FIRST BANCORP /NC/ 10-K

Item 8. Financial Statements and Supplementary Data First Bancorp and Subsidiaries Consolidated Balance Sheets December 31, 2022 and 2021 ($ in thousands) 2022 2021 Assets Cash and due from banks, noninterest-bearing $ 101,133 128,228 Due from banks, interest-bearing 169,185 332,934 Total cash and cash equivalents 270,318 461,162 Securities available for sale 2,314,493 2,630,414 Securities held to maturity (fair values of $ 432,528 in 2022 and $ 511,699 in 2021) 541,700 513,825 Presold mortgages in process of settlement 1,282 19,257 SBA and other loans held for sale — 61,003 Loans 6,665,145 6,081,715 Allowance for credit losses on loans ( 90,967 ) ( 78,789 ) Net loans 6,574,178 6,002,926 Premises and equipment 134,187 136,092 Operating right-of-use lease assets 18,733 20,719 Accrued interest receivable 29,710 25,896 Goodwill 364,263 364,263 Other intangible assets 12,675 17,827 Foreclosed properties 658 3,071 Bank-owned life insurance 164,592 165,786 Other assets 198,260 86,660 Total assets $ 10,625,049 10,508,901 Liabilities Deposits: Noninterest-bearing deposits $ 3,566,003 3,348,622 Interest-bearing deposits 5,661,526 5,776,007 Total deposits 9,227,529 9,124,629 Borrowings 287,507 67,386 Accrued interest payable 2,738 607 Operating lease liabilities 19,391 21,192 Other liabilities 56,288 64,512 Total liabilities 9,593,453 9,278,326 Commitments and contingencies (see Note 12) Shareholders’ Equity Preferred stock, no par value per share. Authorized: 5,000,000 shares Issued & outstanding: none in 2022 and 2021 — — Common stock, no par value per share. Authorized: 60,000,000 shares Issued & outstanding: 35,704,154 shares in 2022 and 35,629,177 shares in 2021 725,153 722,671 Retained earnings 648,418 532,874 Stock in rabbi trust assumed in acquisition ( 1,585 ) ( 1,803 ) Rabbi trust obligation 1,585 1,803 Accumulated other comprehensive loss ( 341,975 ) ( 24,970 ) Total shareholders’ equity 1,031,596 1,230,575 Total liabilities and shareholders’ equity $ 10,625,049 10,508,901 See accompanying notes to consolidated financial statements. 58 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2022, 2021 and 2020 ($ in thousands, except per share data) 2022 2021 2020 Interest Income Interest and fees on loans $ 278,027 219,013 213,099 Interest on investment securities: Taxable interest income 53,536 32,076 20,429 Tax-exempt interest income 4,387 2,402 725 Other, principally overnight investments 5,007 2,427 3,431 Total interest income 340,957 255,918 237,684 Interest Expense Interest on deposits 11,349 7,881 16,301 Interest on borrowings 4,754 1,642 3,261 Total interest expense 16,103 9,523 19,562 Net interest income 324,854 246,395 218,122 Provision for loan losses 12,600 9,611 35,039 (Reversal of) provision for unfunded commitments ( 200 ) 5,420 — Total provision for credit losses 12,400 15,031 35,039 Net interest income after provision for credit losses 312,454 231,364 183,083 Noninterest Income Service charges on deposit accounts 15,523 12,317 11,098 Other service charges, commissions and fees 26,294 25,516 20,097 Fees from presold mortgage loans 2,102 10,975 14,183 Commissions from sales of insurance and financial products 5,195 6,947 8,848 SBA consulting fees 2,608 7,231 8,644 SBA loan sale gains 5,076 7,329 7,973 Bank-owned life insurance income 3,847 2,885 2,533 Securities (losses) gains, net — ( 1,237 ) 8,024 Other gains (losses), net 7,340 1,648 ( 54 ) Total noninterest income 67,985 73,611 81,346 Noninterest Expense Salaries 96,321 86,815 84,941 Employee benefits 21,397 16,434 16,027 Total personnel expense 117,718 103,249 100,968 Occupancy expense 12,796 11,528 11,278 Equipment related expenses 5,808 4,492 4,285 Merger and acquisition expenses 5,072 16,845 — Intangibles amortization 3,684 3,531 3,956 Foreclosed property (gains) losses, net ( 372 ) 24 547 Other operating expenses 50,514 44,987 40,264 Total noninterest expense 195,220 184,656 161,298 Income before income taxes 185,219 120,319 103,131 Income tax expense 38,283 24,675 21,654 Net income $ 146,936 95,644 81,477 Earnings per common share: Basic $ 4.12 3.19 2.81 Earnings per common share: Diluted 4.12 3.19 2.81 Dividends declared per common share $ 0.88 0.80 0.72 Weighted average common shares outstanding: Basic 35,485,620 29,876,151 28,839,866 Diluted 35,674,730 30,027,785 28,981,567 See accompanying notes to consolidated financial statements. 59 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Comprehensive (Loss) Income Years Ended December 31, 2022, 2021 and 2020 ($ in thousands) 2022 2021 2020 Net income $ 146,936 95,644 81,477 Other comprehensive (loss) income: Unrealized (losses) gains on securities available for sale: Unrealized holding (losses) gains arising during the period, pretax ( 411,996 ) ( 53,752 ) 18,729 Tax benefit (expense) 94,677 12,352 ( 4,304 ) Reclassification to realized losses (gains) — 1,237 ( 8,024 ) Tax (benefit) expense — ( 284 ) 1,844 Postretirement plans: Net gain arising during period 695 872 589 Tax expense ( 159 ) ( 201 ) ( 135 ) Amortization of unrecognized net actuarial (gain) loss ( 288 ) 592 686 Tax expense (benefit) 66 ( 136 ) ( 158 ) Other comprehensive (loss) income ( 317,005 ) ( 39,320 ) 9,227 Comprehensive (loss) income $ ( 170,069 ) 56,324 90,704 See accompanying notes to consolidated financial statements. 60 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Shareholders’ Equity Years Ended December 31, 2022, 2021 and 2020 ($ in thousands, except per share data) Common Stock Retained Earnings Stock in rabbi trust assumed in acquisition Rabbi trust obligation Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Shares Amount Balances, January 1, 2020 29,601 $ 429,514 417,764 ( 2,587 ) 2,587 5,123 852,401 Net income 81,477 81,477 Cash dividends declared ($ 0.72 per common share) ( 20,752 ) ( 20,752 ) Change in Rabbi Trust Obligation 344 ( 344 ) — Equity issued related to acquisition earn-out 24 494 494 Stock repurchases ( 1,117 ) ( 31,868 ) ( 31,868 ) Stock withheld for payment of taxes ( 11 ) ( 307 ) ( 307 ) Stock-based compensation 82 2,749 2,749 Other comprehensive income 9,227 9,227 Balances, December 31, 2020 28,579 400,582 478,489 ( 2,243 ) 2,243 14,350 893,421 Adoption of new accounting standard ( 17,051 ) ( 17,051 ) Net income 95,644 95,644 Cash dividends declared ($ 0.80 per common share) ( 24,208 ) ( 24,208 ) Change in Rabbi Trust Obligation 440 ( 440 ) — Equity issued pursuant to acquisition 7,070 324,389 324,389 Stock repurchases ( 107 ) ( 4,036 ) ( 4,036 ) Stock withheld for payment of taxes ( 18 ) ( 786 ) ( 786 ) Stock-based compensation 105 2,522 2,522 Other comprehensive loss ( 39,320 ) ( 39,320 ) Balances, December 31, 2021 35,629 722,671 532,874 ( 1,803 ) 1,803 ( 24,970 ) 1,230,575 Net income 146,936 146,936 Cash dividends declared ($ 0.88 per common share) ( 31,392 ) ( 31,392 ) Change in Rabbi Trust Obligation 218 ( 218 ) — Stock withheld for payment of taxes ( 25 ) ( 840 ) ( 840 ) Stock-based compensation 100 3,322 3,322 Other comprehensive loss ( 317,005 ) ( 317,005 ) Balances, December 31, 2022 35,704 $ 725,153 648,418 ( 1,585 ) 1,585 ( 341,975 ) 1,031,596 See accompanying notes to consolidated financial statements. 61 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2022, 2021 and 2020 ($ in thousands) 2022 2021 2020 Cash Flows From Operating Activities Net income $ 146,936 95,644 81,477 Reconciliation of net income to net cash provided by operating activities: Provision for credit losses 12,400 15,031 35,039 Net security premium amortization 12,005 14,058 5,019 Deferred tax benefit ( 1,810 ) ( 4,800 ) ( 10,007 ) Loan discount accretion ( 5,622 ) ( 8,814 ) ( 6,328 ) Other purchase accounting accretion and amortization, net ( 340 ) ( 47 ) 81 Foreclosed property (gains) losses/write-downs, net ( 372 ) 24 547 Losses (gains) on securities available for sale — 1,237 ( 8,024 ) Other (gains) losses ( 4,069 ) ( 1,648 ) 54 Bank-owned life insurance income ( 3,847 ) ( 2,885 ) ( 2,533 ) (Decrease) increase in net deferred loan fees ( 301 ) ( 1,994 ) 5,639 Depreciation of premises and equipment 6,859 6,187 5,838 Amortization of operating lease right-of-use assets 1,986 1,937 2,012 Repayments of lease obligations ( 1,801 ) ( 1,814 ) ( 1,844 ) Stock-based compensation expense 2,982 2,268 2,540 Amortization of intangible assets 3,684 3,531 3,956 Amortization of SBA servicing assets 2,800 2,272 1,795 Fees/gains from sales of presold mortgages and SBA loans ( 7,178 ) ( 18,304 ) ( 22,156 ) Originations of presold mortgage loans in process of settlement ( 104,596 ) ( 326,019 ) ( 418,394 ) Proceeds from sales of presold mortgage loans in process of settlement 124,181 359,300 410,898 Origination of SBA loans for sale ( 74,452 ) ( 88,304 ) ( 147,934 ) Proceeds from sales of SBA loans 119,549 79,125 115,460 Increase in accrued interest receivable ( 3,814 ) ( 773 ) ( 3,624 ) Decrease in other assets 11,352 17,412 267 Increase (decrease) in accrued interest payable 2,131 ( 683 ) ( 1,250 ) (Decrease) increase in other liabilities ( 8,009 ) 394 9,805 Net cash provided by operating activities 230,654 142,335 58,333 Cash Flows From Investing Activities Purchases of securities available for sale ( 354,765 ) ( 1,572,355 ) ( 1,060,054 ) Purchases of securities held to maturity ( 39,004 ) ( 271,169 ) ( 133,611 ) Proceeds from maturities/issuer calls of securities available for sale 251,314 358,259 223,842 Proceeds from maturities/issuer calls of securities held to maturity 6,500 13,642 33,030 Proceeds from sales of securities available for sale — 106,484 219,697 (Purchases) redemptions of FRB and FHLB stock, net ( 17,244 ) 2,043 9,851 Purchases of bank owned life insurance — ( 25,000 ) — Proceeds from bank owned life insurance death benefits 8,312 — — Purchases of other investments ( 7,990 ) ( 3,434 ) ( 1,258 ) Net increase in loans ( 558,398 ) ( 97,559 ) ( 233,788 ) Proceeds from sales of foreclosed properties 2,904 3,995 2,485 Purchases of premises and equipment ( 5,287 ) ( 9,402 ) ( 12,363 ) Proceeds from sales of premises and equipment 299 313 189 Net cash received (paid) in acquisition activities — 208,992 ( 9,559 ) Net cash received in disposition activities — 11,314 — Net cash used by investing activities ( 713,359 ) ( 1,273,877 ) ( 961,539 ) Cash Flows From Financing Activities Net increase in deposits 103,494 1,258,193 1,342,340 Net increase (decrease) in short-term borrowings 220,000 — ( 198,000 ) Proceeds from long-term borrowings — — 150,000 Payments on long-term borrowings ( 133 ) ( 5,729 ) ( 202,035 ) Cash dividends paid – common stock ( 30,660 ) ( 22,228 ) ( 20,936 ) Repurchases of common stock — ( 4,036 ) ( 31,868 ) Payment of taxes related to stock withheld ( 840 ) ( 786 ) ( 307 ) Net cash provided by financing activities 291,861 1,225,414 1,039,194 (Decrease) increase in Cash and Cash Equivalents ( 190,844 ) 93,872 135,988 Cash and Cash Equivalents, Beginning of Year 461,162 367,290 231,302 Cash and Cash Equivalents, End of Year $ 270,318 461,162 367,290 62 Table of Contents (Continued) First Bancorp and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2022, 2021 and 2020 ($ in thousands) 2022 2021 2020 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest 14,312 10,206 20,812 Cash paid during the period for income taxes 39,722 32,506 29,604 Non-cash: Foreclosed loans transferred to foreclosed real estate 119 2,285 1,583 Non-cash: Unrealized (loss) gain on securities available for sale, net of taxes ( 317,319 ) ( 41,400 ) 14,425 Non-cash: Accrued dividends at period end 7,857 7,125 5,144 Non-cash: Initial recognition of operating lease right-of-use assets and liabilities — 2,191 253 Non-cash: Derecognition of intangible assets related to sale of insurance operations — ( 10,229 ) — Acquisition of Select Bancorp, Inc. — See Note 2 — See accompanying notes to consolidated financial statements. 63 Table of Contents First Bancorp and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 Summary Note 1. Summary of Significant Accounting Policies Basis of Presentation - The consolidated financial statements include the accounts of First Bancorp (the “Company”) and its wholly owned subsidiary First Bank (the “Bank”). The Bank has three wholly owned subsidiaries that are fully consolidated, SBA Complete, Inc. (“SBA Complete”), Magnolia Financial, Inc. ("Magnolia Financial"), and First Troy SPE, LLC. The Company is a bank holding company. The principal activity of the Company is the ownership and operation of the Bank, a state chartered bank with its main office in Southern Pines, North Carolina. SBA Complete specializes in providing consulting services for financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. Magnolia Financial is a business financing company that makes loans throughout the southeastern United States. First Troy SPE, LLC was formed in order to hold and dispose of certain real estate foreclosed upon by the Bank. The Company is also the parent company for a series of statutory trusts that were formed for the purpose of issuing trust preferred debt securities. The trusts are not consolidated for financial reporting purposes as they are variable interest entities and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the 2021 and 2020 consolidated financial statements to be comparable to 2022. These reclassifications had no effect on net income. Subsequent events have been evaluated through the date of filing this Annual Report Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by the Company in the preparation of its consolidated financial statements are the determination of the allowance for credit losses on loans, the allowance for credit losses on unfunded commitments, the accounting and impairment testing related to intangible assets, and the fair value and discount accretion of acquired loans. Business Combinations – The Company accounts for business combinations using the acquisition method of accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net assets acquired is capitalized as goodwill. Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. The Company typically issues common stock and/or pays cash for an acquisition, depending on the terms of the acquisition agreement. The value of common shares issued is determined based on the market price of the stock as of the closing of the acquisition. Cash and Cash Equivalents - The Company considers all highly liquid assets with original maturities of 90 days or less, such as cash on hand, noninterest-bearing and interest-bearing amounts due from banks and federal funds sold, to be “cash equivalents.” Securities - Debt securities that the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” ("HTM") and carried at amortized cost. Debt securities not classified as held to maturity are classified as “available for sale” ("AFS") and carried at fair value, with unrealized holding gains and losses being reported as other comprehensive income or loss and reported as a separate component of shareholders’ equity. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts are generally amortized and accreted into income on a level yield basis, with premiums being amortized to the earliest call date and discounts being accreted to the stated maturity date. Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification method. A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income. 64 Table of Contents Allowance for Credit Losses ("ACL") - Securities Held to Maturity - Since its adoption of ASC 326 ("CECL"), the Company measures expected credit losses on HTM debt securities on a pooled basis. The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. The CECL assumptions, including reasonable and supportable forecast periods, reversion method, and prepayments as applicable, are consistent with those utilized for the ACL on loans as discussed further below. Virtually all of the mortgage-backed securities held by the Company are issued by government-sponsored enterprises. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Substantially all of the state and local government securities held by the Company are highly rated by major rating agencies. Accrued interest receivable of $ 4.3 million and $ 3.7 million at December 31, 2022 and December 31, 2021, respectively, on HTM debt securities was excluded from the estimate of credit losses. Allowance for Credit Losses - Securities Available for Sale - For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income with the establishment of an allowance under CECL. For debt securities AFS that do not meet the aforementioned criteria, the Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the ACL under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable of $ 5.7 million and $ 5.0 million at December 31, 2022 and December 31, 2021, respectively, on AFS debt securities was excluded from the estimate of credit losses. Presold Mortgages in Process of Settlement - As a part of normal business operations, the Company originates residential mortgage loans that have been pre-approved by secondary investors to be sold on a best efforts basis. The terms of the loans are set by the secondary investors, and the purchase price that the investor will pay for the loan is agreed to prior to the funding of the loan by the Company. Generally within three weeks after funding, the loans are transferred to the investor in accordance with the agreed-upon terms. The Company records gains from the sale of these loans on the settlement date of the sale equal to the difference between the proceeds received and the carrying amount of the loan. Additionally, the Company records gains for loans in the process of closing, based on the changes in fair value of the loans and related commitments. Between the initial funding of the loans by the Company and the subsequent reimbursement by the investors, the Company carries the loans on its balance sheet at fair value. SBA and Other Loans Held for Sale - SBA loans included in this line item represent the guaranteed portion of SBA loans that the Company intends to sell in the near future. These loans are carried at the lower of cost or market as determined on an individual loan basis. There were no SBA loans held for sale at December 31, 2022 and there were $ 9.6 million in SBA loans held for sale at December 31, 2021. Also included in the balance at December 31, 2021 was $ 51.4 million of loans assumed in the Company's acquisition of Select Bancorp, Inc. ("Select") that were designated for sale as not aligning with the Company's strategy or markets. The loans were carried at the the lower of cost or market and the disposition of these loans was completed in the first quarter of 2022 at a price that approximated the carrying value. Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to these loans totaled $ 19.7 million at December 31, 2022 and $ 17.2 million at December 31, 2021, and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan 65 Table of Contents origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments. The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date. All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured. Purchased Financial Assets with Credit Deterioration ("PCD") - Subsequent to the Company's adoption of CECL on January 1, 2021, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. In determining whether an acquired loan is a PCD loan, the Company considers internal loan grades, delinquency status, and other relevant factors. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the ACL recorded through provision expense. All loans and leases considered to be purchased credit impaired ("PCI") prior to January 1, 2021 under prior accounting guidance were converted to PCD on that date. Allowance for Credit Losses - Loans - The ACL is an estimate that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial assets. The level of the allowance is determined under the CECL methodology and includes management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, and other pertinent factors. Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums, and deferred loan fees and costs. Accrued interest receivable is presented separately on the consolidated balance sheets and excluded from the estimate of credit losses. Loans are charged off when the Company determines that such financial assets are deemed uncollectible. The ACL is increased through provision for loan losses and decreased by charge-offs, net of recoveries of amounts previously charged-off. The ACL is measured on a collective basis for pools of loans with similar risk characteristics. The Discounted Cash Flow (“DCF”) method is utilized for substantially all pools, with discounted cash flows computed for each loan in a pool based on its individual characteristics (e.g. maturity date, payment amount, interest rate, etc.), and the results are aggregated at the pool level. A probability of default and loss given default, as adjusted for recoveries, are applied to the discounted cash flows for each pool, while considering prepayment and principal curtailment assumptions driven by each loan's collateral type. When the DCF method is used to determine the ACL, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The Company has identified the following primary pools for measuring expected credit losses. There are additional sub-segmentations within each pool, including risk categories. 66 Table of Contents • Owner occupied commercial real estate loans - Owner occupied commercial real estate mortgage loans are secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. For such loans, repayment is largely dependent upon the operation of the borrower's business. • Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily dependent on lease income generated from the underlying collateral. • Consumer real estate mortgage loans - Consumer real estate mortgage consists primarily of loans secured by 1-4 family residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower and may be affected by changes in general economic conditions. • Construction and land development loans - Construction and land development loans include loans where the repayment is dependent on the successful completion and eventual sale, refinance or operation of the related real estate project and are thus impacted by market demand and real estate valuations. Construction and land development loans include 1-4 family construction projects and commercial construction projects. • Commercial and industrial loans - Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows. • Consumer and other loans - Consumer and other loans include all loans issued to individuals not included in the consumer real estate mortgage classification, including automobile loans, consumer credit cards and loans to finance education, among others. Many consumer loans are unsecured and repayment is primarily dependent on the personal cash flow of the borrower which may be impacted by changes in economic conditions and unemployment . In determining the proper level of default rates and loss given default, management has determined that the loss experience of the Company provides the best basis for its assessment of expected credit losses. It therefore utilizes its own historical credit loss experience by each loan segment over an economic cycle, while excluding loss experience from certain acquired institutions (i.e., failed banks). Management considers forward-looking information in estimating expected credit losses. For substantially all segments of collectively evaluated loans, the Company incorporates two or more macroeconomic drivers using a statistical regression modeling methodology. The Company subscribes to a third-party service which provides a quarterly macroeconomic baseline forecast and alternative scenarios for the United States economy. The baseline forecast, which incorporates an equal probability of the United States economy performing better or worse than the projection, along with the alternative scenarios, are evaluated by management to determine the best estimate within the range of expected credit losses. Management has also evaluated the appropriateness of the reasonable and supportable forecast scenarios utilized for each period and has made adjustments as needed. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long-term mean of historical factors over 12 quarters using a straight-line approach. The Company generally utilizes a four-quarter forecast and a 12-quarter reversion period to the long-term average, which is then held static for the remainder of the forecast period. Included in its systematic methodology to determine its ACL on loans, management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e., formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending policies, procedures, and strategies, 2) changes in the nature and volume of the portfolio, 3) staff experience, 4) changes in volume and trends in classified loans, delinquencies, and nonaccrual loans, 5) concentration risk, 6) trends in underlying collateral value, 7) external factors, including competition and legal and regulatory factors, 8) changes in the quality of the Company's loan review system, and 9) economic conditions not already captured. Allowance for Credit Losses - Off-Balance Sheet Credit Exposure - The Company estimates expected credit losses on commitments to extend credit over the contractual period in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable by the Company. The allowance for off-balance sheet credit exposures, which is reflected within "Other Liabilities," is adjusted for as an increase or decrease to the provision for credit losses for unfunded commitments. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded 67 Table of Contents over its estimated life. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund. Troubled Debt Restructurings ("TDR") - A loan for which the terms have been modified resulting in a more than insignificant concession, and for which the borrower is experiencing financial difficulties, is generally considered to be a TDR. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. SBA Loans – Through its SBA Lending Division, the Company offers loans guaranteed by the SBA for the purchase of businesses, business startups, business expansion, equipment, and working capital. All SBA loans are underwritten and documented as prescribed by the SBA. SBA loans are generally fully amortizing and have maturity dates and amortizations of up to 25 years. The portion of SBA loans originated that are guaranteed and intended for sale on the secondary market are classified as held for sale and are carried at the lower of cost or fair value. The Company generally sells the guaranteed portion of the SBA loan as soon as it is eligible to be sold and retains the servicing right. When the guaranteed portion of an SBA loan is sold, the Company allocates the carrying basis of the loan between the guaranteed portion of the loan sold, the unguaranteed portion of the loans retained, and the servicing asset based on their relative fair values. A gain is recorded for the difference between the proceeds received from the sale and the basis allocated to the sold portion. The relative fair value allocation results in a discount that is recorded on the unguaranteed portion of the loan that is retained. The discount is amortized as a yield adjustment over the life of the loan, so long as the loan performs. In the event the loan is moved to nonaccrual status or transfer to foreclosed properties or liquidation of the loan, the remaining discount is amortized, along with any remaining servicing asset and deferred loan costs. SBA Servicing Assets - When the Company sells the guaranteed portion of an SBA loan, the Company continues to perform the servicing on the loan and collects a fee related to the sold portion of the loan. A SBA servicing asset is recorded for the fair value of that fee based on an analysis of discounted cash flows that incorporates estimates of (1) market servicing costs, (2) market-based prepayment rates, and (3) market profit margins. SBA servicing assets are included in “Other intangible assets” on the consolidated balance sheets. SBA servicing assets are initially recorded at fair value and amortized against income over the lives of the related loans as a reduction of servicing fee income, generally five years . SBA servicing assets are tested for impairment on a quarterly basis by comparing their estimated fair values, aggregated by year of origination, to the related carrying values. Changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could result in impairment or reversal of impairment of these servicing assets and, as such, impact the Company's financial condition and results of operations. Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over financial assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation, computed by the straight-line method, is charged to operations over the estimated useful lives of the properties or, in the case of leasehold improvements, over the term of the lease, if shorter. Land is carried at cost. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current operations. Goodwill and Other Intangible Assets - Business combinations are accounted for using the acquisition method of accounting. Identifiable intangible assets are recognized separately and are amortized over their estimated useful lives, which for the Company has generally been five to ten years and at an accelerated rate. Goodwill is recognized in business combinations to the extent that the price paid exceeds the fair value of the net assets acquired, including any identifiable intangible assets. Goodwill is not amortized, but rather is subject to fair value impairment tests on at least an annual basis. Foreclosed Properties - Foreclosed properties consists primarily of real estate acquired by the Company through legal foreclosure or deed in lieu of foreclosure. The property is initially carried at the lower of cost or the estimated fair value of the property less estimated selling costs. If there are subsequent declines in fair value, which is reviewed routinely by management, the property is written down to its fair value through a charge to expense. Capital expenditures made to improve the property are capitalized. Costs of holding real estate, such as property 68 Table of Contents taxes, insurance, and maintenance, less related revenues during the holding period, are recorded as expense as they are incurred. Bank-Owned Life Insurance – The Company has purchased life insurance policies on certain current and past key employees and directors where the insurance policy benefits and ownership are retained by the employer. These policies are recorded at their cash surrender value. Income from these policies and changes in the net cash surrender value are recorded within noninterest income as “Bank-owned life insurance income.” Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence. Other Investments – The Company accounts for its investments in limited partnerships and limited liability companies (“LLCs”) using the equity method of accounting if the percentage ownership and degree of management influence in the investments warrants such accounting treatment. Under the equity method of accounting, the Company records its initial investment at cost. Subsequently, the carrying amount of the investment is increased or decreased to reflect the Company’s share of income or loss of the investee. The Company’s recognition of earnings or losses from an equity method investment is based on the Company’s ownership percentage in the investee and the investee’s earnings on a quarterly basis. The investees generally provide their financial information during the quarter following the end of a given period. The Company’s policy is to record its share of earnings or losses on equity method investments in the quarter the financial information is received. All of the Company’s investments in limited partnerships and LLCs and their market values are not readily available. The Company’s management evaluates its investments in investees for impairment based on the investee’s ability to generate cash through its operations or obtain alternative financing, and other subjective factors. There are inherent risks associated with the Company’s investments in such companies, which may result in income statement volatility in future periods. At December 31, 2022 and 2021, the Company’s investments in limited partnerships and LLCs totaled $ 18.5 million and $ 11.3 million, respectively, and are included in "Other assets". Federal Home Loan Bank ("FHLB") Stock - The Company is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock is carried at cost and is recorded in "Other assets". Cash dividends are reported as income. Federal Reserve Bank ("Federal Reserve") Stock - The Company is a member of its regional Federal Reserve and is required to own stock based on its level of capital. Federal Reserve stock is carried at cost and is recorded in "Other assets." Cash dividends are reported as income. Loan Commitments and Related Financial Instruments - Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Stock-Based Compensation - Restricted stock awards are the primary form of equity grant utilized by the Company. Compensation cost is based on the fair value of the award, which is the closing price of the Company's common stock on the date of the grant. Restricted stock awards issued by the Company typically have vesting periods with service conditions. Compensation cost is recognized as expense over the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period. Because of the insignificant amount of forfeitures the Company has experienced, forfeitures are recognized as they occur. Earnings Per Share Amounts - 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 are comprised 69 Table of Contents of 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 contingently issuable shares. If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common stock issuance is disregarded. Fair Value of Financial Instruments - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument, as more fully described in Note 13. 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 assets 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. Impairment - Goodwill is evaluated for impairment on at least an annual basis, and more often if a triggering event is identified, by comparing the estimated fair value of the reporting units to their related carrying value. At December 31, 2022, the Company had two reporting units which are evaluated for impairment. If the carrying value of a reporting unit exceeds its fair value, the Company utilizes various valuation techniques to determine whether the implied fair value of the goodwill exceeds its carrying value. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is recorded in an amount equal to that excess. The Company reviews all other long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s policy is that an impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Any long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. To date, the Company has not recorded any impairment write-downs of its long-lived assets or goodwill. 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. Variable Interest Entities - The Company's statutory trust subsidiaries (First Bancorp Capital Trust II, Trust III and Trust IV, Carolina Capital Trust, and New Century Statutory Trust I), ("the Trusts") qualify as variable interest entities under ASC 810, “Consolidation.” Notes issued by the Company to the Trusts in return for the proceeds from the issuance of the trust preferred securities have terms that are substantially the same as the corresponding trust preferred securities. As qualified variable interest entities, the Trusts' balance sheet and statement of operations have never been consolidated with those of the Company because the Company is not the primary beneficiary. Further, the Company has no exposure to loss of the operations of the Trusts as the Company is limited to the repayment of the underlying obligations and would not absorb the losses of the Trusts if losses were to occur. The trust preferred securities qualify as capital for regulatory capital adequacy requirements. Segment Reporting - Accounting standards require management to report selected financial and descriptive information about reportable operating segments that exceed certain thresholds. The standards also require related disclosures about products and services, geographic areas, and major customers. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. The Company’s operations are substantially all within a single banking segment, and the financial statements presented herein reflect the combined results of all of its operations with that segment. The Company has no foreign operations or customers. 70 Table of Contents Recent Accounting Pronouncements - Accounting Standards Adopted in 2022 The Company did not adopt any accounting standards during 2022. Accounting Standards Pending Adoption ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments contained in this Accounting Standards Update ("ASU") eliminate the accounting guidance for troubled debt restructurings by creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This ASU also requires entities to disclose current period gross write-offs by year of origination for financing receivables and net investment in leases. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years and early adoption is permitted. The entity must have adopted the amendments in ASU 2016-13 ("CECL") to adopt the amendments in this ASU. The Company has evaluated the adoption of the new guidance on the consolidated financial statements and does not expect it to have a material effect on its financial statements. ASU 2022-03, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." This ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security, and, therefore, is not considered in measuring fair value. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company does not expect the ASU to have a material effect on its financial statements. ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." In 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provided optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The objective of the guidance in Topic 848 was to provide relief during the temporary transition period and the FASB included a sunset provision based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. The United Kingdom Financial Conduct Authority has announced that the intended LIBOR cessation date has been extended from December 31, 2021 to June 30, 2023. As such, ASU 2022-06 defers the sunset date previously set to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848; moreover, it applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The Company does not expect this ASU 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. Note 2. Acquisitions and Dispositions GrandSouth Acquisition On January 1, 2023, the Company completed its acquisition of GrandSouth Bancorporation ("GrandSouth"), in an all-stock transaction pursuant to the previously announced Agreement and Plan of Merger and Reorganization ("the Merger Agreement"), dated June 21, 2022, between the Company and GrandSouth. At the closing of the transaction, GrandSouth merged into the Company. Following the merger of the Company and GrandSouth, GrandSouth Bank, a wholly-owned subsidiary of GrandSouth, merged into the Bank with the Bank being the surviving entity. Pursuant to the Merger Agreement, each share of common and preferred stock of GrandSouth issued and outstanding immediately prior to the effective time of the acquisition was converted into 0.91 shares of the Company's common stock. As a result, the Company issued 5,032,834 shares of the Company common stock effective January 1, 2023. In addition, approximately 596,000 GrandSouth common stock options were converted to options to acquire 0.91 shares of the Company's common stock with an average exercise price of approximately $ 18.22 . The consideration transferred at the close of the transaction was approximately $ 226.9 million. 71 Table of Contents Effective with the transaction close, eight branches in South Carolina were added to the Company's branch network. Immediately prior to the completion of the acquisition, at December 31, 2021, GrandSouth Bank reported total assets of $ 1.2 billion, total loans of $ 1.0 billion, and total deposits of $ 1.1 billion on a Call Report filed with federal banking regulators. The acquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the the high-growth markets of the state including Greenville, Charleston and Columbia. Significant synergies are anticipated to be gained from the acquisition, with asset growth and revenue enhancement opportunities from the new markets and expanded customer base. Accordingly, the Company anticipates recognizing goodwill in the transaction related primarily to the reasons noted, as well as the positive earnings of GrandSouth. It is anticipated that the goodwill which will result from this transaction will be non-deductible for tax purposes. Given that the initial purchase accounting for the acquisition in accordance with GAAP for this business combination is not yet completed, the Company is not yet able to disclose the preliminary fair value of the GrandSouth assets acquired and liabilities assumed. Select Acquisition On October 15, 2021, the Company completed the acquisition of Select, headquartered in Dunn, North Carolina, pursuant to an Agreement and Plan of Merger and Reorganization dated June 1, 2021. Select's subsidiary, Select Bank & Trust, was merged into the Bank. The results of the Select acquisition are included in the Company’s results beginning on the October 15, 2021 acquisition date. The Company exchanged 0.408 shares of its common stock for each share of Select common stock. Additionally, all holders of Select stock options were paid cash for the difference between the exercise price of each option and the cash out value of $ 18.00 per option. The acquisition resulted in the Company issuing 7,070,371 shares of common stock with a fair value $ 324.4 million and paying $ 1.4 million in cash related to the stock options, for total consideration of $ 325.8 million in exchange for 100 % of the outstanding stock of Select. Select operated 22 branches located in North Carolina, South Carolina, and Virginia. The acquisition complemented several of the Company’s high-growth markets and increased its market share in others with facilities, operations, and experienced staff already in place. Accordingly, there were significant synergies to be gained from the acquisition and the Company recognized the goodwill in the transaction related primarily to the reasons just noted, as well as the positive earnings of Select. This transaction was accounted for using the acquisition method of accounting for business combinations, and accordingly, the assets acquired, intangible assets identified, and liabilities assumed of Select were recorded based on estimates of fair values as of October 15, 2021. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. Estimated fair values were based on management’s best estimates, using the information available at the date of acquisition, including the use of third-party valuation specialists. As of December 31, 2021, management has finalized the valuations of all acquired assets and liabilities assumed in the Select acquisition. The following table summarizes the estimated fair value of acquired assets, identified intangible assets, and liabilities assumed as of October 15, 2021. Following the table is a discussion of valuation approaches utilized in estimated the fair values in accordance with ASC 850-10. The $ 132.4 million in goodwill that resulted from this transaction is non-deductible for tax purposes. 72 Table of Contents ($ in thousands) Fair Value Estimate Assets acquired: Cash and cash equivalents $ 210,422 Securities available for sale 226,228 Loans held for sale 51,779 Loans 1,230,107 Premises and equipment 21,509 Core deposit intangible 9,170 Operating right-of-use lease assets 4,649 Other assets 61,020 Total 1,814,884 Liabilities assumed: Deposits 1,593,135 Borrowings 11,038 Other liabilities 17,248 Total 1,621,421 Net identifiable assets acquired 193,463 Less: Total consideration 325,819 Goodwill recorded related to acquisition of Select $ 132,356 The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed included in the table above. Cash and due from banks, and interest-bearing deposits with banks : The carrying amount of these assets was a reasonable estimate of fair value based on the short-term nature of these assets. Securities available for sale : Fair value of securities was measured based on quoted market prices, where available. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. Loans held for sale: The valuation of loans held for sale reflected quotes or bids on these loans directly from the prospective buyers of the pools. Loans: Fair value of loans acquired was based on a discounted cash flow methodology that considered factors including loan type and related collateral, classification status, remaining term of the loan, fixed or variable interest rate, amortization status, and current discount rates. Expected cash flows were derived using inputs consistent with management's assessment of credit risk for allowance measurement, including estimated future credit losses and estimated prepayments. A total fair value mark of $ 19.3 million was recorded. PCD loans were determined based primarily on internal grades and delinquency status. The Company reclassified from the fair value mark to ACL a "Day 1" allowance of $ 4.9 million resulting from PCD loans. The following table presents additional information related to the acquired loan portfolio at the acquisition date: ($ in thousands) October 15, 2021 PCD Loans: Par value $ 111,835 Allowance for credit losses ( 4,895 ) Non-credit discount ( 1,251 ) Purchase price $ 105,689 Non-PCD Loans: Fair Value $ 1,124,418 Gross contractual amounts receivable 1,134,879 Estimate of contractual cash flows not expected to be collected 13,257 73 Table of Contents Premises: Land and buildings held for use were valued at appraised values, which reflect considerations of recent disposition values for similar property types with adjustments for characteristics of individual properties. Locations held for sale are valued at appraised values which also reference recent disposition values for similar property types but also considers marketability discounts for vacant properties. The valuations of locations held for sale are reduced by estimated costs to sell. Lease Assets and Lease Liabilities : Lease assets and lease liabilities were measured using a methodology that involved estimating the future lease payments over the remaining lease term with discounting using a discount rate. The lease term was determined for individual leases based on management's assessment of the probability of exercising existing renewal options. Intangible assets: Core deposit intangible ("CDI") asset represents the value of the relationships with deposit customers. The fair value for the core deposit intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of deposit base, net maintenance cost attributable to customer deposits and an estimate of the cost associated with alternative funding sources. The discount rates used for CDI assets are based on market rates. The CDI is being amortized over 10 years utilizing an accelerated method, which results in a weighted-average amortization period of approximately 41 months. Deposits : The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. Fair values for time deposits were estimated using a discounted cash flow analysis applying interest rates currently offered to the contractual interest rates on such time deposits. Borrowings : The fair values of long-term debt instruments were estimated based on quoted market prices for instrument if available, or for similar instruments if not available. Supplemental Pro Forma Financial Information The following table presents certain pro forma information as if Select had been acquired on January 1, 2020. These results combine the historical results of Select with the Company’s results and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2020. Merger-related costs related to this acquisition of $ 16.8 million were recorded by the Company during 2021 and $ 0.8 million of merger-related costs incurred by Select in 2021 prior to the acquisition were excluded from the pro forma information below. In addition, no adjustments have been made to such pro forma information to eliminate the provision for loan losses recorded by Select in the amount of $ 6.2 million for 2020 and a negative provision for loan losses recorded by Select of $ 1.3 million recorded in 2021 prior the acquisition. Pro forma information for the year 2021 was adjusted to eliminate the following: 1) the non-PCD provision for loan losses recorded on the acquisition date of $ 14.1 million and 2) the initial recording of a provision for credit losses associated with Select’s unfunded commitments of $ 3.9 million. If the Select acquisition had occurred at the beginning of 2020, the acquisition date credit loss reserve amounts would have been included in the fair value measurements of Select and been included in the goodwill calculation. Expenses related to systems conversions and other costs of integration were recorded during 2022. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition. The following table also discloses the impact of the acquisition of Select from the acquisition date of October 15, 2021 through December 31, 2021. These amounts are included in the Company’s consolidated financial statements as of and for the year ended December 31, 2021. Merger-related costs have been excluded from these amounts and the provisions for credit loss amounts associated with non-PCD loans and unfunded commitments that were discussed above have also been excluded. 74 Table of Contents ($ in thousands, unaudited) Revenue Net Income Year Ended December 31, 2021 Actual Select results included in statement of income since acquisition date $ 15,175 $ 8,813 Supplemental consolidated pro forma as if Select had been acquired on January 1, 2020 380,241 143,882 Year Ended December 31, 2020 Supplemental consolidated pro forma as if Select had been acquired on January 1, 2020 $ 362,654 $ 93,980 First Bank Insurance Services, Inc. Disposition On June 30, 2021, the Company completed the sale of the operations and substantially all of the operating assets of its property and casualty insurance agency subsidiary, First Bank Insurance Services Inc. ("First Bank Insurance"), to Bankers Insurance, LLC for an initial purchase price valued at $ 13.0 million and a future earn-out payment of up to $ 1.0 million. Cash received at the time of the sale was $ 11.3 million. Net assets sold and liabilities transferred amounted to $ 1.7 million. The Company recorded a gain of $ 1.7 million related to the sale. Approximately $ 10.2 million of intangible assets were derecognized from the Company's balance sheet as a result of this transaction, including $ 7.4 million in goodwill and $ 2.8 million in other intangibles. Note 3. Securities The book values and approximate fair values of investment securities at December 31, 2022 and 2021 are summarized as follows: 2022 2021 Amortized Cost Fair Value Unrealized Amortized Cost Fair Value Unrealized ($ in thousands) Gains (Losses) Gains (Losses) Securities available for sale: US Treasury securities $ 174,420 168,758 — ( 5,662 ) — — — — Government-sponsored enterprise securities 71,957 57,456 — ( 14,501 ) 71,951 69,179 — ( 2,772 ) Mortgage-backed securities 2,467,839 2,045,000 4 ( 422,843 ) 2,545,150 2,514,805 9,489 ( 39,834 ) Corporate bonds 44,340 43,279 — ( 1,061 ) 45,380 46,430 1,106 ( 56 ) Total available for sale $ 2,758,556 2,314,493 4 ( 444,067 ) 2,662,481 2,630,414 10,595 ( 42,662 ) Securities held to maturity: Mortgage-backed securities $ 15,150 14,221 — ( 929 ) 20,260 20,845 585 — State and local governments 526,550 418,307 7 ( 108,250 ) 493,565 490,854 2,955 ( 5,666 ) Total held to maturity $ 541,700 432,528 7 ( 109,179 ) 513,825 511,699 3,540 ( 5,666 ) All of the Company’s mortgage-backed securities were issued by government-sponsored enterprises ("GSEs"), except for private mortgage-backed securities with a fair value of $ 0.8 million and $ 0.9 million as of December 31, 2022 and 2021, respectively. 75 Table of Contents The following table presents information regarding securities with unrealized losses at December 31, 2022: Securities in an Unrealized Loss Position for Less than 12 Months Securities in an Unrealized Loss Position for More than 12 Months Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses US Treasury securities $ 168,758 5,662 — — 168,758 5,662 Government-sponsored enterprise securities — — 57,456 14,501 57,456 14,501 Mortgage-backed securities 221,006 18,215 1,835,958 405,557 2,056,964 423,772 Corporate bonds 40,644 947 886 114 41,530 1,061 State and local governments 48,385 8,323 368,897 99,927 417,282 108,250 Total temporarily impaired securities $ 478,793 33,147 2,263,197 520,099 2,741,990 553,246 The following table presents information regarding securities with unrealized losses at December 31, 2021: Securities in an Unrealized Loss Position for Less than 12 Months Securities in an Unrealized Loss Position for More than 12 Months Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Government-sponsored enterprise securities $ 21,436 522 47,743 2,250 69,179 2,772 Mortgage-backed securities 1,773,022 25,977 404,484 13,857 2,177,506 39,834 Corporate bonds 999 1 945 55 1,944 56 State and local governments 228,279 3,797 34,398 1,869 262,677 5,666 Total temporarily impaired securities $ 2,023,736 30,297 487,570 18,031 2,511,306 48,328 As of December 31, 2022, the Company's securities portfolio held 666 securities of which 644 securities were in an unrealized loss position. As of December 31, 2021, the Company's securities portfolio held 648 securities of which 371 securities were in an unrealized loss position. In the above tables, all of the securities that were in an unrealized loss position at December 31, 2022 and 2021 are bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. In arriving at this conclusion, the Company reviewed third-party credit ratings and considered the severity of the impairment. The state and local government investments are comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation. The Company has no significant concentrations of bond holdings from one state or local government entity. Nearly all of our mortgage-backed securities were issued by FHLMC, FNMA, GNMA, or the SBA, each of which is a government agency or GSE and guarantees the repayment of its securities. 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. At December 31, 2022 and 2021, the Company determined that expected credit losses associated with HTM securities and AFS debt securities were insignificant. The book values and approximate fair values of investment securities at December 31, 2022, 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. 76 Table of Contents Securities Available for Sale Securities Held to Maturity ($ in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Debt securities Due within one year $ 25,078 25,036 — — Due after one year but within five years 176,932 171,224 997 873 Due after five years but within ten years 87,707 72,348 61,509 50,726 Due after ten years 1,000 885 464,044 366,708 Mortgage-backed securities 2,467,839 2,045,000 15,150 14,221 Total securities $ 2,758,556 2,314,493 541,700 432,528 At December 31, 2022 and 2021, investment securities with carrying values of $ 758.0 million and $ 951.4 million, respectively, were pledged as collateral for public deposits. At December 31, 2022 and 2021, there were no holdings of securities of any one issuer, other than the US Government and its agencies or GSEs, in an amount greater than 10% of shareholders' equity. In 2022, there were no sales of investment securities. In 2021, the Company received proceeds from sales of securities of $ 106.5 million and recorded in $ 1.2 million net losses from the sales. In 2020, the Company received proceeds from sales of securities of $ 219.7 million and recorded $ 8.0 million in net gains from the sales. Included in “Other Assets” in the consolidated balance sheets are investments in FHLB and Federal Reserve stock totaling $ 39.6 million and $ 22.3 million at December 31, 2022 and 2021, respectively. These investments do not have readily determinable fair values. The FHLB stock had a cost and fair value of $ 14.7 million and $ 4.6 million at December 31, 2022 and 2021, 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 Federal Reserve stock had a cost and fair value of $ 24.9 million and $ 17.8 million at December 31, 2022 and 2021, respectively, and is a requirement for Federal Reserve member bank qualification. Periodically, both the FHLB and Federal Reserve recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end. The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain litigation against Visa, to which the Company is not a party. The Class B shares have transfer restrictions, and the conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at December 31, 2022 was approximately 1.60 , which means the Company would receive approximately 19,758 Class A shares if the stock had converted on that date. This Class B stock does not have a readily determinable fair value and is carried at zero . If a readily determinable fair value becomes available for the Class B shares, or upon the conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a credit to earnings. 77 Table of Contents Note 4. Loans, Allowance for Credit Losses, and Asset Quality Information The following is a summary of the major categories of total loans outstanding: December 31, 2022 December 31, 2021 ($ in thousands) Amount Percentage Amount Percentage Commercial, financial, and agricultural $ 641,941 9 % 648,997 11 % Real estate – construction, land development & other land loans 934,176 14 % 828,549 13 % Real estate mortgage – residential (1-4 family) first mortgages 1,195,785 18 % 1,021,966 17 % Real estate mortgage – home equity loans/lines of credit 323,726 5 % 331,932 5 % Real estate mortgage – commercial and other 3,510,261 53 % 3,194,737 53 % Consumer loans 60,659 1 % 57,238 1 % Subtotal 6,666,548 100 % 6,083,419 100 % Unamortized net deferred loan fees ( 1,403 ) ( 1,704 ) Total loans $ 6,665,145 6,081,715 Also included in the table above are SBA loans, generally originated under the SBA 7A loan program, with additional information on these loans presented in the table below. ($ in thousands) December 31, 2022 December 31, 2021 Guaranteed portions of SBA Loans included in table above $ 31,893 48,377 Unguaranteed portions of SBA Loans included in table above 116,910 122,772 Total SBA loans included in the table above $ 148,803 171,149 Sold portions of SBA loans with servicing retained - not included in table above $ 392,370 414,240 As of December 31, 2022, there were essentially no remaining loans originated under the SBA's Paycheck Protection Program ("PPP") as provided for under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") of 2020. As of December 31, 2021, the Company had $ 39.0 million in remaining PPP loans which have been excluded from the above SBA 7A Loan program table. At December 31, 2022 and December 31, 2021, there were remaining unaccreted discounts on the retained portion of sold SBA loans amounting to $ 4.3 million and $ 6.0 million respectively. At December 31, 2022 and December 31, 2021, loans in the amount of $ 5.3 billion and $ 4.3 billion, respectively, were pledged as collateral for certain borrowings. Refer to Note 9 for further discussion. Total loans at December 31, 2022 and 2021 included loans to executive officers and directors of the Company, and their associates, totaling approximately $ 6.0 million and $ 0.6 million, respectively. There were six new loans and advances totaling approximately $ 5.5 million on those loans in 2022 and repayments amounted to $ 0.1 million. Management does not believe these loans involve more than the normal risk of collectability or present other unfavorable features. For acquisitions completed prior to the Company's adoption of CECL, loans designated as PCI loans were reclassified as PCD loans, upon the adoption of CECL. Activity in the accretable yield for PCI loans under the Incurred Loss methodology used by the Company prior to adopting CECL was not material for the year ended December 31, 2020. As of December 31, 2022 and 2021, unamortized discounts on all acquired loans totaled $ 11.6 million and $ 17.2 million, respectively. Loan discounts are generally amortized as yield adjustments over the respective lives of the loans, while the loans perform. 78 Table of Contents Nonperforming assets, defined as nonaccrual loans, troubled debt restructurings, loans past due 90 or more days and still accruing interest, and foreclosed real estate, are summarized as follows: ($ in thousands) December 31, 2022 December 31, 2021 Nonperforming assets Nonaccrual loans $ 28,514 34,696 Restructured loans - accruing 9,121 13,866 Accruing loans > 90 days past due — 1,004 Total nonperforming loans 37,635 49,566 Foreclosed properties 658 3,071 Total nonperforming assets $ 38,293 52,637 At December 31, 2022 and 2021, the Company had $ 0.8 million and $ 1.5 million in residential mortgage loans in process of foreclosure, respectively. At December 31, 2022, there was one loan with an immaterial commitment to lend additional funds to borrowers whose loans were nonperforming. At December 31, 2021, there were no commitments to lend additional funds to debtors whose loans were nonperforming. The following table is a summary of the Company’s nonaccrual loans by major categories for the year ended December 31, 2022. ($ in thousands) Nonaccrual Loans with No Allowance Nonaccrual Loans with an Allowance Total Nonaccrual Loans Commercial, financial, and agricultural $ 3,855 6,374 10,229 Real estate – construction, land development & other land loans — 1,009 1,009 Real estate mortgage – residential (1-4 family) first mortgages 157 3,132 3,289 Real estate mortgage – home equity loans/lines of credit — 1,397 1,397 Real estate mortgage – commercial and other 5,010 7,495 12,505 Consumer loans — 85 85 Total $ 9,022 19,492 28,514 The following table is a summary of the Company’s nonaccrual loans by major categories for the year ended December 31, 2021. ($ in thousands) Nonaccrual Loans with No Allowance Nonaccrual Loans with an Allowance Total Nonaccrual Loans Commercial, financial, and agricultural $ 3,947 8,205 12,152 Real estate – construction, land development & other land loans 495 137 632 Real estate mortgage – residential (1-4 family) first mortgages 858 4,040 4,898 Real estate mortgage – home equity loans/lines of credit — 694 694 Real estate mortgage – commercial and other 7,648 8,583 16,231 Consumer loans — 89 89 Total $ 12,948 21,748 34,696 There is no interest income recognized during the periods presented on nonaccrual loans. The Company follows its nonaccrual policy of reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. 79 Table of Contents The following table represents the accrued interest receivables written off by reversing interest income for the periods indicate. ($ in thousands) Year Ended December 31, 2022 Year Ended December 31, 2021 Commercial, financial, and agricultural $ 102 195 Real estate – construction, land development & other land loans 16 6 Real estate mortgage – residential (1-4 family) first mortgages 45 31 Real estate mortgage – home equity loans/lines of credit 20 14 Real estate mortgage – commercial and other 139 453 Consumer loans 2 — Total $ 324 699 The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2022. ($ 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 $ 438 565 — 10,229 630,709 641,941 Real estate – construction, land development & other land loans 238 1,687 — 1,009 931,242 934,176 Real estate mortgage – residential (1-4 family) first mortgages 3,415 25 — 3,289 1,189,056 1,195,785 Real estate mortgage – home equity loans/lines of credit 457 371 — 1,397 321,501 323,726 Real estate mortgage – commercial and other 620 97 — 12,505 3,497,039 3,510,261 Consumer loans 249 66 — 85 60,259 60,659 Total $ 5,417 2,811 — 28,514 6,629,806 6,666,548 Unamortized net deferred loan fees ( 1,403 ) Total loans $ 6,665,145 80 Table of Contents The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2021. ($ 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 $ 377 93 — 12,152 636,375 648,997 Real estate – construction, land development & other land loans 4,046 — 286 632 823,585 828,549 Real estate mortgage – residential (1-4 family) first mortgages 6,571 1,488 — 4,898 1,009,009 1,021,966 Real estate mortgage – home equity loans/lines of credit 489 124 718 694 329,907 331,932 Real estate mortgage – commercial and other 164 1,496 — 16,231 3,176,846 3,194,737 Consumer loans 116 62 — 89 56,971 57,238 Total $ 11,763 3,263 1,004 34,696 6,032,693 6,083,419 Unamortized net deferred loan (fees) costs ( 1,704 ) Total loans $ 6,081,715 Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans on nonaccrual with a net book balance of $ 350,000 or greater for designation as collateral dependent loans, as well as certain other loans that may still be accruing interest and/or are less than $ 350,000 in size that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2022. ($ in thousands) Residential Property Business Assets Land Commercial Property Total Collateral-Dependent Loans Commercial, financial, and agricultural $ — 6,394 — — 6,394 Real estate mortgage – residential (1-4 family) first mortgages 157 — — — 157 Real estate mortgage – commercial and other — — — 6,723 6,723 Total $ 157 6,394 — 6,723 13,274 The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2021. ($ in thousands) Residential Property Business Assets Land Commercial Property Total Collateral-Dependent Loans Commercial, financial, and agricultural $ — 7,886 — — 7,886 Real estate – construction, land development & other land loans — — 533 — 533 Real estate mortgage – residential (1-4 family) first mortgages 871 — — — 871 Real estate mortgage – commercial and other — — — 10,743 10,743 Total $ 871 7,886 533 10,743 20,033 81 Table of Contents Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the ACL based on the fair value of collateral. The ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The Company's policy is to obtain third-party appraisals on any significant pieces of collateral. For loans secured by real estate, the Company's policy is to write nonaccrual loans down to 90 % of the appraised value, which considers estimated selling costs. For real estate collateral that is in industries that are undergoing heightened stress, the Company often discounts the collateral values by an additional 10 % to 25 % due to additional discounts that are estimated to be incurred in a near-term sale. For non real-estate collateral secured loans, the Company generally writes nonaccrual loans down to 75 % of the appraised value, which provides for selling costs and liquidity discounts that are usually incurred when disposing of non real-estate collateral. For reviewed loans that are not on nonaccrual basis, the Company assigns a specific allowance based on the parameters noted above. The Company does not believe that there is significant over-coverage of collateral for any of the loan types noted above. The following tables presents the activity in the ACL on loans for the periods indicated. The increase in ACL at December 31, 2022 as compared to the prior year was related to a combination of the allowance required for loan growth during the year, and updated economic forecasts and loss driver inputs to the CECL model. Throughout 2022, the economic forecasts have projected general weakening of the economy demonstrated by higher projected unemployment rates, lower GDP, and declining price indices for both commercial real estate and residential mortgages. These worsening economic projections translated to higher forecasted life of loan losses in our portfolio and a higher estimated ACL. ($ in thousands) Commercial, Financial, and Agricultural Real Estate - Construction, Land Development & Other Land Loans Real Estate Mortgage - Residential (1-4 Family) First Mortgages Real Estate Mortgage - Home Equity Loans/Lines of Credit Real Estate Mortgage - Commercial and Other Consumer Loans Total As of and for the year ended December 31, 2022 Beginning balance $ 16,249 16,519 8,686 4,337 30,342 2,656 78,789 Charge-offs ( 2,519 ) — — ( 43 ) ( 1,063 ) ( 840 ) ( 4,465 ) Recoveries 756 480 17 600 1,983 207 4,043 Provisions/(Reversals) 3,232 ( 1,871 ) 2,651 ( 1,736 ) 9,447 877 12,600 Ending balance $ 17,718 15,128 11,354 3,158 40,709 2,900 90,967 ($ in thousands) Commercial, Financial, and Agricultural Real Estate - Construction, Land Development & Other Land Loans Real Estate Mortgage - Residential (1-4 Family) First Mortgages Real Estate Mortgage - Home Equity Loans/Lines of Credit Real Estate Mortgage - Commercial and Other Consumer loans Unallocated Total As of and for the year ended December 31, 2021 Beginning balance $ 11,316 5,355 8,048 2,375 23,603 1,478 213 52,388 Adjustment for implementation of CECL 3,067 6,140 2,584 2,580 ( 257 ) 674 ( 213 ) 14,575 Allowance for Select PCD loans 2,917 165 222 92 1,489 10 — 4,895 Charge-offs ( 3,722 ) ( 245 ) ( 273 ) ( 400 ) ( 2,295 ) ( 667 ) — ( 7,602 ) Recoveries 1,744 948 761 578 533 358 — 4,922 Provisions/ (Reversals) 927 4,156 ( 2,656 ) ( 888 ) 7,269 803 — 9,611 Ending balance $ 16,249 16,519 8,686 4,337 30,342 2,656 — 78,789 82 Table of Contents The following table presents the activity in the allowance for loan losses for the year ended December 31, 2020 under the Incurred Loss methodology. ($ in thousands) Commercial, Financial, and Agricultural Real Estate - Construction, Land Development & Other Land Loans Real Estate Mortgage - Residential (1-4 Family) First Mortgages Real Estate Mortgage - Home Equity Loans/Lines of Credit Real Estate Mortgage - Commercial and Other Consumer loans Unallo- cated Total As of and for the year ended December 31, 2020 Beginning balance $ 4,553 1,976 3,832 1,127 8,938 972 — 21,398 Charge-offs ( 5,608 ) ( 51 ) ( 478 ) ( 524 ) ( 968 ) ( 873 ) — ( 8,502 ) Recoveries 745 1,552 754 487 621 294 — 4,453 Provisions 11,626 1,878 3,940 1,285 15,012 1,085 213 35,039 Ending balance $ 11,316 5,355 8,048 2,375 23,603 1,478 213 52,388 Ending balances as of December 31, 2020: Allowance for loan losses Individually evaluated for impairment $ 3,546 30 800 — 2,175 — — 6,551 Collectively evaluated for impairment 7,742 5,325 7,141 2,375 21,428 1,475 213 45,699 Purchased credit impaired 28 — 107 — — 3 — 138 Loans receivable as of December 31, 2020: Ending balance – total $ 782,549 570,672 972,378 306,256 2,049,203 53,955 — 4,735,013 Unamortized net deferred loan fees ( 3,698 ) Total loans 4,731,315 Ending balances as of December 31, 2020: Loans Individually evaluated for impairment $ 7,700 677 9,303 15 18,582 4 — 36,281 Collectively evaluated for impairment 774,712 569,845 958,848 306,141 2,026,682 53,913 — 4,690,141 Purchased credit impaired 137 150 4,227 100 3,939 38 — 8,591 Interest income recorded on impaired loans during the year ended December 31, 2020 was $ 1.1 million, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on accruing TDRs. 83 Table of Contents Credit Quality Indicators 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. 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 available and felt to provide reasonable coverage with realizable liquidation values in normal circumstances. Repayment performance is satisfactory. P (Pass) Consumer loans 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 Company. 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 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. 84 Table of Contents The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination or renewal as of December 31, 2022. Acquired loans are presented in the year originated, not in the year of acquisition. Term Loans by Year of Origination ($ in thousands) 2022 2021 2020 2019 2018 Prior Revolving Total Commercial, financial, and agricultural Pass $ 185,167 107,747 85,110 51,274 590 76,588 120,590 627,066 Special Mention 342 166 648 1,312 — 990 332 3,790 Classified 734 1,909 808 1,384 — 5,762 488 11,085 Total commercial, financial, and agricultural 186,243 109,822 86,566 53,970 590 83,340 121,410 641,941 Real estate – construction, land development & other land loans Pass 550,752 267,096 42,421 30,973 — 12,722 19,519 923,483 Special Mention 5,128 5 3,679 — — 100 13 8,925 Classified 656 107 38 899 — 44 24 1,768 Total real estate – construction, development & other land loans 556,536 267,208 46,138 31,872 — 12,866 19,556 934,176 Real estate mortgage – residential (1-4 family) first mortgages Pass 317,282 274,756 186,102 98,559 185 301,885 1,379 1,180,148 Special Mention 1,189 127 110 470 — 2,416 — 4,312 Classified 763 251 221 359 — 9,072 659 11,325 Total real estate mortgage – residential (1-4 family) first mortgages 319,234 275,134 186,433 99,388 185 313,373 2,038 1,195,785 Real estate mortgage – home equity loans/lines of credit Pass 869 1,091 349 237 — 2,020 309,786 314,352 Special Mention 175 — — — — 18 1,072 1,265 Classified 106 156 94 87 — 213 7,453 8,109 Total real estate mortgage – home equity loans/lines of credit 1,150 1,247 443 324 — 2,251 318,311 323,726 Real estate mortgage – commercial and other Pass 1,096,643 1,186,678 569,624 247,448 179 324,361 48,882 3,473,815 Special Mention 1,715 1,114 4,436 8,289 — 4,457 665 20,676 Classified 3,480 1,265 84 2,456 — 8,118 367 15,770 Total real estate mortgage – commercial and other 1,101,838 1,189,057 574,144 258,193 179 336,936 49,914 3,510,261 Consumer loans Pass 35,406 7,946 3,610 1,056 3 1,250 10,953 60,224 Special Mention — — — — — — — — Classified 320 31 3 1 — 25 55 435 Total consumer loans 35,726 7,977 3,613 1,057 3 1,275 11,008 60,659 Total $ 2,200,727 1,850,445 897,337 444,804 957 750,041 522,237 6,666,548 Unamortized net deferred loan fees ( 1,403 ) Total loans $ 6,665,145 At December 31, 2022, as derived from the table above, the Company had $ 39.0 million in loans graded as Special Mention and $ 48.5 million in loans graded as Classified, which includes all nonaccrual loans. In the table above, substantially all of the "Classified Loans" have grades of 7 or Fail, with those categories having similar levels of risk. Revolving lines of credit that converted to term loans during the year ended December 31, 2022 amounted to $ 3.3 million. 85 Table of Contents The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination or renewal as of December 31, 2021. Acquired loans are presented in the year originated, not in the year of acquisition. Term Loans by Year of Origination ($ in thousands) 2021 2020 2019 2018 2017 Prior Revolving Total Commercial, financial, and agricultural Pass $ 204,945 138,540 71,369 66,645 16,009 17,492 112,933 627,933 Special Mention 225 1,255 1,313 2,729 225 9 2,348 8,104 Classified 1,609 793 1,703 7,096 511 96 1,152 12,960 Total commercial, financial, and agricultural 206,779 140,588 74,385 76,470 16,745 17,597 116,433 648,997 Real estate – construction, land development & other land loans Pass 573,613 133,888 69,066 12,455 9,764 8,190 13,737 820,713 Special Mention 41 737 5,095 110 104 2 9 6,098 Classified 1,541 49 47 83 14 4 — 1,738 Total real estate – construction, development & other land loans 575,195 134,674 74,208 12,648 9,882 8,196 13,746 828,549 Real estate mortgage – residential (1-4 family) first mortgages Pass 241,619 224,617 120,097 82,531 86,074 234,950 11,051 1,000,939 Special Mention 888 615 516 229 323 3,237 94 5,902 Classified 419 156 535 1,185 653 11,246 931 15,125 Total real estate mortgage – residential (1-4 family) first mortgages 242,926 225,388 121,148 83,945 87,050 249,433 12,076 1,021,966 Real estate mortgage – home equity loans/lines of credit Pass 3,111 498 439 1,304 245 1,649 317,319 324,565 Special Mention 194 — 15 — — 19 1,341 1,569 Classified 75 97 71 — — 607 4,948 5,798 Total real estate mortgage – home equity loans/lines of credit 3,380 595 525 1,304 245 2,275 323,608 331,932 Real estate mortgage – commercial and other Pass 1,328,156 796,992 355,885 211,118 197,165 197,659 66,104 3,153,079 Special Mention 1,759 4,849 5,801 3,741 2,072 1,801 1,440 21,463 Classified 7,147 413 2,110 6,025 3,897 603 — 20,195 Total real estate mortgage – commercial and other 1,337,062 802,254 363,796 220,884 203,134 200,063 67,544 3,194,737 Consumer loans Pass 14,960 25,431 2,965 1,722 673 525 10,810 57,086 Special Mention — 4 — — — — — 4 Classified — 73 — 8 — 25 42 148 Total consumer loans 14,960 25,508 2,965 1,730 673 550 10,852 57,238 Total $ 2,380,302 1,329,007 637,027 396,981 317,729 478,114 544,259 6,083,419 Unamortized net deferred loan fees ( 1,704 ) Total loans $ 6,081,715 At December 31, 2021, as derived from the table above, the Company had $ 43.1 million in loans graded as Special Mention and $ 56.0 million in loans graded as Classified, which includes all nonaccrual loans. In the table above, substantially all of the "Classified Loans" have grades of 7 or Fail, with those categories having similar levels of risk. Revolving lines of credit that converted to term loans during the year ended December 31, 2021 amounted to $ 1.0 million. 86 Table of Contents Troubled Debt Restructurings The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, extension of terms and other actions intended to minimize potential losses. The vast majority of the Company’s TDRs modified during the years ended December 31, 2022, 2021, and 2020 related to interest rate reductions combined with extension of terms. The Company does not generally grant principal forgiveness. The Company’s TDRs can be classified as either nonaccrual or accruing based on the loan’s payment status. The TDRs that are nonaccrual are reported within the nonaccrual loan totals presented previously. The following table presents information related to loans modified in a TDR during the year ended December 31, 2022. For the year ended December 31, 2022 ($ in thousands, except number of contracts) Number of Contracts Pre- Modification Restructured Balances Post- Modification Restructured Balances TDRs – Accruing Commercial, financial, and agricultural 2 $ 143 143 Real estate – construction, land development & other land loans 1 67 67 Real estate mortgage – residential (1-4 family) first mortgages 2 75 78 TDRs – Nonaccrual Commercial, financial, and agricultural 5 744 744 Real estate mortgage – residential (1-4 family) first mortgages 1 36 36 Real estate mortgage – commercial and other 1 72 72 Total TDRs arising during period 12 $ 1,137 1,140 The following table presents information related to loans modified in a TDR during the year ended December 31, 2021. For the year ended December 31, 2021 ($ in thousands, except number of contracts) Number of Contracts Pre- Modification Restructured Balances Post- Modification Restructured Balances TDRs – Accruing Real estate mortgage – residential (1-4 family) first mortgages 1 $ 33 33 TDRs – Nonaccrual Commercial, financial, and agricultural 5 1,438 1,435 Real estate – construction, land development & other land loans 1 75 75 Real estate mortgage – residential (1-4 family) first mortgages 1 263 263 Real estate mortgage – commercial and other 4 1,729 1,729 Total TDRs arising during period 12 $ 3,538 3,535 87 Table of Contents The following table presents information related to loans modified in a TDR during the year ended December 31, 2020. For the year ended December 31, 2020 ($ in thousands, except number of contracts) Number of Contracts Pre- Modification Restructured Balances Post- Modification Restructured Balances TDRs – Accruing Commercial, financial, and agricultural 2 $ 143 143 Real estate – construction, land development & other land loans 1 67 67 Real estate mortgage – residential (1-4 family) first mortgages 2 75 78 Consumer loans 1 4 4 TDRs – Nonaccrual Commercial, financial, and agricultural 1 72 72 Real estate mortgage – commercial and other 5 5,977 5,977 Total TDRs arising during period 12 $ 6,338 6,341 Accruing TDRs that were modified in the previous 12 months and that defaulted during the years ended December 31, 2022, 2021, and 2020 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. For the Year Ended December 31, 2022 For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 ($ in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment Accruing TDRs that subsequently defaulted Real estate mortgage – commercial and other — $ — — $ — 1 $ 274 Total accruing TDRs that subsequently defaulted — $ — — $ — 1 $ 274 Concentration of Credit Risk Most of the Company's business activity is with customers located within the markets where it has banking operations. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy within its markets. Approximately 90 % of the Company's loan portfolio is secured by real estate and is therefore susceptible to changes in real estate valuations. Allowance for Credit Losses - Unfunded Loan Commitments In addition to the ACL on loans, the Company maintains an allowance for lending-related commitments such as unfunded loan commitments and letters of credit. Under CECL, the Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for lending-related commitments on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed in Note 1. The allowance for credit losses for unfunded loan commitments of $ 13.3 million and $ 13.5 million at December 31, 2022 and December 31, 2021, respectively, is separately classified on the consolidated balance sheets within the line items "Other Liabilities." 88 Table of Contents The following table prese nts the balance and activity in the allowance for credit losses for unfunded loan commitments for each period indicated. ($ in thousands) December 31, 2022 December 31, 2021 Beginning balance $ 13,506 $ 582 Adjustments for implementation of CECL on January 1, 2021 — 7,504 Day 2 provision for credit losses on unfunded commitments acquired from Select — 3,982 (Reversal of) provision for credit losses on changes in unfunded commitments ( 200 ) 1,438 Ending balance $ 13,306 $ 13,506 Allowance for Credit Losses - Securities HTM and AFS The ACL for securities HTM and AFS was immaterial at December 31, 2022 and December 31, 2021. Note 5. Premises and Equipment Premises and equipment at December 31, 2022 and 2021 consisted of the following: ($ in thousands) Estimated Useful Lives 2022 2021 Land $ 45,363 45,398 Buildings 15 to 40 years 114,884 112,622 Furniture and equipment 5 to 10 years 33,147 31,099 Leasehold improvements 5 to 39 years 1,644 2,028 Total cost 195,038 191,147 Less accumulated depreciation and amortization ( 60,851 ) ( 55,055 ) Total premises and equipment $ 134,187 136,092 Depreciation expense amounted to $ 6.9 million, $ 6.2 million, and $ 5.8 million for the years ended December 31, 2022, 2021, and 2020, respectively, and is recorded in occupancy expense. Note 6. Goodwill and Other Intangible Assets The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of December 31, 2022 and December 31, 2021 and the carrying amount of unamortizable intangible assets as of those same dates. December 31, 2022 December 31, 2021 ($ in thousands) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortizable intangible assets: Customer lists $ 2,700 1,847 2,700 1,386 Core deposit intangibles 29,050 21,274 29,050 18,076 SBA servicing asset 13,264 9,260 11,932 6,460 Other 100 58 100 33 Total $ 45,114 32,439 43,782 25,955 Unamortizable intangible assets: Goodwill $ 364,263 364,263 Customer lists are generally amortized over five years and core deposit intangibles are generally amortized over 10 years, both at an accelerated rate. 89 Table of Contents Amortization expense of all other intangible assets, excluding the SBA servicing asset, totaled $ 3.7 million, $ 3.5 million, and $ 4.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. SBA guarantee servicing fees and SBA servicing asset amortization expense are both recorded within noninterest income within the line item "Other service charges, commissions, and fees." The following table presents the changes in the SBA servicing assets for each period indicated. Impairment charges included with amortization expense in the table below were immaterial for each period presented. ($ in thousands) December 31, 2022 December 31, 2021 Beginning balance, net $ 5,472 5,788 New servicing assets 1,332 1,956 Amortization expense and impairment charges ( 2,800 ) ( 2,272 ) Ending balance, net $ 4,004 5,472 During 2022, 2021, and 2020, the Company recorded $ 3.4 million, $ 3.9 million, and $ 3.3 million, respectively, in SBA guarantee servicing fee income . At December 31, 2022 and 2021, the Company serviced SBA for others totaling $ 392.4 million and $ 414.2 million, respectively. There were no other loans serviced for others in any year presented. Goodwill is evaluated for impairment on at least an annual basis, with the annual evaluation occurring as of October 31st of each year. Goodwill is also evaluated for impairment any time there is a triggering event indicating that impairment may have occurred. No triggering events were identified during 2022 or 2021, and therefore, the Company did not perform interim impairment evaluations in either of those years. Each of the Company's goodwill impairment evaluations for the periods presented, including the most recent October 2022 evaluation, indicated that there was no goodwill impairment. The following table presents the changes in carrying amounts of goodwill: ($ in thousands) Total Goodwill Balance at December 31, 2020 $ 239,272 Additions from acquisition of Select 132,356 Reduction from disposal of First Bank Insurance ( 7,365 ) Balance at December 31, 2021 364,263 Net activity during 2022 — Balance at December 31, 2022 $ 364,263 In addition to the changes in goodwill presented above, activity for other intangibles related to transactions since January 1, 2021 are presented as follows. Refer to Note 2 for additional discussion of the transactions. • In connection with the Select acquisition on October 15, 2021, the Company recorded $ 9.2 million in core deposit intangibles. • Related to the sale of First Bank Insurance, customer lists with a carrying value of $ 2.8 million were derecognized. 90 Table of Contents The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets for each of the five calendar years ending December 31, 2027 and the estimated amount amortizable thereafter. 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 amortizable intangible assets. ($ in thousands) Estimated Amortization Expense 2023 $ 2,545 2024 1,718 2025 1,358 2026 962 2027 781 Thereafter 1,307 Total $ 8,671 Note 7. Income Taxes The components of income tax expense for the years ended December 31, 2022, 2021, and 2020 are as follows: ($ in thousands) 2022 2021 2020 Current - Federal $ 35,616 25,742 27,799 - State 4,477 3,733 3,909 Deferred - Federal ( 1,658 ) ( 4,247 ) ( 8,893 ) - State ( 152 ) ( 553 ) ( 1,161 ) Total $ 38,283 24,675 21,654 The following is a reconciliation of federal income tax expense at the statutory rate of 21% at December 31, 2022, December 31, 2021, and December 31, 2020, to the income tax provision reported in the financial statements. ($ in thousands) 2022 2021 2020 Tax provision at statutory rate $ 38,896 25,266 21,657 Increase (decrease) in income taxes resulting from: Tax-exempt interest income ( 1,976 ) ( 1,589 ) ( 1,050 ) Low income housing and other tax credits ( 669 ) ( 1,229 ) ( 772 ) Bank-owned life insurance income ( 1,511 ) ( 589 ) ( 532 ) Non-deductible interest expense 26 14 23 State income taxes, net of federal benefit 3,369 2,472 2,117 Nondeductible merger expenses 107 242 — Change in valuation allowance ( 20 ) ( 10 ) ( 20 ) Other, net 61 98 231 Total $ 38,283 24,675 21,654 91 Table of Contents The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets, which are included in Other Assets on the consolidated balance sheets, are as follows at December 31, 2022 and 2021: ($ in thousands) 2022 2021 Deferred tax assets: Allowance for credit losses on loans $ 20,900 18,102 Allowance for credit losses on unfunded commitments 3,057 3,103 Excess book over tax pension plan cost 365 467 Deferred compensation 638 571 Federal & state net operating loss and tax credit carryforwards 197 206 Accruals, book versus tax 4,404 4,235 Pension — 81 Unrealized losses on securities available for sale 102,046 7,369 Foreclosed real estate 3 20 Basis differences in assets acquired in FDIC transactions — 504 Purchase accounting adjustments 2,982 4,076 Equity compensation 768 694 Partnership investments 652 310 Leases 151 108 SBA servicing asset 77 108 All other — 101 Gross deferred tax assets 136,240 40,055 Less: Valuation allowance ( 30 ) ( 10 ) Net deferred tax assets 136,210 40,045 Deferred tax liabilities: Loan fees ( 3,102 ) ( 2,840 ) Depreciable basis of fixed assets ( 5,493 ) ( 5,790 ) Amortizable basis of intangible assets ( 10,047 ) ( 10,328 ) Basis differences in assets acquired in FDIC transactions ( 108 ) — Trust preferred securities ( 416 ) ( 453 ) Pension ( 12 ) — Gross deferred tax liabilities ( 19,178 ) ( 19,411 ) Net deferred tax asset $ 117,032 20,634 The valuation allowances for 2022, 2021 and 2020 related primarily to state net operating loss carryforwards. It is management’s belief that the realization of the remaining net deferred tax assets is more likely than not. The Company had no significant uncertain tax positions, and thus no reserve for uncertain tax positions has been recorded. Additionally, the Company determined that it has no material unrecognized tax benefits that if recognized would affect the effective tax rate. The Company’s general policy is to record tax penalties and interest as a component of “other operating expenses.” The Company is subject to routine audits of its tax returns by the Internal Revenue Service and various state taxing authorities. The Company’s tax returns are subject to income tax audit by federal and state agencies beginning with the year 2019. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority. Retained earnings at December 31, 2022, 2021 and 2020 included approximately $ 6.9 million representing pre-1988 tax bad debt reserve base year amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of the Bank’s stock. 92 Table of Contents Note 8. Deposits The following table lists the composition of the deposit portfolio as of the end of the respective years. ($ in thousands) December 31, 2022 December 31, 2021 Noninterest-bearing checking accounts $ 3,566,003 3,348,622 Interest-bearing checking accounts 1,514,166 1,593,231 Money market accounts 2,416,146 2,562,283 Savings accounts 728,641 708,054 Other time deposits 726,254 555,084 Time deposits of $250,000 or more 276,319 357,355 Total deposits $ 9,227,529 $ 9,124,629 At December 31, 2022, the scheduled maturities of time deposits were as follows: ($ in thousands) 2023 $ 882,741 2024 61,393 2025 27,906 2026 17,565 2027 12,084 Thereafter 884 $ 1,002,573 Deposits received from executive officers and directors and their associates totaled approximately $ 2.0 million and $ 2.5 million at December 31, 2022 and 2021, respectively. Deposit overdrafts of approximately $ 0.8 million and $ 0.9 million at December 31, 2022 and 2021 are included within "Loans" on the consolidated balance sheets. As of December 31, 2022 and 2021, the Company held $ 276.3 million and $ 357.4 million, respectively, in time deposits of more than $ 250,000 (which was the FDIC insurance limit for insured deposits as of December 31, 2022). Brokered deposits were $ 261.9 million and $ 7.4 million at December 31, 2022 and 2021, respectively. Total reciprocal deposits through the Certificate of Deposit Account Registry Services ("CDARS") and Insured Cash Sweep ("ICS") were $ 10.3 million and $ 12.6 million at December 31, 2022 and 2021, respectively. 93 Table of Contents Note 9. Borrowings and Borrowings Availability The following tables present information regarding the Company’s outstanding borrowings at December 31, 2022 and 2021 (dollars are in thousands) : Description – 2022 Due date Call Feature 2022 Amount Interest Rate FHLB Principal Reducing Credit 7/24/2023 None $ 32 1.00 % fixed FHLB Principal Reducing Credit 12/22/2023 None 912 1.25 % fixed FHLB Principal Reducing Credit 6/26/2028 None 214 0.25 % fixed FHLB Principal Reducing Credit 7/17/2028 None 38 0.00 % fixed FHLB Principal Reducing Credit 8/18/2028 None 158 1.00 % fixed FHLB Principal Reducing Credit 8/22/2028 None 159 1.00 % fixed FHLB Principal Reducing Credit 12/20/2028 None 329 0.50 % fixed FHLB Daily Rate Credit 8/23/2023 None 40,000 4.57 % fixed FHLB Fixed Rate Credit 1/9/2023 None 50,000 4.15 % fixed FHLB Fixed Rate Credit 2/9/2023 None 50,000 4.35 % fixed FHLB Fixed Rate Credit 2/1/2023 None 80,000 4.25 % fixed Trust Preferred Securities 1/23/2034 Quarterly by Company beginning 1/23/2009 20,620 7.12 % at 12/31/22 adjustable rate 3 month LIBOR + 2.70 % Trust Preferred Securities 6/15/2036 Quarterly by Company beginning 6/15/2011 25,774 6.16 % at 12/31/22 adjustable rate 3 month LIBOR + 1.39 % Trust Preferred Securities 1/7/2035 Quarterly by Company beginning 1/7/2010 10,310 6.08 % at 12/31/22 adjustable rate 3 month LIBOR + 2.00 % Trust Preferred Securities 9/20/2034 Quarterly by Company beginning 9/20/2009 12,372 6.90 % at 12/31/22 adjustable rate 3 month LIBOR + 2.15 % Total borrowings / weighted average rate as of December 31, 2022 290,918 4.82 % Unamortized discount on acquired borrowings ( 3,411 ) Total borrowings $ 287,507 94 Table of Contents The following table presents information regarding the Company’s outstanding borrowings at December 31, 2021 (dollars are in thousands) : Description – 2021 Due date Call Feature 2021 Amount Interest Rate FHLB Principal Reducing Credit 7/24/2023 None $ 79 1.00 % fixed FHLB Principal Reducing Credit 12/22/2023 None 952 1.25 % fixed FHLB Principal Reducing Credit 6/26/2028 None 225 0.25 % fixed FHLB Principal Reducing Credit 7/17/2028 None 44 0.00 % fixed FHLB Principal Reducing Credit 8/18/2028 None 166 1.00 % fixed FHLB Principal Reducing Credit 8/22/2028 None 166 1.00 % fixed FHLB Principal Reducing Credit 12/20/2028 None 342 0.50 % fixed Trust Preferred Securities 1/23/2034 Quarterly by Company beginning 1/23/2009 20,620 2.91 % at 12/31/20 adjustable rate 3 month LIBOR + 2.70 % Trust Preferred Securities 6/15/2036 Quarterly by Company beginning 6/15/2011 25,774 1.61 % at 12/31/20 adjustable rate 3 month LIBOR + 1.39 % Trust Preferred Securities 1/7/2035 Quarterly by Company beginning 1/7/2010 10,310 2.24 % at 12/31/20 adjustable rate 3 month LIBOR + 2.00 % Trust Preferred Securities 9/20/2034 Quarterly by Company beginning 9/20/2009 12,372 2.27 % at 12/31/21 adjustable rate 3 month LIBOR + 2.15 % Total borrowings / weighted average rate as of December 31, 2021 71,050 2.24 % Unamortized discount on acquired borrowings ( 3,664 ) Total borrowings $ 67,386 All outstanding FHLB borrowings may be accelerated immediately by the FHLB in certain circumstances, including material adverse changes in the condition of the Company or if the Company’s qualifying collateral amounts to less than that required under the terms of the FHLB borrowing agreement. In the above tables, at December 31, 2022 short-term borrowings (original maturity terms of less than 3 months) totaled $ 220.0 million. There were no short-term borrowings at December 31, 2021. In the above tables, the $ 20.6 million in borrowings due on January 23, 2034 relate to borrowings structured as trust preferred capital securities that were issued by First Bancorp Capital Trusts II and III ($ 10.3 million by each trust), which are unconsolidated subsidiaries of the Company, on December 19, 2003 and qualify as capital for regulatory capital adequacy requirements. These unsecured debt securities became callable by the Company at par on any quarterly interest payment date beginning on January 23, 2009. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.70 %. In the above tables, the $ 25.8 million in borrowings due on June 15, 2036 relate to borrowings structured as trust preferred capital securities that were issued by First Bancorp Capital Trust IV, an unconsolidated subsidiary of the Company, on April 13, 2006 and qualify as capital for regulatory capital adequacy requirements. These unsecured debt securities became callable by the Company at par on any quarterly interest payment date beginning on June 15, 2011. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 1.39 %. In the above tables, the $ 10.3 million in borrowings due on January 7, 2035 relate to borrowings structured as trust preferred capital securities that were issued by Carolina Capital Trust, an unconsolidated subsidiary of the Company. The Company acquired Carolina Bank Holdings, Inc. and its subsidiary, Carolina Capital Trust, on March 3, 2017. These unsecured debt securities qualify as capital for regulatory capital adequacy requirements and became callable by the Company at par on any quarterly interest payment date beginning on January 7, 2010. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.00 %. 95 Table of Contents In the above tables, the $ 12.4 million in borrowings due on September 20, 2034 relate to borrowings structured as trust preferred capital securities that were issued by New Century Statutory Trust I, an unconsolidated subsidiary of the Company. The Company acquired Select Bancorp, Inc. and its subsidiary, New Century Statutory Trust I, on October 15, 2021. These unsecured debt securities qualify as capital for regulatory capital adequacy requirements and became callable by the Company at par on any quarterly interest payment date beginning on September 20, 2009. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.15 %. At December 31, 2022, the Company had three sources of readily available borrowing capacity: • An $ 847.1 million line of credit with the FHLB that can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity needs and is secured by the Company’s FHLB stock and a blanket lien on most of its real estate loan portfolio. $ 221.8 million was outstanding at December 31, 2022 and $ 2.0 million was outstanding at December 31, 2021; • A total of $ 265.0 million federal funds lines of credit with correspondent banks which allow the Company to purchase federal funds on an overnight, unsecured basis. None was outstanding at December 31, 2022 or 2021; and • An approximately $ 165.4 million line of credit through the Federal Reserve discount window, and is secured by a blanket lien on a portion of the Company’s commercial and consumer loan portfolio (excluding real estate collateral). None was outstanding at December 31, 2022 or 2021. Note 10. Leases The Company enters into leases in the normal course of business. As of December 31, 2022, the Company leased 16 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 office space for several operational departments. All of the Company’s leases are operating leases under applicable accounting standards and the lease agreements have maturity dates ranging from July 2023 through May 2076, some of which include options for multiple five - and ten-year extensions. The Company includes lease extension options in the lease term if, after considering relevant economic, market, and strategic factors, it is reasonably certain the Company will exercise the option. The weighted average remaining life of the lease term for these leases was 19.6 years as of December 31, 2022. Certain of the Company's lease agreements include variable lease payments based on changes in inflation, with the impact of that factor being insignificant to the Company's total lease expense. As permitted by applicable accounting standards, the Company has elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company's consolidated balance sheets. The short-term lease cost for each period presented was insignificant. Leases are classified as either operating or finance leases at the lease commencement date, and as previously noted, all of the Company's leases have been determined to be operating leases. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments when the rate implicit in the lease is not known. The weighted average discount rate for leases was 2.97 % as of December 31, 2022. The right-of-use assets and lease liabilities were $ 18.7 million and $ 19.4 million as of December 31, 2022, respectively, and were $ 20.7 million and $ 21.2 million as of December 31, 2021, respectively. Total operating lease expense charged to operations under all operating lease agreements was $ 2.9 million in 2022, $ 2.6 million in 2021, and $ 2.9 million in 2020. 96 Table of Contents Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2022 for each of the five calendar years ending December 31, 2027 are as follows: ($ in thousands) 2023 $ 2,360 2024 2,163 2025 1,706 2026 1,685 2027 1,547 Thereafter 18,441 Total undiscounted lease payments 27,902 Less effect of discounting ( 8,511 ) Present value of estimated lease payments (lease liability) $ 19,391 Note 11. Employee Benefit Plans 401(k) Plan . The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code ("IRC"). New employees who have met the age requirement are automatically enrolled in the plan at a 6 % deferral rate. The automatic deferral can be modified by the employee at any time. An eligible employee may contribute up to 15 % of annual salary to the plan, not to exceed IRC limits. The Company’s matches 100 % of the employee’s contribution up to 6 %. The Company’s matching contribution expense was $ 4.9 million, $ 4.3 million, and $ 4.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. Although discretionary contributions by the Company are permitted by the plan, the Company did not make any such contributions in the years presented. The Company’s matching and discretionary contributions are made according to the same investment elections each participant has established for their deferral contributions. Pension Plan . Historically, the Company offered a noncontributory defined benefit retirement plan (the “Pension Plan”) that qualified under Section 401(a) of the IRC. The Pension Plan provided for a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75 % of Final Average Annual Compensation ( five highest consecutive calendar years’ earnings out of the last ten years of employment) multiplied by the employee’s years of service not in excess of 40 years, and (ii) 0.65 % of Final Average Annual Compensation in excess of the average social security wage base multiplied by years of service not in excess of 35 years. Benefits were fully vested after five years of service. Effective December 31, 2012, the Company froze the Pension Plan for all participants. 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. As discussed below, the contributions are invested to provide for benefits under the Pension Plan. The Company did not make any contributions to the Pension Plan for any of the years presented. The Company also does not expect to contribute to the Pension Plan in 2023. The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between the two amounts representing the funded status of the Pension Plan as of the end of the respective year. 97 Table of Contents ($ in thousands) 2022 2021 2020 Change in benefit obligation Benefit obligation at beginning of year $ 41,657 44,750 41,592 Service cost — — — Interest cost 1,043 981 1,223 Actuarial (gain) loss ( 10,286 ) ( 2,041 ) 3,788 Benefits paid ( 1,803 ) ( 2,033 ) ( 1,853 ) Accumulated benefit obligation at end of year 30,611 41,657 44,750 Change in plan assets Plan assets at beginning of year 44,904 48,167 43,824 Actual return on plan assets ( 9,446 ) ( 1,230 ) 6,196 Employer contributions — — — Benefits paid ( 1,803 ) ( 2,033 ) ( 1,853 ) Plan assets at end of year 33,655 44,904 48,167 Funded status at end of year $ 3,044 3,247 3,417 The amount recognized in the Other Assets in the consolidated balance sheets at December 31, 2022 and 2021 as it relates to the Pension Plan, excluding the related deferred tax assets, was $ 3.0 million and $ 3.2 million. The following table presents information regarding the amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) at December 31, 2022 and 2021, as it relates to the Pension Plan. ($ in thousands) 2022 2021 Net loss $ ( 1,497 ) ( 1,441 ) Prior service cost — — Amount recognized in AOCI before tax effect ( 1,497 ) ( 1,441 ) Tax benefit 344 331 Net amount recognized as decrease to AOCI $ ( 1,153 ) ( 1,110 ) The following table reconciles the beginning and ending balances of AOCI at December 31, 2022 and 2021, as it relates to the Pension Plan: ($ in thousands) 2022 2021 Accumulated other comprehensive loss at beginning of fiscal year $ ( 1,110 ) ( 1,364 ) Net loss arising during period ( 312 ) ( 247 ) Amortization of unrecognized actuarial loss 256 577 Tax expense (benefit) of changes during the year, net 13 ( 76 ) Accumulated other comprehensive loss at end of fiscal year $ ( 1,153 ) ( 1,110 ) The following table reconciles the beginning and ending balances of the prepaid pension cost related to the Pension Plan: ($ in thousands) 2022 2021 Prepaid pension cost as of beginning of fiscal year $ 4,689 5,188 Net periodic pension cost for fiscal year ( 147 ) ( 499 ) Actual employer contributions — — Prepaid pension asset as of end of fiscal year $ 4,542 4,689 98 Table of Contents Net pension cost for the Pension Plan included the following components for the years ended December 31, 2022, 2021, and 2020: ($ in thousands) 2022 2021 2020 Service cost – benefits earned during the period $ — — — Interest cost on projected benefit obligation 1,043 981 1,223 Expected return on plan assets ( 1,152 ) ( 1,059 ) ( 1,300 ) Net amortization and deferral 256 577 843 Net periodic pension cost $ 147 499 766 The following table is an estimate of the benefits that will be paid in accordance with the Pension Plan for each of the five calendar years ending December 31, 2027 and thereafter, assuming the Pension Plan is operated on an ongoing basis. ($ in thousands) Estimated benefit payments 2023 $ 1,932 2024 1,973 2025 2,035 2026 2,069 2027 2,109 2028-2032 10,728 The investment objective of the Company’s Pension Plan is to ensure that there are sufficient assets to fund regular pension benefits payable to employees over the long-term life of the plan. The Plan seeks to allocate plan assets in a manner that is closely duration-matched with the actuarial projected cash flows of the Plan liabilities, consistent with prudent standards for preservation of capital, tolerance of investment risk, and maintenance of liquidity. Assets of the Plan are held by Fidelity Investments as Trustee. In 2018, the Pension Plan adopted a liability-driven investment strategy to help meet these objectives. This strategy employs a structured fixed-income portfolio designed to reduce volatility in the Pension Plan’s future funding requirements and funding status. This is accomplished by using a blend of high quality corporate and government fixed-income securities, with both intermediate and long-term durations. Generally, the value of these fixed income securities is inversely correlated to changes in market interest rates, which substantially offsets changes in the value of the pension benefit obligation caused by changes in the interest rate used to discount plan liabilities. The fair values of the Company’s pension plan assets at December 31, 2022, by asset category, were as follows: ($ in thousands) Total Fair Value at December 31, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 194 — 194 — Fixed income investment funds 33,461 — 33,461 — Total $ 33,655 — 33,655 — 99 Table of Contents The fair values of the Company’s Pension Plan assets at December 31, 2021, by asset category, were as follows: ($ in thousands) Total Fair Value at December 31, 2021 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 267 — 267 — Fixed income investment funds 44,637 — 44,637 — Total $ 44,904 — 44,904 — The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2022 and 2021. - Cash and cash equivalents: Valued at net asset value (“NAV”), which can be validated with a sufficient level of observable activity (i.e. purchases and sales at NAV), and therefore, the funds were classified within Level 2 of the fair value hierarchy. - Fixed income funds consist of commingled funds that primarily include investments in U.S. government securities and corporate bonds. The commingled funds also include an insignificant portion of investments in other asset-based securities, municipal securities, etc. The commingled funds are valued at the NAV for the units in the fund. The NAV, as provided by the Trustee, is used as practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund. Supplemental Executive Retirement Plan . Historically, the Company sponsored a Supplemental Executive Retirement Plan (the “SERP”) for the benefit of certain senior management executives of the Company. The purpose of the SERP was to provide additional monthly pension benefits to ensure that each such senior management executive would receive lifetime monthly pension benefits equal to 3 % of his or her final average compensation multiplied by his or her years of service (maximum of 20 years) to the Company or its subsidiaries, subject to a maximum of 60 % of his or her final average compensation. The amount of a participant’s monthly SERP benefit is reduced by (i) the amount payable under the Company’s Pension Plan (described above), and (ii) 50 % of the participant’s primary social security benefit. Final average compensation means the average of the five highest consecutive calendar years of earnings during the last ten years of service prior to termination of employment. The SERP is an unfunded plan. Payments are made from the general assets of the Company. Effective December 31, 2012, the Company froze the SERP to all participants. The following table reconciles the beginning and ending balances of the SERP’s benefit obligation, as computed by the Company’s independent actuarial consultants: ($ in thousands) 2022 2021 2020 Change in benefit obligation Benefit obligation at beginning of year $ 4,660 5,982 5,638 Service cost — — — Interest cost 112 119 158 Actuarial (gain) loss ( 1,006 ) ( 1,119 ) 517 Benefits paid ( 245 ) ( 322 ) ( 331 ) Accumulated benefit obligation at end of year 3,521 4,660 5,982 Plan assets — — — Funded status at end of year $ ( 3,521 ) ( 4,660 ) ( 5,982 ) The amount recognized in the Other Liabilities in the consolidated balance sheets at December 31, 2022 and 2021 as it relates to the SERP, excluding the related deferred tax assets, was $ 3.5 million and $ 4.7 million. 100 Table of Contents The following table presents information regarding the amounts recognized in AOCI at December 31, 2022 and 2021, as it relates to the SERP: ($ in thousands) 2022 2021 Net gain $ 1,551 1,088 Prior service cost — — Amount recognized in AOCI before tax effect 1,551 1,088 Tax expense ( 356 ) ( 250 ) Net amount recognized as increase to AOCI $ 1,195 838 The following table reconciles the beginning and ending balances of AOCI at December 31, 2022 and 2021, as it relates to the SERP: ($ in thousands) 2022 2021 Accumulated other comprehensive income (loss) at beginning of fiscal year $ 838 ( 35 ) Net gain arising during period 1,007 1,119 Prior service cost — — Amortization of unrecognized actuarial (loss) gain ( 544 ) 15 Amortization of prior service cost and transition obligation — — Tax expense related to changes during the year, net ( 106 ) ( 261 ) Accumulated other comprehensive income at end of fiscal year $ 1,195 838 The following table reconciles the beginning and ending balances of the prepaid pension cost related to the SERP: ($ in thousands) 2022 2021 Accrued liability as of beginning of fiscal year $ ( 5,748 ) ( 5,936 ) Net periodic pension cost for fiscal year 432 ( 134 ) Benefits paid 245 322 Accrued liability as of end of fiscal year $ ( 5,071 ) ( 5,748 ) Net pension cost for the SERP included the following components for the years ended December 31, 2022, 2021, and 2020: ($ in thousands) 2022 2021 2020 Service cost – benefits earned during the period $ — — — Interest cost on projected benefit obligation 112 119 158 Net amortization and deferral ( 544 ) 15 ( 157 ) Net periodic pension cost $ ( 432 ) 134 1 The following table is an estimate of the benefits that will be paid in accordance with the SERP for each of the five calendar years ending December 31, 2027 and thereafter: ($ in thousands) Estimated benefit payments 2023 $ 240 2024 237 2025 275 2026 277 2027 295 2028-2032 1,345 101 Table of Contents Applicable to both Plans The components of net periodic benefit cost other than the service cost component are included in the line item "Other operating expenses" in the consolidated statements of income. The following assumptions were used in determining the actuarial information for the Pension Plan and the SERP for the years ended December 31, 2022, 2021, and 2020: 2022 2021 2020 Pension Plan SERP Pension Plan SERP Pension Plan SERP Discount rate used to determine net periodic pension cost 2.62 % 2.48 % 2.24 % 2.04 % 3.03 % 2.89 % Discount rate used to calculate end of year liability disclosures 4.94 % 4.90 % 2.62 % 2.48 % 2.24 % 2.04 % Expected long-term rate of return on assets 2.62 % n/a 2.24 % n/a 3.03 % n/a The Company’s discount rate policy for the Pension Plan is based on a calculation of the Company’s expected pension payments, with those payments discounted using the FTSE yield curve (formerly called the Citigroup Pension Index yield curve) that matches the specific expected cash flows of the Pension Plan. The discount rate policy for the SERP is to use the FTSE yield curve that matches the expected cash flows of the SERP. Note 12. Commitments and Contingencies In the normal course of business, there are various outstanding commitments to extend credit that are not reflected in the financial statements. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. Commitments may expire without being used. The following table presents the Company’s outstanding loan commitments at December 31, 2022 and December 31, 2021. December 31, 2022 December 31, 2021 ($ in thousands) Fixed Rate Variable Rate Total Fixed Rate Variable Rate Total Loan commitments $ 681,486 211,071 892,557 389,758 230,521 620,279 Unused lines of credit 273,244 1,194,575 1,467,819 273,693 1,176,803 1,450,496 Total $ 954,730 1,405,646 2,360,376 663,451 1,407,324 2,070,775 At December 31, 2022 and 2021, the Company had $ 20.2 million and $ 21.3 million, respectively, in standby letters of credit outstanding. The Company has no carrying amount for these standby letters of credit at either of those dates. The nature of the standby letters of credit is a stand-alone obligation made on behalf of the Company’s customers to suppliers of the customers to guarantee payments owed to the supplier by the customer. The standby letters of credit are generally for terms for one year, at which time they may be renewed for another year if both parties agree. The Company maintains an ACL for unfunded loan commitments which is included in the balance of other liabilities in the consolidated balance sheets. The ACL for unfunded loan commitments is determined as part of the quarterly ACL analysis. The Company also periodically invests in limited partnerships and LLCs primarily for the purposes of fulfilling CRA requirements and obtaining tax credits. As of December 31, 2022, the Company had a remaining funding commitments of $ 28.6 million related to these investments. See Note 10 with respect to future obligations under operating leases and Note 11 with respect to future benefits that will be paid under the Company's Pension Plan and SERP. The Company, in the normal course of business, may be subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. The Company is not involved in any legal proceedings which, in management’s opinion, could have a material effect on the consolidated financial position of the Company. 102 Table of Contents Note 13. Fair Value of Financial Instruments Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2022. Description of Financial Instruments ($ in thousands) Fair Value at December 31, 2022 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: US Treasury securities $ 168,758 — 168,758 — Government-sponsored enterprise securities 57,456 — 57,456 — Mortgage-backed securities 2,045,000 — 2,045,000 — Corporate bonds 43,279 — 43,279 — Total available for sale securities $ 2,314,493 — 2,314,493 — Presold mortgages in process of settlement $ 1,282 1,282 — — Nonrecurring Individually evaluated loans $ 9,590 — — 9,590 Foreclosed real estate 38 — — 38 The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2021. Description of Financial Instruments ($ in thousands) Fair Value at December 31, 2021 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 $ 69,179 — 69,179 — Mortgage-backed securities 2,514,805 — 2,514,805 — Corporate bonds 46,430 — 46,430 — Total available for sale securities $ 2,630,414 — 2,630,414 — Presold Mortgages in process of settlement $ 19,257 19,257 — — Nonrecurring Impaired loans $ 11,583 — — 11,583 Foreclosed real estate 364 — — 364 103 Table of Contents The following is a description of the valuation methodologies used for instruments measured at fair value. Presold Mortgages in Process of Settlement - The fair value is based on the committed price that an investor has agreed to pay for the loan and is considered a Level 1 input. Securities Available for Sale — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by our third-party bond accounting provider using matrix pricing. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities, commercial mortgage-backed obligations, government-sponsored enterprise securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. Individually evaluated loans — Fair values for individually evaluated loans are measured on a non-recurring basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is generally determined by third-party appraisers using an income or market valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Appraisals used in this analysis are generally obtained at least annually based on when the loans first became impaired, and thus the appraisals are not necessarily as of the period ends presented. Any fair value adjustments are recorded in the period incurred as provision for credit 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). Appraisals used in this analysis are generally obtained at least annually based on when the assets were acquired, and thus the appraisals are not necessarily as of the period ends presented. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the consolidated statements of income. 104 Table of Contents For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows: ($ in thousands) Fair Value at December 31, 2022 Valuation Technique Significant Unobservable Inputs Range (Weighted Average) Individually evaluated loans - collateral-dependent $ 5,680 Appraised value Discounts applied for estimated costs to sell 10 % Individually evaluated loans - cash-flow dependent 3,909 PV of expected cash flows Discount rates used in the calculation of PV of expected cash flows 5.5 % - 11.1 % ( 6.76 %) Foreclosed real estate 38 Appraised value Discounts applied for estimated costs to sell 10 % For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows: ($ in thousands) Fair Value at December 31, 2021 Valuation Technique Significant Unobservable Inputs Range (Weighted Average) Impaired loans - valued at collateral value $ 7,326 Appraised value Discounts applied for estimated costs to sell 10 % Impaired loans - valued at PV of expected cash flows 4,257 PV of expected cash flows Discount rates used in the calculation of PV of expected cash flows 4 % - 11 % ( 6.22 %) Foreclosed real estate 364 Appraised value Discounts applied for estimated costs to sell 10 % The carrying amounts and estimated fair values of financial instruments not carried at fair value as of December 31, 2022 and 2021 are as follows: December 31, 2022 December 31, 2021 ($ 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 $ 101,133 101,133 128,228 128,228 Due from banks, interest-bearing Level 1 169,185 169,185 332,934 332,934 Securities held to maturity Level 2 541,700 432,528 513,825 511,699 SBA and other loans held for sale Level 2 — — 61,003 62,004 Total loans, net of allowance Level 3 6,574,178 6,240,870 6,002,926 5,990,235 Accrued interest receivable Level 1 29,710 29,710 25,896 25,896 Bank-owned life insurance Level 1 164,592 164,592 165,786 165,786 SBA servicing asset Level 3 4,004 4,721 5,472 5,546 Deposits Level 2 9,227,529 9,218,945 9,124,629 9,124,701 Borrowings Level 2 287,507 277,146 67,386 61,295 Accrued interest payable Level 1 2,738 2,738 607 607 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. 105 Table of Contents Note 14. Stock-Based Compensation The Company recorded total stock-based compensation expense of $ 3.0 million, $ 2.3 million, and $ 2.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Company recognized $ 0.7 million, $ 0.5 million, and $ 0.6 million of income tax benefits related to stock-based compensation expense in its income statement for the years ended December 31, 2022, 2021, and 2020, respectively. At December 31, 2022, the sole equity-based compensation plan for the Company is the First Bancorp 2014 Equity Plan (the "Equity Plan"), which was approved by shareholders on May 8, 2014. As of December 31, 2022, the Equity Plan had 348,087 shares remaining available for grant. The Equity Plan is intended to serve as a means to attract, retain, and motivate key employees and directors and to associate the interests of the Plan's participants with those of the Company and its shareholders. The Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted and unrestricted stock, restricted performance stock, and performance units. For the last several years, the only equity-based compensation granted by the Company has been shares of restricted stock, as it relates to employees, and unrestricted stock as it relates to non-employee directors. Recent restricted stock awards to employees typically include service-related vesting conditions only. Compensation expense for these grants 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 Equity Plan), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested. Certain of the Company’s equity grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company recognizes compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for each incremental award. Compensation expense is based on the estimated number of stock awards that will ultimately vest. Over the past five years, there have been insignificant amounts of forfeitures, and therefore the Company assumes that all awards granted with service conditions only will vest. The Company issues new shares of common stock when options are exercised. In addition to employee equity awards, the Company's practice is to grant unrestricted common shares to each non-employee director (currently 12 in total) in June of each year. These grants were each valued at approximately $ 32,000 in 2022. Compensation expense associated with these director awards is recognized on the date of the award since there are no vesting conditions. On June 1, 2022, the Company granted 10,344 shares of common stock to non-employee directors ( 862 shares per director), at a fair market value of $ 37.12 per share, which was the closing price of the Company’s common stock on that date, which resulted in $ 384,000 in expense. On June 1, 2021, the Company granted 7,050 shares of common stock to non-employee directors ( 705 shares per director), at a fair market value of $ 45.41 per share, which was the closing price of the Company’s common stock on that date, which resulted in $ 320,000 in expense. The expense associated with director grants is classified as "other operating expense" in the consolidated statements of income. 106 Table of Contents The following table presents information regarding the activity during 2020, 2021, and 2022 related to the Company’s outstanding restricted stock: Long-Term Restricted Stock Shares Grant Date Fair Value Nonvested at January 1, 2020 159,366 $ 36.79 Granted during the period 68,704 26.96 Vested during the period ( 55,965 ) 33.91 Nonvested at December 31, 2020 172,105 33.80 Granted during the period 104,414 40.56 Vested during the period ( 63,369 ) 39.82 Forfeited or expired during the period ( 6,819 ) 37.32 Nonvested at December 31, 2021 206,331 35.25 Granted during the period 95,960 38.09 Vested during the period ( 70,110 ) 36.69 Forfeited or expired during the period ( 9,169 ) 32.62 Nonvested at December 31, 2022 223,012 36.14 Total unrecognized compensation expense as of December 31, 2022 amounted to $ 4.7 million with a weighted average remaining term of 2.1 years. The Company expects to record $ 2.5 million of compensation expense in the next twelve months related to these nonvested awards that are outstanding at December 31, 2022. Note 15. Shareholders’ Equity Rabbi Trust Obligations With the acquisition of Carolina Bank in March 2017, the Company assumed a deferred compensation plan structured as a Rabbi Trust for certain members of Carolina Bank’s board of directors that is fully funded by Company common stock, which was valued at $ 7.7 million on the date of acquisition. Subsequent to this acquisition, approximately $ 6.1 million of the deferred compensation has been paid to the plan participants. The balances of the related asset and liability were $ 1.6 million and $ 1.8 million at December 31, 2022 and December 31, 2021, respectively, both of which are presented as components of shareholders’ equity. In the acquisition of Select on October 15, 2021, the Company assumed a deferred compensation plan structured as a Rabbi Trust for certain members of Select’s board of directors that is fully funded by Company common stock, which was valued at $ 5.1 million on the date of acquisition. This plan was fully liquidated during the fourth quarter of 2021 by distributing the shares to the participants. Stock Repurchases During 2022, the Company did not repurchase any shares of the Company's common stock. The $ 40.0 million repurchase authorization in effect during 2022 expired December 31, 2022 and the Company's Board has not approved any additional repurchase authorizations. During 2021, the Company repurchased approximately 106,744 shares of the Company’s common stock at an average price of $ 37.81 , which totaled $ 4.0 million, under a $ 20 million repurchase authorization publicly announced in November 2020, which expired on December 31, 2021. 107 Table of Contents Note 16. Earnings Per Share The following is a reconciliation of the income (numerator) and shares (denominator) used in computing Basic and Diluted Earnings Per Common Share ("EPS"): For Years Ended December 31, 2022 2021 2020 ($ in thousands except per share amounts) Income Shares Per Share Amount Income Shares Per Share Amount Income Shares Per Share Amount Basic EPS: Net income $ 146,936 $ 95,644 $ 81,477 Less: income allocated to participating securities ( 779 ) ( 483 ) ( 398 ) Basic EPS per common share $ 146,157 35,485,620 $ 4.12 $ 95,161 29,876,151 $ 3.19 $ 81,079 28,839,866 $ 2.81 Diluted EPS: Net income $ 146,936 35,485,620 $ 95,644 29,876,151 $ 81,477 28,839,866 Effect of Dilutive Securities — 189,110 — 151,634 — 141,701 Diluted EPS per common share $ 146,936 35,674,730 $ 4.12 $ 95,644 30,027,785 $ 3.19 $ 81,477 28,981,567 $ 2.81 For the years ended December 31, 2022 , 2021, and 2019, there were no options that were anti-dilutive. Note 17. Accumulated Other Comprehensive (Loss) Income The components of AOCI for the Company are as follows: ($ in thousands) December 31, 2022 December 31, 2021 December 31, 2020 Unrealized (loss) gain on securities available for sale $ ( 444,063 ) ( 32,067 ) 20,448 Deferred tax asset (liability) 102,046 7,369 ( 4,699 ) Net unrealized (loss) gain on securities available for sale ( 342,017 ) ( 24,698 ) 15,749 Postretirement plans asset (liability) 54 ( 353 ) ( 1,817 ) Deferred tax (liability) asset ( 12 ) 81 418 Net postretirement plans asset (liability) 42 ( 272 ) ( 1,399 ) Total accumulated other comprehensive (loss) income $ ( 341,975 ) ( 24,970 ) 14,350 108 Table of Contents The following table discloses the changes in AOCI for the years ended December 31, 2022, 2021, and 2020 (all amounts are net of tax). ($ in thousands) Unrealized Gain (Loss) on Securities Available for Sale Postretirement Plans (Liability) Asset Total Beginning balance at January 1, 2020 $ 7,504 ( 2,381 ) 5,123 Other comprehensive income before reclassifications 14,425 454 14,879 Amounts reclassified from accumulated other comprehensive income ( 6,180 ) 528 ( 5,652 ) Net current-period other comprehensive income 8,245 982 9,227 Ending balance at December 31, 2020 15,749 ( 1,399 ) 14,350 Other comprehensive (loss) income before reclassifications ( 41,400 ) 671 ( 40,729 ) Amounts reclassified from accumulated other comprehensive income 953 456 1,409 Net current-period other comprehensive (loss) income ( 40,447 ) 1,127 ( 39,320 ) Ending balance at at December 31, 2021 ( 24,698 ) ( 272 ) ( 24,970 ) Other comprehensive (loss) income before reclassifications ( 317,319 ) 536 ( 316,783 ) Amounts reclassified from accumulated other comprehensive income — ( 222 ) ( 222 ) Net current-period other comprehensive (loss) income ( 317,319 ) 314 ( 317,005 ) Ending balance at December 31, 2022 $ ( 342,017 ) 42 ( 341,975 ) Amounts reclassified from AOCI for Unrealized Gain (Loss) on Securities AFS represent realized securities gains or losses, net of tax effects. Amounts reclassified from AOCI for Postretirement Plans Asset (Liability) represent amortization of amounts included in , net of taxes, and are recorded in the "Other operating expenses" line item of the consolidated statements of income. Note 18. Regulatory Restrictions The Company is regulated by the Federal Reserve and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. The Bank is regulated by the Federal Reserve and the North Carolina Commissioner of Banks. The primary source of funds for the payment of dividends by the Company is dividends received from its subsidiary, the Bank. The Bank, as a North Carolina banking corporation, may declare dividends so long as such dividends do not reduce its capital below its applicable required capital (typically, the level of capital required to be deemed “adequately capitalized”). As of December 31, 2022, approximately $ 830.8 million of the Company’s investment in the Bank was restricted as to transfer to the Company without obtaining prior regulatory approval. There was no average reserve balance requirement under the requirements of the Federal Reserve at December 31, 2022. The Company and the Bank 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 the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Company’s and the Bank’s respective regulatory capital ratios as of December 31, 2022 and 2021, along with the minimum amounts required for capital adequacy purposes and to be well capitalized under prompt corrective 109 Table of Contents action in effect at such times are presented below. There are no conditions or events since year-end that management believes have changed the Company’s or the Bank's classification. Actual Fully Phased-In Regulatory Guidelines Minimum To Be Well Capitalized Under Current Prompt Corrective Action Provisions ($ in thousands) Amount Ratio Amount Ratio Amount Ratio (must equal or exceed) (must equal or exceed) As of December 31, 2022 Common Equity Tier I Capital Ratio Company $ 1,010,369 13.02 % 543,403 7.00 % N/A N/A Bank 1,077,526 13.88 % 543,301 7.00 % 504,494 6.50 % Total Capital Ratio Company 1,171,084 15.09 % 815,104 10.50 % N/A N/A Bank 1,174,634 15.13 % 814,951 10.50 % 776,144 10.00 % Tier I Capital Ratio Company 1,073,958 13.83 % 659,846 8.50 % N/A N/A Bank 1,077,526 13.88 % 659,723 8.50 % 620,915 8.00 % Leverage Ratio Company 1,073,958 10.51 % 408,623 4.00 % N/A N/A Bank 1,077,526 10.55 % 408,569 4.00 % 510,712 5.00 % As of December 31, 2021 Common Equity Tier I Capital Ratio Company $ 888,936 12.53 % 496,635 7.00 % N/A N/A Bank 934,687 13.18 % 496,285 7.00 % 460,836 6.50 % Total Capital Ratio Company 1,040,964 14.67 % 744,953 10.50 % N/A N/A Bank 1,023,354 14.43 % 744,427 10.50 % 708,979 10.00 % Tier I Capital Ratio Company 952,272 13.42 % 603,057 8.50 % N/A N/A Bank 934,687 13.18 % 602,632 8.50 % 567,183 8.00 % Leverage Ratio Company 952,272 9.39 % 405,790 4.00 % N/A N/A Bank 934,687 9.22 % 405,652 4.00 % 507,065 5.00 % 110 Table of Contents Note 19. Revenue from Contracts with Customers All of the Company’s revenues that are in the scope of the “ Revenue from Contracts with Customers ” accounting standard (“ASC 606”) are recognized within noninterest income. The following table presents the Company’s sources of noninterest income for years ended December 31, 2022, 2021, and 2020. Items outside the scope of ASC 606 are noted as such. For the Years Ended December 31, ($ in thousands) 2022 2021 2020 Noninterest income in-scope of ASC 606: Service charges on deposit accounts $ 15,523 12,317 11,098 Other service charges, commissions, and fees: Bankcard Interchange income, net 14,996 17,323 13,101 Other service charges and fees 5,683 4,352 3,905 Commissions from sales of insurance and financial products: Insurance income — 2,725 5,353 Wealth management income 5,195 4,160 3,495 SBA consulting fees 2,608 7,231 8,644 Noninterest income (in-scope of ASC 606) 44,005 48,108 45,596 Noninterest income (out-of-scope of ASC 606) 23,980 25,503 35,750 Total noninterest income $ 67,985 73,611 81,346 A description of the Company’s revenue streams accounted for under ASC 606 is detailed below. Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Overdraft fees are recognized at the point in time that the overdraft occurs. Maintenance and activity fees include account maintenance fees and transaction-based fees. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees, which include services such as ATM usage fees, stop payment charges, statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Service charges on deposits are withdrawn from the customer’s account balance. Other service charges, commissions, and fees: The Company earns interchange income on its customers’ debit and credit card usage and earns fees from other services utilized by its customers. Interchange income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange fees are offset with interchange expenses and are presented on a net basis. 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 wealth management products and also earned commissions from the sale of insurance policies until the sale of First Bank Insurance Services on June 30, 2021. Wealth management income primarily consists of commissions received on financial product sales, such as annuities. The Company’s performance obligation is generally satisfied upon the issuance of the financial product. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company also earns some fees from asset management, which is billed quarterly for services rendered in the most recent period, for which the performance obligation has been satisfied. Insurance income, which was earned by the Company until June 30, 2021, generally consisted of commissions from the sale of insurance policies and performance-based commissions from insurance companies. The Company recognized commission income from the sale of insurance policies when it acted as an agent between the 111 Table of Contents insurance company and the policyholder. The Company’s performance obligation was generally satisfied upon the issuance of the insurance policy. 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. 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 20. Supplementary Income Statement Information Components of other noninterest income or noninterest expense exceeding 1% of total revenue ($ 4.1 million) for any of the years ended December 31, 2022, 2021, and 2020 are as follows: ($ in thousands) 2022 2021 2020 Noninterest income: Other service charges, commissions, and fees – interchange fees, net $ 14,996 17,323 13,101 Noninterest expense: Other operating expenses – software costs 6,064 5,315 5,149 Other operating expenses – data processing expense 7,535 5,959 4,743 Other operating expenses – credit card rewards expense 547 3,431 2,391 Note 21. Condensed Parent Company Information Condensed financial data for the Company (parent company only) follows: CONDENSED BALANCE SHEETS As of December 31, ($ in thousands) 2022 2021 Assets Cash on deposit with bank subsidiary $ 5,611 18,625 Investment in wholly-owned subsidiaries, at equity 1,100,829 1,279,285 Premises and Equipment 7 7 Other assets 22 5,056 Total assets $ 1,106,469 1,302,973 Liabilities and shareholders’ equity Trust preferred securities $ 65,665 65,412 Other liabilities 9,208 6,986 Total liabilities 74,873 72,398 Shareholders’ equity 1,031,596 1,230,575 Total liabilities and shareholders’ equity $ 1,106,469 1,302,973 CONDENSED STATEMENTS OF INCOME Year Ended December 31, ($ in thousands) 2022 2021 2020 Dividends from wholly-owned subsidiaries $ 17,400 25,300 63,100 Earnings of wholly-owned subsidiaries, net of dividends 133,147 75,697 20,899 Interest expense ( 2,672 ) ( 1,455 ) ( 1,743 ) All other expense, net ( 939 ) ( 3,898 ) ( 779 ) Net income $ 146,936 95,644 81,477 112 Table of Contents CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, ($ in thousands) 2022 2021 2020 Operating Activities: Net income $ 146,936 95,644 81,477 Equity in undistributed earnings of subsidiaries ( 133,147 ) ( 75,697 ) ( 20,899 ) Decrease in other assets 4,055 3,924 5,806 Increase (decrease) in other liabilities 642 ( 859 ) ( 3 ) Total – operating activities 18,486 23,012 66,381 Investing Activities: Net cash received in acquisitions — 7,379 — Total - investing activities — 7,379 — Financing Activities: Payment of common stock cash dividends ( 30,660 ) ( 22,228 ) ( 20,936 ) Repurchases of common stock — ( 4,036 ) ( 31,868 ) Stock withheld for payment of taxes ( 840 ) ( 786 ) ( 307 ) Total - financing activities ( 31,500 ) ( 27,050 ) ( 53,111 ) Net (decrease) increase in cash ( 13,014 ) 3,341 13,270 Cash, beginning of year 18,625 15,284 2,014 Cash, end of year $ 5,611 18,625 15,284 113 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors First Bancorp Southern Pines, North Carolina Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of First Bancorp (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 28, 2023 expressed an unqualified opinion thereon. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2021 due to the adoption of ASC Topic 326, Financial Instruments - Credit Losses. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by 114 Table of Contents communicating the critical audit matters below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Allowance for Credit Losses As described in Notes 1 and 4 to the Company's consolidated financial statements, the Company had a gross loan portfolio of approximately $6.7 billion and related allowance for credit losses of approximately $91.0 million as of December 31, 2022. The allowance for credit losses consists of quantitative and qualitative components. The Company considers historical loss experience, current economic and business conditions, as well as reasonable and supportable forecasts to develop the quantitative component. This quantitative component is then adjusted for qualitative risk factors that involve significant estimates and subjective assumptions that require a high degree of management’s judgment. We identified management’s significant judgments and assumptions used in the determination of the qualitative factors and the selection of the relevant macroeconomic forecasts to be used in the reasonable and supportable forecast period of the allowance for credit losses as a critical audit matter. Auditing these complex judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill and knowledge needed. The primary procedures we performed to address this critical audit matter included: • Assessing the reasonableness of management’s significant judgments and assumptions related to evaluation of the loan portfolio and other qualitative factors for collectively evaluated loans. • Evaluating the relevance and reliability of data used in determining the qualitative factors by verifying the data to internally developed and third-party sources, and other audit evidence gathered. • Utilizing personnel with specialized skill and knowledge to assist with evaluating the reasonableness of the macroeconomic forecasts used in the reasonable and supportable forecast period. /s/ BDO USA, LLP We have served as the Company's auditor since 2019. Raleigh, North Carolina February 28, 2023 115 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors First Bancorp Southern Pines, North Carolina Opinion on Internal Control over Financial Reporting We have audited First Bancorp’s (the “Company’s”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 28, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 116 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP Raleigh, North Carolina February 28, 2023 117 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.