FIRST BANCORP /NC/ - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

Commission File Number 0-15572

FIRST BANCORP

(Exact Name of Registrant as Specified in its Charter)



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

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

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

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



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

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

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

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



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

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

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

The number of shares of the registrant's Common Stock outstanding on October 31, 2019 was 29,604,830.

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FIRST BANCORP AND SUBSIDIARIES



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Part I. Financial Information

Item 1 - Financial Statements
Consolidated Balance Sheets - September 30, 2019 and December 31, 2018	4
Consolidated Statements of Income - For the Three and Nine Months Ended September 30, 2019 and 2018	5
Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2019 and 2018	6
Consolidated Statements of Shareholders’ Equity - For the Three and Nine Months Ended September 30, 2019 and 2018	7
Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2019 and 2018	9
Notes to Consolidated Financial Statements	10
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition	39
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	56
Item 4 – Controls and Procedures	58

Part II. Other Information

Item 1 – Legal Proceedings	58
Item 1A – Risk Factors	58
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 6 – Exhibits	60
Signatures	61

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FORWARD-LOOKING STATEMENTS

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

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Part I. Financial Information

Item 1 - Financial Statements

First Bancorp and Subsidiaries

Consolidated Balance Sheets



($ in thousands)	September 30, 2019 (unaudited)			December 31, 2018
ASSETS
Cash and due from banks, noninterest-bearing	$	52,621		56,050
Due from banks, interest-bearing	264,840			406,848
Total cash and cash equivalents	317,461			462,898

Securities available for sale	705,224			501,351
Securities held to maturity (fair values of $74,465 and $99,906)	74,265			101,237

Presold mortgages in process of settlement	16,269			4,279

Loans	4,396,544			4,249,064
Allowance for loan losses	(19,260		)	(21,039	)
Net loans	4,377,284			4,228,025

Premises and equipment	136,668			119,000
Accrued interest receivable	16,297			16,004
Goodwill	234,368			234,368
Other intangible assets	18,456			21,112
Foreclosed properties	4,589			7,440
Bank-owned life insurance	103,806			101,878
Other assets	64,224			66,524
Total assets	$	6,068,911		5,864,116

LIABILITIES
Deposits: Noninterest bearing checking accounts	$	1,491,494		1,320,131
Interest bearing checking accounts	894,777			916,374
Money market accounts	1,124,614			1,035,523
Savings accounts	418,043			432,389
Time deposits of $100,000 or more	686,554			690,922
Other time deposits	259,900			264,000
Total deposits	4,875,382			4,659,339
Borrowings	300,656			406,609
Accrued interest payable	2,169			1,976
Other liabilities	55,722			31,962
Total liabilities	5,233,929			5,099,886

Commitments and contingencies

SHAREHOLDERS’ EQUITY
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Issued & outstanding: none and none	—			—
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 29,604,830 and 29,724,874 shares	429,136			434,453
Retained earnings	402,212			341,738
Stock in rabbi trust assumed in acquisition	(2,577		)	(3,235	)
Rabbi trust obligation	2,577			3,235
Accumulated other comprehensive income (loss)	3,634			(11,961	)
Total shareholders’ equity	834,982			764,230
Total liabilities and shareholders’ equity	$	6,068,911		5,864,116

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Income



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

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

Net interest income	53,778			51,845		161,548		153,584
Provision (reversal) for loan losses	(1,105		)	87		(913	)	(4,282	)
Net interest income after provision for loan losses	54,883			51,758		162,461		157,866

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

NONINTEREST EXPENSES
Salaries expense	19,833			18,771		58,530		56,615
Employee benefits expense	4,144			4,061		13,150		12,752
Total personnel expense	23,977			22,832		71,680		69,367
Occupancy expense	2,786			2,742		8,269		8,087
Equipment related expenses	1,231			1,438		3,783		3,931
Merger and acquisition expenses	—			167		213		3,568
Intangibles amortization expense	1,163			1,452		3,737		4,518
Other operating expenses	9,763			10,403		30,948		31,683
Total noninterest expenses	38,920			39,034		118,630		121,154

Income before income taxes	31,593			27,896		90,025		83,585
Income tax expense	6,574			5,905		18,862		18,191

Net income	$	25,019		21,991		71,163		65,394

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

Dividends declared per common share	$	0.12		0.10		0.36		0.30

Weighted average common shares outstanding:
Basic	29,542,001			29,530,203		29,585,383		29,536,273
Diluted	29,684,105			29,621,130		29,759,459		29,639,126

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income



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

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity



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

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

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


Three Months Ended September 30, 2019
Balances, July 1, 2019	29,717		432,533			380,748		(2,866	)	2,866		1,888		815,169

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

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

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity (continued)



($ in thousands, except share data - unaudited)	Common Stock					Retained Earnings		Stock in Rabbi Trust Assumed in Acquisition		Rabbi Trust Obligation		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
($ in thousands, except share data - unaudited)	Shares		Amount			Retained Earnings		Stock in Rabbi Trust Assumed in Acquisition		Rabbi Trust Obligation		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Nine Months Ended September 30, 2018
Balances, January 1, 2018	29,639		$	432,794		264,331		(3,581	)	3,581		(4,146	)	692,979

Net income						65,394								65,394
Cash dividends declared ($0.30 per common share)						(8,903	)							(8,903	)
Change in Rabbi Trust Obligation								357		(357	)			—
Stock option exercises	25		324											324
Stock withheld for payment of taxes	(7	)	(264		)									(264	)
Stock-based compensation	72		1,373											1,373
Other comprehensive income (loss)												(7,827	)	(7,827	)

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


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

Net income						71,163								71,163
Cash dividends declared ($0.36 per common share)						(10,689	)							(10,689	)
Change in Rabbi Trust Obligation								658		(658	)			—
Equity issued related to acquisition earn-out	78		3,070											3,070
Stock repurchases	(282	)	(10,000		)									(10,000	)
Stock option exercises	9		129											129
Stock withheld for payment of taxes	(15	)	(558		)									(558	)
Stock-based compensation	90		2,042											2,042
Other comprehensive income (loss)												15,595		15,595

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

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows



($ in thousands-unaudited)	Nine Months Ended September 30,
	2019			2018
Cash Flows From Operating Activities
Net income	$	71,163		65,394
Reconciliation of net income to net cash provided by operating activities:
Provision (reversal) for loan losses	(913		)	(4,282	)
Net security premium amortization	1,827			2,184
Loan discount accretion	(4,473		)	(5,982	)
Other purchase accounting accretion and amortization, net	(16		)	(165	)
Foreclosed property (gains) losses and write-downs, net	899			579
Gains on securities available for sale	(97		)	—
Other losses (gains)	331			(811	)
Increase in net deferred loan costs	(261		)	(1,475	)
Depreciation of premises and equipment	4,326			4,420
Amortization of operating lease right-of-use assets	1,372			—
Repayments of lease obligations	(1,250		)	—
Stock-based compensation expense	1,748			1,201
Amortization of intangible assets	3,737			4,518
Amortization of SBA servicing assets	975			555
Fees/gains from sale of presold mortgages and SBA loans	(9,725		)	(11,004	)
Origination of presold mortgage loans in process of settlement	(108,723		)	(97,081	)
Proceeds from sales of presold mortgage loans in process of settlement	99,606			105,506
Origination of SBA loans for sale	(125,982		)	(162,782	)
Proceeds from sales of SBA loans	101,349			130,460
Increase in accrued interest receivable	(293		)	(888	)
Increase in other assets	(4,061		)	(893	)
Increase in accrued interest payable	193			681
Increase (decrease) in other liabilities	1,690			(6,448	)
Net cash provided by operating activities	33,422			23,687

Cash Flows From Investing Activities
Purchases of securities available for sale	(339,030		)	(48,975	)
Proceeds from maturities/issuer calls of securities available for sale	114,003			27,609
Proceeds from maturities/issuer calls of securities held to maturity	26,316			12,841
Proceeds from sales of securities available for sale	39,797			—
Redemptions (purchases) of FRB and FHLB stock, net	4,088			(6,129	)
Net increase in loans	(116,664		)	(103,091	)
Proceeds from sales of foreclosed properties	4,628			6,829
Purchases of premises and equipment	(2,714		)	(6,656	)
Proceeds from sales of premises and equipment	1,148			2,739
Net cash used by investing activities	(268,428		)	(114,833	)

Cash Flows From Financing Activities
Net increase in deposits	216,195			121,719
Net decrease in borrowings	(106,089		)	(1,086	)
Cash dividends paid – common stock	(10,108		)	(8,308	)
Repurchases of common stock	(10,000		)	—
Proceeds from stock option exercises	129			324
Stock withheld for payment of taxes	(558		)	(264	)
Net cash provided by financing activities	89,569			112,385

(Decrease) increase in cash and cash equivalents	(145,437		)	21,239
Cash and cash equivalents, beginning of period	462,898			489,490

Cash and cash equivalents, end of period	$	317,461		510,729

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

See accompanying notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements



(unaudited)	For the Period Ended September 30, 2019

Note 1 - Basis of Presentation

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

Note 2 – Accounting Policies

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

Accounting Standards Adopted in 2019

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

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

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

Accounting Standards Pending Adoption

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

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

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

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

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

In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

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

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Note 3 – Reclassifications

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

Note 4 – Stock-Based Compensation Plans

The Company recorded total stock-based compensation expense of $546,000 and $374,000 for the three months ended September 30, 2019 and 2018, respectively, and $1,748,000 and $1,201,000 for the nine months ended September 30, 2019 and 2018, respectively. Stock-based compensation expense for the Company relates to equity awards granted to employees and directors.

At September 30, 2019, the Company had the following stock-based compensation plans: the First Bancorp 2014 Equity Plan and the First Bancorp 2007 Equity Plan. The Company’s shareholders approved each plan. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of September 30, 2019, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants, and there were 675,319 shares remaining available for grant.

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

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

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

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

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

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

Nonvested at September 30, 2019	173,162		$	36.58

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

Prior to 2010, stock options were the primary form of stock-based compensation utilized by the Company. At September 30, 2019, there were no stock options outstanding. The following table presents information regarding the activity for the first nine months of 2019 related to the Company’s outstanding stock options:



	Options Outstanding
	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Balance at January 1, 2019	9,000		$	14.35

Granted	—		—
Exercised	(9,000	)	14.35
Forfeited	—		—
Expired	—		—

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

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

During both the three months ended September 30, 2019 and 2018, there were no stock option exercises. During the nine months ended September 30, 2019 and 2018, the Company received $129,000 and $324,000, respectively, as a result of stock option exercises.

Note 5 – Earnings Per Common Share

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

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

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

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

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



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

Diluted EPS:
Net income	$	25,019		29,542,001			$	21,991	29,530,203
Effect of Dilutive Securities	—			142,104			—		90,927
Diluted EPS per common share	$	25,019		29,684,105	$	0.84	$	21,991	29,621,130	$	0.74



	For the Nine Months Ended September
	2019						2018
($ in thousands except per share amounts)	Per Share Amount			Shares (Denominator)	Per Share Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS:
Net income	$	71,163					$	65,394
Less: income allocated to participating securities	(329		)				—
Basic EPS per common share	$	70,834		29,585,383	$	2.39	$	65,394	29,536,273	$	2.21

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

For both the three and nine months ended September 30, 2019 and 2018, there were no options that were antidilutive.

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Note 6 – Securities

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



($ in thousands)	September 30, 2019						December 31, 2018
	Amortized Cost		Fair Value	Unrealized			Amortized Cost	Fair Value	Unrealized
	Amortized Cost		Fair Value	Gains	(Losses)		Amortized Cost	Fair Value	Gains	(Losses)
Securities available for sale:
Government-sponsored enterprise securities	$	30,000	30,053	55	(2	)	82,995	82,662	63	(396	)
Mortgage-backed securities	634,176		640,488	7,794	(1,482	)	396,995	385,551	39	(11,483	)
Corporate bonds	33,721		34,683	1,052	(90	)	33,751	33,138	76	(689	)
Total available for sale	$	697,897	705,224	8,901	(1,574	)	513,741	501,351	178	(12,568	)

Securities held to maturity:
Mortgage-backed securities	$	43,968	43,801	—	(167	)	52,048	50,241	—	(1,807	)
State and local governments	30,297		30,664	369	(2	)	49,189	49,665	525	(49	)
Total held to maturity	$	74,265	74,465	369	(169	)	101,237	99,906	525	(1,856	)

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

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



($ in thousands)	Securities in an Unrealized Loss Position for Less than 12 Months			Securities in an Unrealized Loss Position for More than 12 Months		Total
	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Government-sponsored enterprise securities	$	4,998	2	—	—	4,998	2
Mortgage-backed securities	123,726		625	118,579	1,024	242,305	1,649
Corporate bonds	—		—	910	90	910	90
State and local governments	—		—	940	2	940	2
Total temporarily impaired securities	$	128,724	627	120,429	1,116	249,153	1,743

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



($ in thousands)	Securities in an Unrealized Loss Position for Less than 12 Months			Securities in an Unrealized Loss Position for More than 12 Months		Total
	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Government-sponsored enterprise securities	$	4,921	78	13,682	318	18,603	396
Mortgage-backed securities	82,525		351	294,305	12,939	376,830	13,290
Corporate bonds	20,704		433	5,817	256	26,521	689
State and local governments	595		1	6,641	48	7,236	49
Total temporarily impaired securities	$	108,745	863	320,445	13,561	429,190	14,424

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In the above tables, all of the securities that were in an unrealized loss position at September 30, 2019 and December 31, 2018 were bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. The Company evaluated the collectability of each of these bonds and concluded that there was no other-than-temporary impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.

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



	Securities Available for Sale			Securities Held to Maturity
($ in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Securities
Due within one year	$	—	—	1,165	1,168
Due after one year but within five years	58,721		59,661	21,645	21,925
Due after five years but within ten years	—		—	6,673	6,718
Due after ten years	5,000		5,075	814	853
Mortgage-backed securities	634,176		640,488	43,968	43,801
Total securities	$	697,897	705,224	74,265	74,465

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

In the three and nine months ended September 2019, the Company received proceeds from sales of securities of $39,797,000 and recorded gains of $97,000 from the sales. There were no securities sales in the first nine months of 2018.

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

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

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Note 7 – Loans and Asset Quality Information

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



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

Commercial, financial, and agricultural	$	486,768	11	%	$	457,037	11	%
Real estate – construction, land development & other land loans	471,326		11	%	518,976		12	%
Real estate – mortgage – residential (1-4 family) first mortgages	1,093,619		25	%	1,054,176		25	%
Real estate – mortgage – home equity loans / lines of credit	343,378		8	%	359,162		8	%
Real estate – mortgage – commercial and other	1,928,931		44	%	1,787,022		42	%
Installment loans to individuals	70,962		1	%	71,392		2	%
Subtotal	4,394,984		100	%	4,247,765		100	%
Unamortized net deferred loan costs	1,560				1,299
Total loans	$	4,396,544			$	4,249,064

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



($ in thousands)	September 30, 2019		December 31, 2018
Guaranteed portions of SBA Loans included in table above	$	47,280	53,205
Unguaranteed portions of SBA Loans included in table above	112,976		97,572
Total SBA loans included in the table above	$	160,256	150,777

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

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

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



PCI loans	For the Nine Months Ended September 30, 2019			For the Year Ended September 30, 2018
Balance at beginning of period	$	17,393		23,165
Change due to payments received and accretion	(3,694		)	(2,994	)
Change due to loan charge-offs	(11		)	—
Transfers to foreclosed real estate	—			(10	)
Other	110			28
Balance at end of period	$	13,798		20,189

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



Accretable Yield for PCI loans	For the Nine Months Ended September 30, 2019			For the Nine Months Ended September 30, 2018
Balance at beginning of period	$	4,750		4,688
Accretion	(1,050		)	(1,169	)
Reclassification from (to) nonaccretable difference	583			712
Other, net	211			831
Balance at end of period	$	4,494		5,062

During the first nine months of 2019, the Company received $291,000 in payments that exceeded the carrying amount of the related PCI loans, of which $263,000 was recognized as loan discount accretion income and $28,000 was recorded as additional loan interest income. During the first nine months of 2018, the Company received $225,000 in payments that exceeded the carrying amount of the related PCI loans, of which $184,000 was recognized as loan discount accretion income and $41,000 was recorded as additional loan interest income.

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



($ in thousands)	September 30, 2019		December 31, 2018
Nonperforming assets
Nonaccrual loans	$	19,720	22,575
TDRs- accruing	9,566		13,418
Accruing loans > 90 days past due	—		—
Total nonperforming loans	29,286		35,993
Foreclosed real estate	4,589		7,440
Total nonperforming assets	$	33,875	43,433

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

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

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

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



($ in thousands)	September 30, 2019		December 31, 2018
Commercial, financial, and agricultural	$	2,472	919
Real estate – construction, land development & other land loans	1,235		2,265
Real estate – mortgage – residential (1-4 family) first mortgages	7,661		10,115
Real estate – mortgage – home equity loans / lines of credit	1,878		1,685
Real estate – mortgage – commercial and other	6,370		7,452
Installment loans to individuals	104		139
Total	$	19,720	22,575

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



($ in thousands)	Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due	Accruing 90 Days or More Past Due	Nonaccrual Loans	Accruing Current	Total Loans Receivable
Commercial, financial, and agricultural	$	5,995	95	—	2,472	477,964	486,526
Real estate – construction, land development & other land loans	803		—	—	1,235	469,119	471,157
Real estate – mortgage – residential (1-4 family) first mortgages	2,392		1,185	—	7,661	1,076,708	1,087,946
Real estate – mortgage – home equity loans / lines of credit	712		399	—	1,878	340,180	343,169
Real estate – mortgage – commercial and other	3,376		121	—	6,370	1,911,677	1,921,544
Installment loans to individuals	299		46	—	104	70,395	70,844
Purchased credit impaired	6		390	1,065	—	12,337	13,798
Total	$	13,583	2,236	1,065	19,720	4,358,380	4,394,984
Unamortized net deferred loan costs							1,560
Total loans							$	4,396,544

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



($ in thousands)	Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due	Accruing 90 Days or More Past Due	Nonaccrual Loans	Accruing Current	Total Loans Receivable
Commercial, financial, and agricultural	$	191	5	—	919	455,691	456,806
Real estate – construction, land development & other land loans	849		212	—	2,265	515,472	518,798
Real estate – mortgage – residential (1-4 family) first mortgages	14,178		1,369	—	10,115	1,022,262	1,047,924
Real estate – mortgage – home equity loans / lines of credit	1,048		254	—	1,685	355,831	358,818
Real estate – mortgage – commercial and other	709		520	—	7,452	1,768,205	1,776,886
Installment loans to individuals	359		220	—	139	70,422	71,140
Purchased credit impaired	990		138	583	—	15,682	17,393
Total	$	18,324	2,718	583	22,575	4,203,565	4,247,765
Unamortized net deferred loan costs							1,299
Total loans							$	4,249,064

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



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

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

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

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

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

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

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

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



($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development & Other Land Loans		Real Estate – Residential (1-4 Family) First Mortgages		Real Estate – Mortgage – Home Equity Lines of Credit		Real Estate – Mortgage – Commercial and Other		Installment Loans to Individuals		Unallocated		Total
As of and for the year ended December 31, 2018

Beginning balance	$	3,111		2,816		6,147		1,827		6,475		950		1,972		23,298
Charge-offs	(2,128		)	(158	)	(1,734	)	(711	)	(1,459	)	(781	)	—		(6,971		)
Recoveries	1,195			4,097		833		364		1,503		309		—		8,301
Provisions	711			(4,512	)	(49	)	185		1,464		474		(1,862	)	(3,589		)
Ending balance	$	2,889		2,243		5,197		1,665		7,983		952		110		21,039

Ending balances as of December 31, 2018: Allowance for loan losses
Individually evaluated for impairment	$	226		134		955		48		906		—		—		2,269
Collectively evaluated for impairment	$	2,661		2,109		4,143		1,608		7,070		941		110		18,642
Purchased credit impaired	$	2		—		99		9		7		11		—		128

Loans receivable as of December 31, 2018:
Ending balance – total	$	457,037		518,976		1,054,176		359,162		1,787,022		71,392		—		4,247,765
Unamortized net deferred loan costs																1,299
Total loans																$	4,249,064

Ending balances as of December 31, 2018: Loans
Individually evaluated for impairment	$	696		1,345		12,391		296		9,525		—		—		24,253
Collectively evaluated for impairment	$	456,111		517,453		1,035,532		358,522		1,767,361		71,140		—		4,206,119
Purchased credit impaired	$	230		178		6,253		344		10,136		252		—		17,393

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



($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans		Real Estate – Residential (1-4 Family) First Mortgages		Real Estate – Mortgage – Home Equity Lines of Credit		Real Estate – Mortgage – Commercial and Other		Installment Loans to Individuals		Unallocated		Total
As of and for the three months ended September 30, 2018

Beginning balance	$	2,268		2,692		7,059		2,250		7,295		897		837		23,298
Charge-offs	(933		)	(126	)	(1,183	)	(192	)	(1,086	)	(232	)	—		(3,752	)
Recoveries	159			181		155		51		209		158		—		913
Provisions	1,221			(366	)	(664	)	(330	)	753		79		(606	)	87
Ending balance	$	2,715		2,381		5,367		1,779		7,171		902		231		20,546

As of and for the nine months ended September 30, 2018

Beginning balance	$	3,111		2,816		6,147		1,827		6,475		950		1,972		23,298
Charge-offs	(1,542		)	(158	)	(1,598	)	(378	)	(1,398	)	(494	)	—		(5,568	)
Recoveries	971			3,568		671		294		1,333		261		—		7,098
Provisions	175			(3,845	)	147		36		761		185		(1,741	)	(4,282	)
Ending balance	$	2,715		2,381		5,367		1,779		7,171		902		231		20,546

Ending balances as of September 30, 2018: Allowance for loan losses
Individually evaluated for impairment	$	126		—		1,004		—		502		—		—		1,632
Collectively evaluated for impairment	$	2,585		2,335		4,306		1,765		6,662		887		231		18,771
Purchased credit impaired	$	4		46		57		14		7		15		—		143

Loans receivable as of September 30, 2018
Ending balance – total	$	435,730		559,450		1,038,436		362,829		1,723,598		70,096		—		4,190,139
Unamortized net deferred loan fees																489
Total loans																4,190,628

Ending balances as of September 30, 2018: Loans
Individually evaluated for impairment	$	1,981		2,642		12,617		22		10,490		—		—		27,752
Collectively evaluated for impairment	$	433,485		556,283		1,019,645		362,462		1,700,519		69,804		—		4,142,198
Purchased credit impaired	$	264		525		6,174		345		12,589		292		—		20,189

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



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

Commercial, financial, and agricultural	$	18	20	—	89
Real estate – mortgage – construction, land development & other land loans	227		263	—	403
Real estate – mortgage – residential (1-4 family) first mortgages	3,713		3,951	—	4,443
Real estate – mortgage –home equity loans / lines of credit	338		358	—	100
Real estate – mortgage –commercial and other	2,781		3,758	—	3,390
Installment loans to individuals	—		—	—	—
Total impaired loans with no allowance	$	7,077	8,350	—	8,425

Impaired loans with an allowance recorded:

Commercial, financial, and agricultural	$	1,072	1,125	168	866
Real estate – mortgage – construction, land development & other land loans	577		577	45	589
Real estate – mortgage – residential (1-4 family) first mortgages	6,229		6,466	828	6,446
Real estate – mortgage –home equity loans / lines of credit	—		—	—	69
Real estate – mortgage –commercial and other	4,160		4,795	230	4,689
Installment loans to individuals	—		—	—	—
Total impaired loans with allowance	$	12,038	12,963	1,271	12,659

Interest income recorded on impaired loans during the nine months ended September 30, 2019 was insignificant.

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



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

Commercial, financial, and agricultural	$	310	310	—	957
Real estate – mortgage – construction, land development & other land loans	485		803	—	2,366
Real estate – mortgage – residential (1-4 family) first mortgages	4,626		4,948	—	4,804
Real estate – mortgage –home equity loans / lines of credit	22		31	—	91
Real estate – mortgage –commercial and other	3,475		4,237	—	3,670
Installment loans to individuals	—		—	—	—
Total impaired loans with no allowance	$	8,918	10,329	—	11,888

Impaired loans with an allowance recorded:

Commercial, financial, and agricultural	$	386	387	226	422
Real estate – mortgage – construction, land development & other land loans	860		864	134	385
Real estate – mortgage – residential (1-4 family) first mortgages	7,765		7,904	955	8,963
Real estate – mortgage –home equity loans / lines of credit	274		275	48	184
Real estate – mortgage –commercial and other	6,050		6,054	906	5,911
Installment loans to individuals	—		—	—	2
Total impaired loans with allowance	$	15,335	15,484	2,269	15,867

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

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

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



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

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



($ in thousands)	Pass		Special Mention Loans	Classified Accruing Loans	Classified Nonaccrual Loans	Total
Commercial, financial, and agricultural	$	471,225	7,735	5,094	2,472	486,526
Real estate – construction, land development & other land loans	463,122		4,640	2,160	1,235	471,157
Real estate – mortgage – residential (1-4 family) first mortgages	1,047,592		15,193	17,500	7,661	1,087,946
Real estate – mortgage – home equity loans / lines of credit	334,054		1,267	5,970	1,878	343,169
Real estate – mortgage – commercial and other	1,888,049		20,081	7,044	6,370	1,921,544
Installment loans to individuals	70,122		218	400	104	70,844
Purchased credit impaired	8,279		2,797	2,722	—	13,798
Total	$	4,282,443	51,931	40,890	19,720	4,394,984
Unamortized net deferred loan costs						1,560
Total loans						4,396,544

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



($ in thousands)	Pass		Special Mention Loans	Classified Accruing Loans	Classified Nonaccrual Loans	Total
Commercial, financial, and agricultural	$	452,372	3,056	459	919	456,806
Real estate – construction, land development & other land loans	509,251		5,668	1,614	2,265	518,798
Real estate – mortgage – residential (1-4 family) first mortgages	1,004,458		12,238	21,113	10,115	1,047,924
Real estate – mortgage – home equity loans / lines of credit	348,792		1,688	6,653	1,685	358,818
Real estate – mortgage – commercial and other	1,750,810		14,484	4,140	7,452	1,776,886
Installment loans to individuals	70,357		231	413	139	71,140
Purchased credit impaired	8,355		5,214	3,824	—	17,393
Total	$	4,144,395	42,579	38,216	22,575	4,247,765
Unamortized net deferred loan costs						1,299
Total loans						4,249,064

Troubled Debt Restructurings

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

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

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

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

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

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



($ in thousands)	For the nine months ended September 30, 2019					For the nine months ended September 30, 2018
	Number of Contracts	Pre- Modification Restructured Balances		Post- Modification Restructured Balances		Number of Contracts	Pre- Modification Restructured Balances		Post- Modification Restructured Balances
TDRs – Accruing
Commercial, financial, and agricultural	1	$	143	$	143	—	$	—	$	—
Real estate – construction, land development & other land loans	—	—		—		—	—		—
Real estate – mortgage – residential (1-4 family) first mortgages	3	387		391		1	18		18
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—
Installment loans to individuals	—	—		—		—	—		—
TDRs – Nonaccrual
Commercial, financial, and agricultural	—	—		—		—	—		—
Real estate – construction, land development & other land loans	—	—		—		1	61		61
Real estate – mortgage – residential (1-4 family) first mortgages	—	—		—		2	254		264
Real estate – mortgage – home equity loans / lines of credit	—	—		—		—	—		—
Real estate – mortgage – commercial and other	—	—		—		—	—		—
Installment loans to individuals	—	—		—		—	—		—
Total TDRs arising during period	4	$	530	$	534	4	$	333	$	343

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

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



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

There were no accruing restructured loans that were modified in the previous 12 months and defaulted during the three months ended September 30, 2019 or 2018.

Note 8 – Goodwill and Other Intangible Assets

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



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

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

The Company recorded $2,056,000 and $2,755,000 in servicing assets associated with the guaranteed portion of SBA loans originated and sold during the first nine months of 2019 and 2018, respectively. During the first nine months of 2019 and 2018, the Company recorded $975,000 and $555,000, respectively, in related amortization expense. Servicing assets are recorded for loans, or portions thereof, that the Company has sold but continue to service for a fee. Servicing assets are recorded at fair value and amortized over the expected lives of the related loans and are tested for impairment on a quarterly basis. SBA servicing asset amortization expense is recorded within noninterest income to offset SBA servicing fees.

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

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

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



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

Note 9 – Pension Plans

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

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



	For the Three Months Ended September 30,
($ in thousands)	2019 Pension Plan			2018 Pension Plan		2019 SERP		2018 SERP	2019 Total Both Plans		2018 Total Both Plans
Service cost	$	—		—		—		32	—		32
Interest cost	367			328		82		40	449		368
Expected return on plan assets	(360		)	(177	)	—		—	(360	)	(177	)
Amortization of net (gain)/loss	282			(93	)	(127	)	6	155		(87	)
Net periodic pension cost	$	289		58		(45	)	78	244		136



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

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

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

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

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Note 10 – Comprehensive Income (Loss)

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



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

Additional pension asset (liability)	(2,609		)	(3,220	)
Deferred tax asset (liability)	600			753
Net additional pension asset (liability)	(2,009		)	(2,467	)

Total accumulated other comprehensive income (loss)	$	3,634		(11,961	)

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



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

Ending balance at September 30, 2019	$	5,643		(2,009	)	3,634

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



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

Ending balance at September 30, 2018	$	(9,533	)	(2,440	)	(11,973	)

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Note 11 – Fair Value

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

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

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

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

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



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

Nonrecurring
Impaired loans	$	12,406	—	—	12,406
Foreclosed real estate	2,294		—	—	2,294

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



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

Nonrecurring
Impaired loans	$	13,071	—	—	13,071
Foreclosed real estate	7,440		—	—	7,440

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

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

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

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

Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the Consolidated Statements of Income.

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

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($ in thousands)
Description	Fair Value at September 30, 2019		Valuation Technique	Significant Unobservable Inputs	Range of Significant Unobservable Input Values
Impaired loans	$	12,406	Appraised value; PV of expected cash flows	Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell	0-10%
Foreclosed real estate	2,294		Appraised value; List or contract price	Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell	0-10%

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



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

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

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

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

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		September 30, 2019			December 31, 2018
($ in thousands)	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value	Carrying Amount	Estimated Fair Value
Cash and due from banks, noninterest-bearing	Level 1	$	52,621	52,621	56,050	56,050
Due from banks, interest-bearing	Level 1	264,840		264,840	406,848	406,848
Securities available for sale	Level 2	705,224		705,224	501,351	501,351
Securities held to maturity	Level 2	74,265		74,465	101,237	99,906
Presold mortgages in process of settlement	Level 1	16,269		16,269	4,279	4,279
Total loans, net of allowance	Level 3	4,377,284		4,341,770	4,228,025	4,181,139
Accrued interest receivable	Level 1	16,297		16,297	16,004	16,004
Bank-owned life insurance	Level 1	103,806		103,806	101,878	101,878
SBA Servicing Asset	Level 3	5,500		5,966	4,419	4,617

Deposits	Level 2	4,875,382		4,874,274	4,659,339	4,653,522
Borrowings	Level 2	300,656		294,913	406,609	402,556
Accrued interest payable	Level 2	2,169		2,169	1,976	1,972

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

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

Note 12 – Revenue from Contracts with Customers

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

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

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

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

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

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

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

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

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

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

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

Note 13 – Leases

Effective January 1, 2019, the Company adopted new accounting guidance regarding Leases (Topic 842). As of September 30, 2019, the Company leased eight branch offices for which the land and buildings are leased and nine branch offices for which the land is leased but the building is owned. The Company also leases one loan production office and office space for several operational departments. All of the Company’s leases have historically qualified as operating leases under prior accounting guidance, and therefore, were not previously recognized on the Company’s Consolidated Balance Sheets. The lease agreements have maturity dates ranging from January 2021 through May 2076, some of which include options for multiple five- and ten-year extensions. The weighted average remaining life of the lease term for these leases was 19.80 years as of September 30, 2019.

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

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

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



($ in thousands)	Maturity Analysis of Lease Liabilities
October 1 to December 31, 2019	$	583
2020	2,504
2021	2,329
2022	1,941
2023	1,848
Thereafter	21,145
Total estimated lease payments	30,350
Less effect of discounting	(9,607		)
Present value of estimated lease payments (lease liability)	$	20,743

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Future obligations for minimum rentals under noncancealable operating leases at December 31, 2018 were as follows:



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

Note 14 - Equity Issuance

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

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

Critical Accounting Policies

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

Allowance for Loan Losses

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

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

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

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

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

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

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

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

Intangible Assets

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

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

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

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

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

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

Fair Value and Discount Accretion of Acquired Loans

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

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

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

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

Current Accounting Matters

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

FINANCIAL OVERVIEW

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

For the nine months ended September 30, 2019, we recorded net income of $71.2 million, or $2.39 per diluted common share, an increase of 8.1% in earnings per share from the $65.4 million, or $2.21 per diluted common share, for the nine months ended September 30, 2018.

Net Interest Income and Net Interest Margin

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

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the third quarter of 2019 was 3.95%, which was 8 basis points lower than the 4.03% realized in the third quarter of 2018. For the nine month period ended September 30, 2019, our net interest margin was 4.02% compared to 4.09% for the same period in 2018. The lower margins were due to a combination of lower loan discount accretion and funding costs that rose by more than asset yields.

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

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

Provision for Loan Losses and Asset Quality

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

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

Noninterest Income

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

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

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

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

Noninterest Expenses

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

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

Income Taxes

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

Balance Sheet and Capital

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

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

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

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

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

Components of Earnings

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended September 30, 2019 amounted to $53.8 million, an increase of $1.9 million, or 3.7%, from the $51.8 million recorded in the third quarter of 2018. Net interest income on a tax-equivalent basis for the three month period ended September 30, 2019 amounted to $54.2 million, an increase of $1.9 million, or 3.7%, from the $52.3 million recorded in the third quarter of 2018. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.



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

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



	Nine Months Ended September 30,
($ in thousands)	2019		2018
Net interest income, as reported	$	161,548	153,584
Tax-equivalent adjustment	1,260		1,151
Net interest income, tax-equivalent	$	162,808	154,735

There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

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

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The following table presents an analysis of net interest income.



	For the Three Months Ended September 30,
	2019						2018
($ in thousands)	Average Volume		Average Rate		Interest Earned or Paid		Average Volume		Average Rate		Interest Earned or Paid
Assets
Loans (1)	$	4,354,477	5.02	%	$	55,142	$	4,191,751	4.96	%	$	52,407
Taxable securities	747,044		2.72	%	5,129		400,861		2.48	%	2,501
Non-taxable securities	27,711		3.04	%	212		50,373		2.89	%	367
Short-term investments, primarily overnight funds	310,781		2.42	%	1,898		500,435		2.33	%	2,944
Total interest-earning assets	5,440,013		4.55	%	62,381		5,143,420		4.49	%	58,219

Cash and due from banks	54,132						78,078
Premises and equipment	136,468						113,812
Other assets	391,366						377,630
Total assets	$	6,021,979					$	5,712,940

Liabilities
Interest bearing checking	$	883,002	0.15	%	$	338	862,065		0.11	%	$	235
Money market deposits	1,124,240		0.68	%	1,915		1,018,933		0.34	%	869
Savings deposits	416,732		0.29	%	307		435,579		0.21	%	230
Time deposits >$100,000	692,417		2.02	%	3,519		658,479		1.39	%	2,302
Other time deposits	261,424		0.79	%	518		272,468		0.39	%	270
Total interest-bearing deposits	3,377,815		0.77	%	6,597		3,247,524		0.48	%	3,906
Borrowings	300,714		2.65	%	2,006		406,652		2.41	%	2,468
Total interest-bearing liabilities	3,678,529		0.93	%	8,603		3,654,176		0.69	%	6,374

Noninterest bearing checking	1,460,759						1,278,488
Other liabilities	55,777						42,716
Shareholders’ equity	826,914						737,560
Total liabilities and shareholders’ equity	$	6,021,979					5,712,940

Net yield on interest-earning assets and net interest income			3.92	%	$	53,778			4.00	%	$	51,845
Net yield on interest-earning assets and net interest income – tax-equivalent (2)			3.95	%	$	54,191			4.03	%	$	52,273

Interest rate spread			3.62	%					3.80	%

Average prime rate			5.27	%					5.01	%

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

(2) Includes tax-equivalent adjustments of $413,000 and $428,000 in 2019 and 2018, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

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	For the Nine Months Ended September 30,
	2019						2018
($ in thousands)	Average Volume		Average Rate		Interest Earned or Paid		Average Volume		Average Rate		Interest Earned or Paid
Assets
Loans (1)	$	4,322,078	5.10	%	$	164,754	$	4,141,645	4.97	%	$	154,028
Taxable securities	706,300		2.81	%	14,859		406,975		2.48	%	7,552
Non-taxable securities	34,833		3.15	%	820		51,283		2.91	%	1,115
Short-term investments, primarily overnight funds	347,335		2.58	%	6,705		457,908		2.14	%	7,320
Total interest-earning assets	5,410,546		4.62	%	187,138		5,057,811		4.49	%	170,015

Cash and due from banks	54,579						88,596
Premises and equipment	136,550						114,656
Other assets	384,966						383,629
Total assets	$	5,986,641					$	5,644,692

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

Noninterest bearing checking	1,405,830						1,236,002
Other liabilities	57,047						37,964
Shareholders’ equity	801,228						718,982
Total liabilities and shareholders’ equity	$	5,986,641					$	5,644,692

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

Interest rate spread			3.70	%					3.89	%

Average prime rate			5.42	%					4.78	%

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

(2) Includes tax-equivalent adjustments of $1,260,000 and $1,151,000 in 2019 and 2018, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

Average loans outstanding for the third quarter of 2019 were $4.354 billion, which was $163 million, or 3.9%, higher than the average loans outstanding for the third quarter of 2018 ($4.192 billion). For the first nine months of 2019, average loans outstanding were $4.322 billion, which was $180 million, or 4.4% higher than the average loans outstanding for the comparable period of 2018 ($4.142 billion). The higher amount of average loans outstanding in 2019 was primarily due to our loan growth initiatives, including our continued focus and expansion into higher growth markets, our hiring of experienced bankers and our emphasis on SBA lending.

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

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

Average total deposits outstanding for the third quarter of 2019 were $4.839 billion, which was $313 million, or 6.9%, higher than the average deposits outstanding for the third quarter of 2018 ($4.526 billion). Average total deposits for the nine months ended September 30, 2019 were $4.785 billion, which was $304 million, or 6.8%, higher than the average deposits outstanding for the same period of 2018 ($4.481 billion). We continue to implement strategies to grow deposits, which we believe to be the principal reason for the increases in our deposit balances in 2019. Average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $3.573 billion during the first nine months of 2018 to $3.813 billion during the first nine months of 2019, representing growth of $240 million, or 6.7%. Average time deposits also increased from $908 million during the first nine months of 2018 to $972 million for the first nine months of 2019, an increase of $64 million, or 7.0%.

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

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

As derived from the tables above, in comparing the periods in 2019 to the periods in 2018, interest-earning asset yields increased 6 basis points in the third quarter of 2019 compared to the third quarter of 2018, while interest-bearing liability costs increased by 24 basis points over that same period. On a year to date basis, interest-earning asset yields increased 13 basis points in 2019 compared to 2018, whereas interest-bearing liability costs increased by 32 basis points. The narrowing of that spread in 2019 was primarily due to flattening of the yield curve and competitive pressures.

The impact of the higher rising interest-bearing liability costs in 2019 has been partially offset by the impact of the approximately 13% growth in average noninterest-bearing deposits since December 31, 2018. Our total cost of funds, which includes noninterest bearing checking accounts at a zero percent cost only rose by 15 basis points (from 0.51% to 0.66%) and 22 basis points (from 0.45% to 0.67%) for the three and nine month periods in 2019, respectively, compared to the same periods of 2018.

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

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

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



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

Management evaluates noninterest income on a basis that excludes items that can be volatile in nature, such as foreclosed property gains (losses), net. We consider this adjusted noninterest income and believe it reflects regular sources of noninterest income, that are within the control of management. As presented in the table above, adjusted noninterest income for the third quarter of 2019 was $15.9 million, a 2.9% increase from the $15.5 million reported for the third quarter of 2018. Adjusted noninterest income for the nine months ended September 30, 2019 was $47.3 million, a 1.5% increase from the $46.6 million reported for the first nine months of 2018.

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

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

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

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

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

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

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

Other gains (losses) amounted to losses of $0.1 million and $0.3 million in the three and nine months ended September 30, 2019, respectively, and losses of $0.1 million and gains of $0.8 million for the three and nine months ended September 30, 2018. Losses in 2019 were due to miscellaneous items, whereas in the second quarter of 2018, we recorded a $0.9 million gain on the sale of a former branch location.

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

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

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

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

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

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

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

The consolidated statements of comprehensive income reflect other comprehensive income of $1.7 million during the third quarter of 2019 compared other comprehensive loss of $0.8 million during the third quarter of 2018. During the nine months ended September 30, 2019 and 2018, we recorded other comprehensive income of $15.6 million and other comprehensive loss of $7.8 million, respectively. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains (losses) of our available for sale securities. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.

FINANCIAL CONDITION

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



January 1, 2019 to September 30, 2019	Balance at beginning of period		Internal Growth, net		Balance at end of period	Total percentage growth
Total loans	$	4,249,064	147,480		4,396,544	3.5	%

Deposits – Noninterest bearing checking	1,320,131		171,363		1,491,494	13.0	%
Deposits – Interest bearing checking	916,374		(21,597	)	894,777	(2.4	)%
Deposits – Money market	1,035,523		89,091		1,124,614	8.6	%
Deposits – Savings	432,389		(14,346	)	418,043	(3.3	)%
Deposits – Brokered	239,875		(112,356	)	127,519	(46.8	)%
Deposits – Internet time	3,428		(1,983	)	1,445	(57.8	)%
Deposits – Time>$100,000	447,619		109,971		557,590	24.6	%
Deposits – Time<$100,000	264,000		(4,100	)	259,900	(1.6	)%
Total deposits	$	4,659,339	216,043		4,875,382	4.6	%

As derived from the table above, for the first nine months of 2019, loan growth was $147.5 million, or 3.5% (4.6% on an annualized basis). Loan growth for the period was organic and driven by our continued expansion into high-growth markets, our hiring of experienced bankers and our emphasis on SBA lending. We expect continued growth in our loan portfolio for the remainder of 2019.

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

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

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

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

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

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

Nonperforming Assets

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



ASSET QUALITY DATA ($ in thousands)	As of/for the quarter ended September 30, 2019			As of/for the quarter ended December 31, 2018
Nonperforming assets
Nonaccrual loans	$	19,720		22,575
TDRs – accruing	9,566			13,418
Accruing loans >90 days past due	—			—
Total nonperforming loans	29,286			35,993
Foreclosed real estate	4,589			7,440
Total nonperforming assets	$	33,875		43,433

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

Asset Quality Ratios – All Assets
Net charge-offs to average loans - annualized	0.04		%	0.02	%
Nonperforming loans to total loans	0.67		%	0.85	%
Nonperforming assets to total assets	0.56		%	0.74	%
Allowance for loan losses to total loans	0.44		%	0.50	%
Allowance for loan losses to nonperforming loans	65.77		%	58.45	%

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

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

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

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TDRs are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At September 30, 2019, total accruing TDRs amounted to $9.6 million, compared to $13.4 million at December 31, 2018.

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

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



($ in thousands)	At September 30, 2019		At December 31, 2018
Commercial, financial, and agricultural	$	2,472	919
Real estate – construction, land development, and other land loans	1,235		2,265
Real estate – mortgage – residential (1-4 family) first mortgages	7,661		10,115
Real estate – mortgage – home equity loans/lines of credit	1,878		1,685
Real estate – mortgage – commercial and other	6,370		7,452
Installment loans to individuals	104		139
Total nonaccrual loans	$	19,720	22,575

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

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



($ in thousands)	At September 30, 2019		At December 31, 2018
Vacant land and farmland	$	1,733	2,035
1-4 family residential properties	1,220		2,311
Commercial real estate	1,636		3,094
Total foreclosed real estate	$	4,589	7,440

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



	As of September 30, 2019
($ in thousands)	Total Nonperforming Loans		Total Loans	Nonperforming Loans to Total Loans		Total Foreclosed Real Estate
Region (1)
Eastern Region (NC)	$	6,344	927,000	0.68	%	$	617
Triangle Region (NC)	7,426		951,000	0.78	%	706
Triad Region (NC)	4,305		885,000	0.49	%	480
Charlotte Region (NC)	950		332,000	0.29	%	—
Southern Piedmont Region (NC)	3,185		285,000	1.12	%	360
Western Region (NC)	673		667,000	0.10	%	738
South Carolina Region	765		163,000	0.47	%	822
Former Virginia Region	191		1,000	19.10	%	444
Other	5,447		186,000	2.93	%	422
Total	$	29,286	4,397,000	0.67	%	$	4,589


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

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

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

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

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

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

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

South Carolina Region - Chesterfield, Dillon, Florence

Former Virginia Region - Wythe, Washington, Montgomery, Roanoke

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

Summary of Loan Loss Experience

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

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

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

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



($ in thousands)	Nine Months Ended September 30, 2019			Twelve Months Ended December 31, 2018		Nine Months Ended September 30, 2018
Loans outstanding at end of period	$	4,396,544		4,249,064		4,190,628
Average amount of loans outstanding	$	4,322,078		4,161,838		4,141,645

Allowance for loan losses, at beginning of year	$	21,039		23,298		23,298
Provision (reversal) for loan losses	(913		)	(3,589	)	(4,282	)
	20,126			19,709		19,016

Loans charged off:
Commercial, financial, and agricultural	(1,224		)	(2,128	)	(1,542	)
Real estate – construction, land development & other land loans	(340		)	(158	)	(158	)
Real estate – mortgage – residential (1-4 family) first mortgages	(379		)	(1,734	)	(1,598	)
Real estate – mortgage – home equity loans / lines of credit	(216		)	(711	)	(378	)
Real estate – mortgage – commercial and other	(1,455		)	(1,459	)	(1,398	)
Installment loans to individuals	(555		)	(781	)	(494	)
Total charge-offs	(4,169		)	(6,971	)	(5,568	)
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural	768			1,195		971
Real estate – construction, land development & other land loans	797			4,097		3,568
Real estate – mortgage – residential (1-4 family) first mortgages	521			833		671
Real estate – mortgage – home equity loans / lines of credit	513			364		294
Real estate – mortgage – commercial and other	550			1,503		1,333
Installment loans to individuals	154			309		261
Total recoveries	3,303			8,301		7,098
Net (charge-offs) recoveries	(866		)	1,330		1,530
Allowance for loan losses, at end of period	$	19,260		21,039		20,546

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

We recorded a negative provision for loan losses (reduction of the allowance for loan losses) of $0.9 million in the first nine months of 2019, compared to a negative provision for loan losses of $4.3 million in the first nine months of 2018. In the first nine months of 2018, the Company experienced net loan recoveries of $1.5 million, which drove the negative provision for the period and was the primary reason for the variance in the provision for loan losses when comparing the first nine months of 2019 to the first nine months of 2018. Other factors impacting the provision for loan loss are discussed in the following two paragraphs.

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

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The ratio of our allowance to total loans was 0.44% and 0.50% at September 30, 2019 and December 31, 2018, respectively. The decline in this ratio was a result of the factors discussed above that impacted our low levels of provision for loan losses. Our relatively low level of allowance to total loans is significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank in 2017, which had over $1 billion in total loans. Applicable accounting guidance did not allow us to record an allowance for loan losses upon the acquisition of loans – instead the acquired loans were recorded at their discounted fair value, which included the consideration of any expected losses. No allowance for loan losses is recorded for the acquired loans unless the expected credit losses exceed the remaining unamortized discounts – based on an individual basis for purchased credit impaired loans and on a pooled basis for performing acquired loans. See Critical Accounting Policies above for further discussion. Unaccreted discount on acquired loans, which is available to absorb loan losses on those acquired loans, amounted to $13.8 million and $17.3 million at September 30, 2019 and December 31, 2018, respectively.

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

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

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

Liquidity, Commitments, and Contingencies

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

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

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

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

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

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

Off-Balance Sheet Arrangements and Derivative Financial Instruments

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

Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through September 30, 2019, and have no current plans to do so.

Capital Resources

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

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

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

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

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

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

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

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

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

Leverage capital ratios:
Tier 1 capital to quarterly average total assets	11.17	%	10.47	%
Minimum required Tier 1 leverage capital	4.00	%	4.00	%

First Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above. At September 30, 2019, First Bank significantly exceeded the minimum ratios established by the regulatory authorities.

BUSINESS DEVELOPMENT MATTERS

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


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

SHARE REPURCHASES

We repurchased 282,000 shares of our common stock during the first nine months of 2019 at an average price of $35.48 per share, which totaled $10.0 million. At September 30, 2019, we had authority from our board of directors to repurchase up to an additional $15 million in shares of the Company’s common stock. We may repurchase these shares in open market and privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations. See also Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

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

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Using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call). At September 30, 2019, we had $1.5 billion more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only measures the magnitude of the timing differences and does not address earnings, market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of “when” various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities subject to interest rate changes within one year at September 30, 2019 are deposits totaling $2.4 billion comprised of checking, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced with, or in the same proportion, as general market indicators.

Overall, we believe that in the near term (twelve months), net interest income will not likely experience significant downward pressure from rising interest rates. Similarly, we would not expect a significant increase in near term net interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. In the short-term (less than six months), this results in us being asset-sensitive, meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates. However, in the twelve-month horizon, the impact of having a higher level of interest-sensitive liabilities lessens the short-term effects of changes in interest rates. Overall, the Company's interest rate modeling indicates that the Company is slightly asset sensitive in a 1-2 year horizon.

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

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

As it relates to deposits, after cutting interest rates to historic lows in 2008 in an effort to stimulate the economy, the Federal Reserve made no changes to the short term interest rates it sets directly until mid-December 2015. During that period, we were able to reprice substantially all of our deposits to low levels. As a result of the nine interest rate increases initiated by the Federal Reserve from 2015 through 2018 and significant competitive pressures in our market area, our deposits costs began to rise. Deposit pricing competition began to intensify in the second half of 2018, which continued into 2019. In the first nine months of 2019, our deposit costs rose at a higher rate than the increase in asset yields, which negatively impacted our net interest margin.

In the third quarter of 2019, in an effort to address concerns about the economy, the Federal Reserve cut short term interest rates twice by a total of 50 basis points, which resulted in the prime rate of interest declining to 5.00% And in late October 2019, the Federal Reserve cut rates by an additional 25 basis points. Our interest-bearing cash balances and most of our variable rate loans, which comprise approximately one-third of our loan portfolio, reset to lower rates soon after those rate cuts and the offering rates on new loan originations also declined. Due to competitive pressures, we were unable to lower our deposit costs to offset the impact of the lower asset yields. Due largely to those reasons, our net interest margin decreased in the third quarter of 2019 by 11 basis points from the preceding quarter. While we believe our deposit costs will begin to decline in the near future, we believe that the recent rate cuts will to continue to negatively impact our net interest margin for the reasons discussed above.

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

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

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

Item 4 – Controls and Procedures

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

Part II. Other Information

Item 1 – Legal Proceedings

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

Item 1A – Risk Factors

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

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

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

Footnotes to the Above Table


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


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

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

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Item 6 - Exhibits

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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SIGNATURES

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



	FIRST BANCORP

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


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

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