1.62% - 2.53%		430,500		392,064		2.48	%

Long-term borrowed funds
Long-term FHLB advances, due 2020														14,000		1.76% - 2.56%		27,000		18,011		1.71	%
Subordinated debentures, due 2032 through 2037														32,525		4.48% - 6.00%		32,525		32,503		6.79	%

																	Maximum		Average for the
															Contractual		Month		Period including
													Ending		Period End		End		Fair Value Amortization
													Balance		Rate		Balance		Balance		Rate
At or for the three months ended June 30, 2018													(Dollars in thousands)
Short-term borrowed funds
Short-term FHLB advances													$	354,500		1.04% - 2.71%		408,500		362,874		1.88	%

Long-term borrowed funds
Long-term FHLB advances, due 2019 through 2020														14,000		1.62% - 2.09%		35,000		34,539		1.30	%
Subordinated debentures, due 2032 through 2037														32,347		4.09% - 5.26%		32,347		32,324		6.29	%

																	Maximum		Average for the
															Contractual		Month		Period including
													Ending		Period End		End		Fair Value Amortization
													Balance		Rate		Balance		Balance		Rate
At or for the six months ended June 30, 2019													(Dollars in thousands)

Short-term borrowed funds
Short-term FHLB advances	$	320,500		1.04%-2.71	%		408,500		328,388		1.81	%	$	370,500		1.05% - 2.68%		430,500		386,097		2.48	%

Long-term borrowed funds
Long-term FHLB advances, due 2019 through 2021		12,000		1.72%-2.35	%		42,500		29,244		1.64	%
Long-term FHLB advances, due 2020														14,000		1.72% - 2.70%		27,000		22,481		1.90	%
Subordinated debentures, due 2032 through 2037		32,391		4.07%-5.50	%		32,391		32,325		6.15	%		32,525		4.48% - 6.00%		32,525		32,481		6.87	%

7275

						Maximum		Average for the									Maximum		Average for the
			Contractual			Month		Period including							Contractual		Month		Period including
	Ending		Period End			End		Fair Value Amortization					Ending		Period End		End		Fair Value Amortization
	Balance		Rate			Balance		Balance		Rate			Balance		Rate		Balance		Balance		Rate
At or for the nine months ended September 30, 2017	(Dollars in thousands)
At or for the six months ended June 30, 2018													(Dollars in thousands)

Short-term borrowed funds
Short-term FHLB advances	$	180,000		0.83% - 2.70	%		214,500		165,610		0.99	%	$	354,500		1.04% - 2.71%		408,500		346,773		1.72	%

Long-term borrowed funds
Long-term FHLB advances, due 2017 through 2021		31,000		1.20% - 1.22	%		52,000		31,008		2.64	%
Subordinated debentures, due 2032 through 2034		23,351		3.04% - 4.75	%		23,355		21,100		4.74	%
Long-term FHLB advances, due 2019 through 2020														14,000		1.62% - 2.09%		42,500		37,047		1.64	%
Subordinated debentures, due 2032 through 2037														32,347		4.09% - 5.26%		32,347		32,303		6.04	%

Liquidity

~~Liquidity~~

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

The Company utilizes borrowing facilities in order to maintain adequate liquidity including: the FHLB of Atlanta, the Federal Reserve Bank (“FRB”), and federal funds purchased. The Company also uses wholesale deposit products, including brokered deposits as well as national certificate of deposit services. Additionally, the Company ~~holds~~has certain investment securities classified as available-for-sale that are carried at market value with changes in market value, net of tax, recorded through ~~stockholders’~~stockholders' equity.

Lines of credit with the FHLB of Atlanta are based upon FHLB-approved percentages of Bank assets, but must be supported by appropriate collateral to be available. The Company has pledged first lien residential mortgage, second lien residential mortgage, residential home equity line of credit, commercial mortgage and multifamily mortgage portfolios under blanket lien agreements. At ~~September~~June 30, ~~2018,~~2019, the Company had FHLB advances of ~~$332.5~~$384.5 million outstanding with excess collateral pledged to the FHLB during those periods that would support additional borrowings of approximately ~~$479.5~~$404.2 million.

Lines of credit with the FRB are based on collateral pledged. At ~~September~~June 30, ~~2018~~2019, the Company had lines available with the FRB for ~~$186.9~~$127.7 million. At ~~September~~June 30, ~~2018~~2019, the Company had no FRB advances outstanding.

Capital Resources

The Company and the Bank are subject to various federal and state regulatory requirements, including regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions that if undertaken could have a direct material effect on the ~~Company’s~~Company's and the ~~Bank’s~~Bank's financial statements.

Effective January 2, 2015, the Company and Bank became subject to the regulatory risk-based capital rules adopted by the federal banking agencies implementing Basel III. Under the new capital guidelines, applicable regulatory capital components consist of (1) common equity Tier 1 capital (common stock, including related surplus, and retained earnings, plus limited amounts of minority interest in the form of common stock, net of goodwill and other intangibles (other than mortgage servicing assets), deferred tax assets arising from net operating loss and tax credit carry forwards above certain levels, mortgage servicing rights above certain levels, gain on sale of securitization exposures and certain investments in the capital of unconsolidated financial institutions, and adjusted by unrealized gains or losses on cash flow hedges and accumulated other comprehensive income items (subject to the ability of a non-advanced approaches institution to make a one-time irrevocable election to exclude from regulatory capital most components of AOCI), (2) additional Tier 1 capital (qualifying non-cumulative perpetual preferred stock, including related surplus, plus qualifying Tier 1 minority interest and, in the case of holding companies with less than $15 billion in consolidated assets at December 31, 2009, certain grandfathered trust preferred securities and cumulative perpetual preferred stock in limited amounts, net of mortgage servicing rights, deferred tax assets related to temporary timing differences, and certain investments in financial institutions) and (3) Tier 2 capital (the allowance for loan and lease losses in an amount not exceeding 1.25% of standardized risk-weighted assets, plus qualifying preferred stock, qualifying subordinated debt and qualifying total capital minority interest, net of Tier 2 investments in financial institutions). Total Tier 1 capital, plus Tier 2 capital, constitutes total risk-based capital.

The required minimum ratios are as follows:

Common equity Tier 1 capital ratio (common equity Tier 1 capital to total risk-weighted assets) of 4.5%;

Tier 1 Capital Ratio (Tier 1 capital to total risk-weighted assets) of 6%;

Total capital ratio (total capital to total risk-weighted assets) of 8%; and

Leverage ratio (Tier 1 capital to average total consolidated assets) of 4%.

The new capital guidelines also provide that all covered banking organizations must maintain a new capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The phase-in of the capital conservation buffer requirement began on January 1, ~~2016.~~2016 and became fully phased in as of January 1, 2019.

The final regulatory capital rules also incorporate these changes in regulatory capital into the prompt corrective action framework, under which the thresholds for “adequately capitalized” banking organizations are equal to the new minimum capital requirements. Under this framework, in order to be considered “well capitalized”, insured depository institutions are required to maintain a Tier 1 leverage ratio of 5%, a common equity Tier 1 risk-based capital measure of 6.5%, a Tier 1 risked-based capital ratio of 8% and a total risk-based capital ratio of 10%.

On June 11, 2018, the Company completed the sale of 1.5 million shares of its common stock. The net proceeds of the offering to the Company, after estimated expenses, were approximately $63.1 million.

On December 3, 2018, the Company announced that the Board of Directors had approved a plan to repurchase up to $25,000,000 in shares of the Company's common stock through open market and privately negotiated transactions over the next three years. The Company began stock repurchases on December 4, 2018. During the second quarter, the Company repurchased 29,905 shares at an average price of $34.33. Cumulatively since December 4, 2018 through June 30, 2019, the Company repurchased 334,136 shares at an average price of $31.62.

The actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the Company and the Bank at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are as follows:

																To Be Well
						Minimum Capital					Minimum Capital					Capitalized Under																				To Be Well
						Required - Basel III					Required - Basel III					Prompt Corrective										Minimum Capital					Minimum Capital					Capitalized Under
	Actual					Phase-In Schedule					Fully Phased-In					Action Regulations										Required - Basel III					Required - Basel III					Prompt Corrective
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Actual					Phase-In Schedule					Fully Phased-In					Action Regulations
	(Dollars in thousands)																				Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
																					(Dollars in thousands)
September 30, 2018

June 30, 2019
Carolina Financial Corporation
CET1 capital (to risk weighted assets)	$	421,770		15.19	%		176,989		6.375	%		194,341		7.000	%		N/A		N/A		$	455,140		15.22	%		209,374		7.000	%		209,374		7.000	%		N/A		N/A
Tier 1 capital (to risk weighted assets)		453,045		16.32	%		218,634		7.875	%		235,986		8.500	%		N/A		N/A			486,549		16.27	%		254,239		8.500	%		254,239		8.500	%		N/A		N/A
Total capital (to risk weighted assets)		466,660		16.81	%		274,160		9.875	%		291,512		10.500	%		N/A		N/A			502,415		16.80	%		314,060		10.500	%		314,060		10.500	%		N/A		N/A
Tier 1 capital (to total average assets)		453,045		12.87	%		140,764		4.000	%		141,248		4.000	%		N/A		N/A			486,549		13.04	%		149,220		4.000	%		149,220		4.000	%		N/A		N/A

CresCom Bank
CET1 capital (to risk weighted assets)		447,378		16.13	%		176,841		6.375	%		194,179		7.000	%		180,309		6.50	%		481,576		16.11	%		209,292		7.000	%		209,292		7.000	%		194,343		6.50	%
Tier 1 capital (to risk weighted assets)		447,378		16.13	%		218,451		7.875	%		235,788		8.500	%		221,918		8.00	%		481,576		16.11	%		254,140		8.500	%		254,140		8.500	%		239,191		8.00	%
Total capital (to risk weighted assets)		460,993		16.62	%		273,931		9.875	%		291,268		10.500	%		277,398		10.00	%		497,442		16.64	%		313,938		10.500	%		313,938		10.500	%		298,989		10.00	%
Tier 1 capital (to total average assets)		447,378		12.71	%		140,771		4.000	%		140,771		4.000	%		175,963		5.00	%		481,576		12.91	%		149,166		4.000	%		149,166		4.000	%		186,457		5.00	%

December 31, 2017
December 31, 2018
Carolina Financial Corporation
CET1 capital (to risk weighted assets)	$	328,511		12.42	%		152,145		5.750	%		185,220		7.000	%		N/A		N/A		$	431,568		15.19	%		181,094		6.375	%		198,848		7.000	%		N/A		N/A
Tier 1 capital (to risk weighted assets)		359,654		13.59	%		191,835		7.250	%		224,910		8.500	%		N/A		N/A			462,888		16.29	%		223,704		7.875	%		241,459		8.500	%		N/A		N/A
Total capital (to risk weighted assets)		371,133		14.03	%		244,755		9.250	%		277,830		10.500	%		N/A		N/A			477,351		16.80	%		280,518		9.875	%		298,273		10.500	%		N/A		N/A
Tier 1 capital (to total average assets)		359,654		12.38	%		116,198		4.000	%		116,198		4.000	%		N/A		N/A			462,888		13.01	%		142,270		4.000	%		142,270		4.000	%		N/A		N/A

CresCom Bank
CET1 capital (to risk weighted assets)		355,024		13.43	%		152,035		5.750	%		185,086		7.000	%		171,865		6.50	%		454,181		16.00	%		180,948		6.375	%		198,688		7.000	%		184,496		6.50	%
Tier 1 capital (to risk weighted assets)		355,024		13.43	%		191,696		7.250	%		224,747		8.500	%		211,527		8.00	%		454,181		16.00	%		223,524		7.875	%		241,264		8.500	%		227,072		8.00	%
Total capital (to risk weighted assets)		366,503		13.86	%		244,578		9.250	%		277,629		10.500	%		264,408		10.00	%		468,644		16.51	%		280,292		9.875	%		298,032		10.500	%		283,840		10.00	%
Tier 1 capital (to total average assets)		355,024		12.21	%		116,312		4.000	%		116,312		4.000	%		145,390		5.00	%		454,181		12.76	%		142,392		4.000	%		142,392		4.000	%		177,990		5.00	%

7578

The following table provides the amount of dividends and dividend payout ratios (dividends declared divided by net income) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2018 2017 2018 2017
(In thousands)

Dividends declared $ 1,580 $ 646 3,987 1,869
Dividend payout ratios 10.39 % 8.08 % 11.65 % 8.41 %

2018.


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands)

Dividends declared	$	2,007			1,355			3,792			2,407
Dividend payout ratios		13.31	%		9.05	%		12.80	%		12.65	%

Off Balance Sheet Arrangements

Through the operations of ~~the~~our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified ~~period of time.~~period. We evaluate each ~~customer’s~~customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

At ~~September~~June 30, ~~2018,~~2019, we had issued commitments to extend credit ~~and standby letters of credit~~ of approximately ~~$396.4~~$461.2 million through various types of lending arrangements. There were 6960 standby letters of credit included in the commitments for ~~$13.9~~$22.1 million. Total variable rate commitments were $347.2 million and fixed rate commitments were ~~$94.7 million and variable rate commitments were $301.7~~$113.9 million.

Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. A significant portion of the unfunded commitments relate to consumer equity lines of credit and commercial lines of credit. Based on historical experience, we anticipate that a portion of these lines of credit will not be funded.

Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Market Risk Management and Interest Rate Risk

The effective management of market risk is essential to achieving the ~~Company’s~~Company's objectives. As a financial institution, the ~~Company’s~~Company's most significant market risk exposure is interest rate risk. The primary objective of managing interest rate risk is to minimize the effect that changes in interest rates have on net income. This is accomplished through active asset and liability management, which requires the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The expected result of these strategies is the development of appropriate maturity and re-pricing opportunities in those accounts to produce consistent net income during periods of changing interest rates. The ~~Bank’s~~Bank's asset/liability management committee, or ALCO, monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios. The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or re-pricing opportunities of interest-earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of interest-earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The ALCO meets regularly to review the ~~Company’s~~Company's interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards. The Board of Directors also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity.

7679

The Company uses interest rate sensitivity analysis to measure the sensitivity of projected net interest income to changes in interest rates. Management monitors the ~~Company’s~~Company's interest sensitivity by means of a computer model that incorporates current volumes, average rates earned and paid, and scheduled maturities, payments of asset and liability portfolios, together with multiple scenarios of prepayments, repricing opportunities and anticipated volume growth. Interest rate sensitivity analysis shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next 12 months under the current interest rate environment. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates.

As of ~~September~~June 30, ~~2018,~~2019, the following table summarizes the forecasted impact on net interest income using a base case scenario given downward movements in interest rates of 100 and 200 basis points and upward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the consolidated financial statements. Therefore, ~~management’s~~management's assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market condition.

Annualized Hypothetical
Interest Rate Scenario Percentage Change in
Change Prime Rate Net Interest Income

(1.00)% 4.25% (2.20)%
0.00% 5.25% 0.00%
1.00% 6.25% 0.80%
2.00% 7.25% 1.80%
3.00% 8.25% 2.10%

		Annualized Hypothetical
Interest Rate Scenario		Percentage Change in
Change	Prime Rate	Net Interest Income

(2.00)%	3.50%	(7.70)%
(1.00)%	4.50%	(3.30)%
0.00%	5.50%	0.00%
1.00%	6.50%	1.60%
2.00%	7.50%	2.90%
3.00%	8.50%	4.10%

The primary uses of derivative instruments are related to the mortgage banking activities of the Company. As such, the Company holds derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate mortgage loans to customers (interest rate lock commitments) and forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans. The ~~Company’s~~Company's objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives related to these commitments are recorded as either a derivative asset or a derivative liability in the balance sheet and are measured at fair value. Both the interest rate lock commitments and the forward commitments are reported at fair value, with adjustments recorded in current period earnings within the noninterest income of the consolidated statements of operations.

Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements that do not satisfy the hedge accounting requirements, are recorded at fair value and are classified with resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations.

7780

Accounting, Reporting, and Regulatory Matters

Information regarding recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of the financial information by the Company are included in Note 1 ~~“Summary~~- Summary of Significant Accounting ~~Polices”~~Polices in the accompanying financial statements.

Effect of Inflation and Changing Prices

The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with GAAP.

Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

See Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations – Market Risk Management and Interest Rate Risk, and Liquidity.

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the ~~Company’s~~Company's internal control over financial reporting during the three months ended ~~September~~June 30, ~~2018,~~2019, that has materially affected, or is reasonably likely to materially affect, the ~~Company’s~~Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

We are a party to claims and lawsuits arising in the ordinary course of business. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse impact on the ~~Company’s~~Company's financial position, results of operations or cash flows.

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 fiscal ~~years~~year ended December 31, ~~2017,~~2018, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Cautionary Note Regarding Any Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q and in our other filings with the SEC.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

(a) Not applicable

(b) Not applicable

The following table reflects share repurchase activity during the three months ended June 30, 2019:

					(c) Total Number of Shares		(d) Maximum Number (or
					Purchased as Part of		Approximate Dollar Value) of
	(a) Total Number of		(b) Average Price		Publicly Announced Plans		Shares that may yet be Purchased
Period	Shares Purchased		Paid per Share		or Programs		Under the Plans or Programs
April 1 - April 30		3,810		34.99		3,810		15,327,759
May 1 - May 31		7,575		34.58		7,575		15,065,816
June 1 - June 30		18,520		34.10		18,520		14,434,284
		29,905				29,905

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable

Item 4. MINE SAFETY DISCLOSURES.

Not applicable

Item 5. OTHER INFORMATION.

Not applicable

Item 6. EXHIBITS.

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are incorporated herein by reference.

7983

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.


		CAROLINA FINANCIAL CORPORATION
		Registrant

Date: ~~November 8, 2018~~August 9, 2019		/s/ Jerold L. Rexroad
		Jerold L. Rexroad
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November 8, 2018~~August 9, 2019		/s/ William A. Gehman III
		William A. Gehman III
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

8084

INDEX TO EXHIBITS

~~INDEX TO EXHIBITS~~Exhibit
Number		Description
~~Exhibit~~ ~~Number~~		~~Description~~
2.1
~~2.1~~		Agreement and Plan of Merger by and ~~between Carolina Financial Corporation, CBAC, Inc., and Congaree Bancshares, Inc. dated January 5, 2016.~~⁽¹⁾

~~2.2~~		~~Agreement and Plan of Merger~~Reorganization by and between Carolina Financial Corporation and ~~Greer Bancshares Incorporated,~~Carolina Trust BancShares, Inc. dated ~~November 7, 2016.~~July 15, 2019.⁽²⁾⁽¹⁾

~~2.3~~2.2		Agreement and Plan of Merger and Reorganization by and between Carolina Financial Corporation and First South Bancorp, Inc. dated June 9, 2017.⁽³⁾⁽²⁾

4.1		Restated Certificate of Incorporation.⁽⁴⁾⁽³⁾

4.2		Amendment to the Restated Certificate of ~~Incorporation.~~⁽⁵⁾Incorporation (incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A filed on June 30, 2016).

4.3		Amendment to Restated ~~Certificate~~certificate of ~~Incorporation.~~⁽⁶⁾Incorporation (incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A filed on March 29, 2018).

4.4		Amended and Restated Bylaws.⁽⁷⁾⁽⁴⁾

4.5		Specimen Common Stock Certificate.⁽⁸⁾⁽⁵⁾

4.6		See Exhibits 4.1, 4.2, ~~4.3,~~ and ~~4.4~~4.3 for provisions of the Restated Certificate of Incorporation and Amended and Restated Bylaws which define the rights of the stockholders.

31.1		Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2		Rule 13a-14(a) Certification of the Principal Financial Officer.

32		Section 1350 Certifications.

101		The following materials from the Quarterly Report on Form 10-Q of Carolina Financial Corporation as of and for the quarter ended ~~September~~June 30, ~~2018,~~2019, formatted in eXtensible Business Reporting ~~Language(XBRL)~~Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in ~~Stockholders’~~Stockholders' Equity, (v) Consolidated Statement of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.

⁽¹⁾		Incorporated by reference to Exhibit 2.1 of the ~~Company’s~~Company's Current Report on Form 8-K filed on ~~January 11, 2016.~~July 18, 2019.

⁽²⁾		~~Incorporated by reference to Exhibit 2.2 of the Company’s Registration Statement on Form S-3 filed on December 23, 2016.~~

⁽³⁾		Incorporated by reference to Exhibit 2.1 of the ~~Company’s~~Company's Current Report on Form 8-K filed on June 15, 2017.

⁽⁴⁾⁽³⁾		Incorporated by reference to Exhibit 3.1 of the ~~Company’s~~Company's Registration Statement on Form S-3 filed on August 31, 2015.

⁽⁵⁾⁽⁴⁾		~~Incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement on Schedule 14A filed on March 31, 2016.~~

⁽⁶⁾		~~Incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement on Schedule 14A filed on March 29, 2018.~~

⁽⁷⁾		Incorporated by reference to Exhibit 3.1 of the ~~Company’s~~Company's Current Report on Form 8-K filed on May 5, 2016.

⁽⁸⁾⁽⁵⁾		Incorporated by reference to Exhibit 4.2 of the ~~Company’s~~Company's Registration Statement on Form 10 filed on February 26, 2014.

8185

		Page
PART 1 –	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

Item 2.	~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations	49

Item 3.	Quantitative and Qualitative ~~Disclosure~~Disclosures about Market Risk	7882

Item 4.	Controls and Procedures	7882

PART II –	OTHER INFORMATION	7882

Item 1.	Legal Proceedings	7882

Item 1A.	Risk Factors	7982

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7983

Item 3.	Defaults Upon Senior Securities	7983

Item 4.	Mine Safety Disclosures	7983

Item 5.	Other Information	7983

Item 6.	Exhibits	7983

Common stock issued (4,822,540 shares at $36.85 per share)	$	177,711
Cash in lieu of fractional shares and fair value of stock options		983
Total consideration paid	$	178,694

	As Reported by			Fair Value			As Recorded by
November 1, 2017	First South			Adjustments			the Company
Assets	(In thousands)
Cash and cash equivalents	$	66,109			—			66,109
Securities available-for-sale		186,038			—			186,038
Federal Home Loan Bank stock		1,593			—			1,593
Loans held for sale		1,282			—			1,282
Loans receivable		783,779			(24,620	)(a)		759,159
Allowance for loan losses		(9,495	)		9,495	(b)		—
Premises and equipment		10,761			1,500	(c)		12,261
Foreclosed assets		1,922			(556	)(d)		1,366
Core deposit intangible		1,410			11,090	(e)		12,500
Deferred tax asset, net		3,961			238	(f)		4,199
Other assets		33,552			(3,417	)(g)		30,135
Total assets acquired	$	1,080,912			(6,270	)		1,074,642

Liabilities
Deposits	$	952,573			78	(h)		952,651
Borrowings		26,810			(1,439	)(i)		25,371
Other liabilities		8,515			(284	)(j)		8,231
Total liabilities assumed	$	987,898			(1,645	)		986,253
Net identifiable assets acquired over liabilities assumed								88,389
Total consideration paid								178,694
Goodwill							$	90,305

Common stock issued (1,789,523 shares at $30.30 per share)	$	54,223
Cash payments to common stockholders		4,422
Total consideration paid	$	58,645

	As Reported			Fair Value			As Recorded by
March 18, 2017	by Greer			Adjustments			the Company
Assets	(In thousands)
Cash and cash equivalents	$	42,187			—			42,187
Securities available for sale		121,374			—			121,374
Loans held for sale		105			—			105
Loans receivable		205,209			(10,559	)(a)		194,650
Allowance for loan losses		(3,198	)		3,198	(b)		—
Premises and equipment		3,928			4,202	(c)		8,130
Foreclosed assets		42			—			42
Core deposit intangible		—			4,480	(d)		4,480
Deferred tax asset, net		3,831			(1,434	)(e)		2,397
Other assets		11,367			(241	)(f)		11,126
Total assets acquired	$	384,845			(354	)		384,491

Liabilities
Deposits	$	310,866			200	(g)		311,066
Borrowings		43,712			(3,510	)(h)		40,202
Other liabilities		7,086			512	(i)		7,598
Total liabilities assumed	$	361,664			(2,798	)		358,866
Net identifiable assets acquired over liabilities assumed								25,625
Total consideration paid								58,645
Goodwill							$	33,020

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
	(In thousands)

Balance at beginning of period	$	64,518			23,993			78,415			—
Fair value of acquired loans		—			—			—			25,439
Net reductions for payments, foreclosures, and accretion		(6,785	)		(3,406	)		(20,682	)		(4,852	)
Balance at end of period	$	57,733			20,587			57,733			20,587

	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2018				2017					2018					2017
	Average		Interest		Average		Interest			Average		Interest			Average		Interest
	Recorded		Income		Recorded		Income			Recorded		Income			Recorded		Income
	Investment		Recognized		Investment		Recognized			Investment		Recognized			Investment		Recognized
	(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family	$	2,115		25		2,686		13			2,220		27			2,757		34
Home equity		17		3		347		6			55		4			290		18
Commercial real estate		3,108		37		3,552		(13	)		3,087		86			3,543		85
Construction and development		267		4		158		6			267		13			182		14
Consumer loans		20		1		19		—			21		1			19		—
Commercial business loans		155		104		32		—			426		118			32		1
		5,682		174		6,794		12			6,076		249			6,823		152

With an allowance recorded:
Loans secured by real estate:
One-to-four family		1,293		7		775		6			1,278		23			748		14
Home equity		—		—		274		—			—		—			246		(1	)
Commercial real estate		1,702		16		1,472		62			1,679		55			1,472		62
Construction and development		1,447		—		—		—			1,137		(4	)		—		—
Consumer loans		—		—		—		—			—		—			—		—
Commercial business loans		160		2		193		2			160		7			192		8
		4,602		25		2,714		70			4,254		81			2,658		83

Total:
Loans secured by real estate:
One-to-four family		3,408		32		3,461		19			3,498		50			3,505		48
Home equity		17		3		621		6			55		4			536		17
Commercial real estate		4,810		53		5,024		49			4,766		141			5,015		147
Construction and development		1,714		4		158		6			1,404		9			182		14
Consumer loans		20		1		19		—			21		1			19		—
Commercial business loans		315		106		225		2			586		125			224		9
	$	10,284		199		9,508		82			10,330		330			9,481		235


	At or for the Three						At or for the Nine
	Months Ended						Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017

Performance Ratios (annualized):
Return on average equity		10.87	%		11.16	%		8.91	%		11.49	%
Return on average assets		1.66	%		1.43	%		1.27	%		1.44	%
Return on average tangible equity (Non-GAAP)		14.68	%		13.24	%		12.46	%		13.25	%
Average earning assets to average total assets		89.59	%		91.09	%		89.57	%		91.18	%
Average loans receivable to average deposits		87.82	%		85.59	%		88.74	%		87.53	%
Average stockholders’ equity to average assets		15.27	%		12.85	%		14.21	%		12.56	%
Net interest margin-tax equivalent (1)		4.15	%		3.94	%		4.15	%		3.97	%
Net charge-offs (recoveries) to average loans receivable		0.02	%		0.02	%		(0.05	)%		0.00	%
Nonperforming assets to period end loans receivable		0.49	%		0.44	%		0.49	%		0.44	%
Nonperforming assets to total assets		0.32	%		0.29	%		0.32	%		0.29	%
Nonperforming loans to total loans		0.43	%		0.33	%		0.43	%		0.33	%
Allowance for loan losses as a percentage of loans receivable (end of period)		0.55	%		0.72	%		0.55	%		0.72	%
Allowance for loan losses as a percentage of non-acquired loans receivable (Non-GAAP)		0.80	%		0.87	%		0.80	%		0.87	%
Allowance for loan losses as a percentage of nonperforming loans		129.26	%		216.53	%		129.26	%		216.53	%


	At September 30, 2018
	(In thousands)

Three months or less	$	67,578
Over three through nine months		124,460
Over six through twelve months		113,632
Over twelve months		165,012
Total certificates of deposits	$	470,682