S E L E C T E D F I N A N C I A L D A T A
Financial Highlights
Years Ended December 31
($ in thousands except share data)
S EL ECTED I NCO ME STATEMENT DATA
Net interest income
Provision for loan losses
Noninterest income
Noninterest expenses
Income taxes
Net income
Preferred stock dividends
Net income - common shareholders
PE R SHARE DATA
Earnings per common share - basic
Earnings per common share - diluted
Cash dividends declared - common
Market Price:
High
Low
Close
Book value - common
Tangible book value - common
S EL ECTED B ALA NCE SHEET DATA
(at year end)
Assets
Loans
Deposits
Shareholders’ Equity
PE R FORMA NCE R ATIOS
Return on average assets
Return on average common equity
NO NF IN AN CI A L DATA
Common shares outstanding
Number of branches
Number of employees - full/part time
n/m = not meaningful.
01
2013
2012
Change 2012
to 2013
1.0%
-61.6%
1591.1%
-0.7%
n/m
n/m
-68.1%
n/m
n/m
n/m
0.0%
29.8%
56.0%
29.6%
5.4%
7.4%
-1.8%
3.6%
-2.5%
4.4%
n/m
n/m
$ 136,526
30,616
23,489
96,619
12,081
20,699
895
19,804
$ 1.01
0.98
0.32
17.39
11.98
16.62
15.30
11.81
135,200
79,672
1,389
97,275
(16,952)
(23,406)
2,809
(26,215)
(1.54)
(1.54)
0.32
13.40
7.68
12.82
14.51
11.00
$ 3,185,070
2,463,194
2,751,019
371,922
3,244,910
2,376,457
2,821,360
356,117
0.62%
6.78%
-0.79%
-9.29%
19,679,659
96
837/36
19,669,302
97
810/42
Richard H. Moore
President and Chief
Executive Officer
P R E S I D E N T ’ S L E T T E R
Dear Shareholders, Customers and Friends,
Thank you for this opportunity to report on a successful 2013 for our company. It was a
year of change, as we undertook many important initiatives. We are optimistic that our
actions combined with the economic recovery we are seeing in much of our market area
will lead to enhanced shareholder value for years to come.
M O V I N G T O W A R D S S T R O N G E R E A R N I N G S
First, I will discuss our earnings for 2013. Net income available to common shareholders
totaled $19.8 million, or $0.98 per diluted common share, compared to a net loss
of $26.2 million, or $1.54 per diluted common share, for 2012. In 2012, we incurred
losses associated with a loan sale and a foreclosed property write-down that were the
primary causes of the loss for the year. The tough decisions made in late 2012 led to
2013 having the lowest level of loan and foreclosed property losses since 2009. The
core profitability of the company remains strong, with net interest margins that exceed
peer averages, fee income that is trending up and overhead expenses that are being
managed very closely. The company’s return on average assets was 0.62% for 2013,
which was the highest it has been since 2009.
In addition to the strong earnings, we also experienced good loan and core deposit
growth in 2013. Excluding loans assumed in failed bank acquisitions, our net loan
growth for the year was $159 million, or 7.6%. This high growth was a result of both a
recovering economy and improvements made in our internal loan process that have
made us more efficient and responsive to our customers’ needs.
On the liability side, we experienced good growth in our low cost core deposit
accounts, while maintaining discipline in our pricing of higher cost CD’s, which led to
declines in that category of deposits. The bank’s lower cost core deposits increased
6.8%, while time deposits declined 15.6%, which led to an overall deposit decline
of 2.5%. The shift in deposits from high-cost categories to low cost ones led to the
company’s average cost of funds declining from 0.59% in 2012 to 0.39% in 2013, which
helped the company maintain a strong net interest margin of 4.92% for 2013.
As it relates to asset quality, our key ratios at year end were approximately the same
as they were following our loan sale in January 2013. The company’s ratio of legacy
nonperforming assets to total assets (excludes failed bank assets) amounted to 2.78%
at year end. That is higher than we would like and remains an area of focus for our
company. We are optimistic that with recently implemented enhancements in our
internal processes and the recovering economy that better days are ahead.
For our shareholders, 2013 was a very good year. The price for First Bancorp’s common
stock (Ticker: FBNC) increased from $12.82 on January 1, 2013 to $16.62 at December
31, 2013, an increase of 30%. When you add the dividends that the company paid, the
total return for our shareholders in 2013 was 33%.
Now I will discuss some of the strategic initiatives that the company has undertaken.
02
P R E S I D E N T ’ S L E T T E R
M O V I N G I N T O N E W T E R R I T O R Y
First, we intend to keep growing. Recently, we opened loan production offices in Charlotte, Fayetteville and
Greenville (all in North Carolina). These are all attractive markets where we had already been making loans from
surrounding counties. We believe that our skilled loan officers, who now also have a physical presence, will be a
source of solid growth in 2014 and beyond. These locations could also lay the foundation for future full-service
branches. That was the scenario that occurred in Blacksburg, Virginia. We opened a loan production office in
Blacksburg several years ago and were pleased to grow our market share enough to be able to upgrade our
presence into a full-service branch during 2013.
Another source of strategic growth is acquisitions. In 2013, we completed the purchase of two competitor
branches located in Southern Pines and Rockingham. We consolidated the Southern Pines branch into our
existing nearby branch (without buying the competitor’s building), whereas in Rockingham, the branch we
purchased is now our flagship branch in that long-time First Bank market. While we assumed all deposits of
the two branches, we hand-selected the loans we purchased. The purchase of the two branches was a low risk
transaction that eliminated a competitor, while more efficiently leveraging our existing footprint.
While targeted increases in our branch network is an important
growth strategy, we also recognize that expenses associated
with operating branches are high. Therefore, we continually
evaluate our branch network for locations for possible closure
or consolidation—those with limited prospects for profitability
or ones where we can serve our customers easily from a nearby
branch. With the
ever-increasing popularity of online and mobile banking,
the need for branch locations is lessening in importance. In
this regard, since December 2012, we have closed and/or
consolidated five branch locations.
First Bank headquarters, Southern Pines, NC
M O V I N G O U R C U S T O M E R S W I T H W O R L D - C L A S S W E B O F F E R I N G S A N D N E W S E R V I C E S
I just mentioned the importance of digital banking, which has become an increasingly important part of our
relationship with our customers. Thus in January 2014, we were excited to rollout our new and improved website.
We changed our website address from www.FirstBancorp.com to a domain that more closely identifies with our
bank name and that conveys who we are to the communities we serve—www.LocalFirstBank.com. In addition to
the domain change, the website was upgraded for ease-of-use and now provides valuable educational resources
and tools. If you are not already a user of our website, I encourage you to visit us at www.LocalFirstBank.com.
Work has recently begun on a significant update to our mobile and online banking products that will offer our
customers a best-in-class experience in 2014 however they choose to bank with us.
As for social media, the same change in domain name carried over to our Facebook page and Twitter account.
Please like us on our Facebook page—www.facebook.com/LocalFirstBank—and follow us on Twitter —
@LocalFirstBank. With the growing importance of social media, we have made investments in our online social
presence and are looking forward to increased engagement with our customers via this form of media.
In 2013, we rolled-out our brand new MasterCard® credit card. We have always offered a credit card product,
however, we recognized that we needed to offer more to our customers if we wanted to grow market share. Last
summer, we did just that. Our new MasterCard® comes with easy-to-earn rewards, a competitive interest rate and
no annual fee. In addition, we increased the rate at which cardholders earn points, and we now provide an option
that allows cardholders to combine the points earned from all eligible First Bank MasterCard® debit and credit
cards. If you don’t already have MasterCard® debit and credit cards, I hope you will visit your local First Bank
branch today and ask for them!
03
P R E S I D E N T ’ S L E T T E R
M O V I N G F O R W A R D I N 2 0 1 4
In late 2013, we rolled out the biggest change to our product offerings in many years—a new deposit account
line-up. Our goal was to simplify our checking, savings and money market accounts by reducing the number of
options available and making them easier to understand for our customers. Another fundamental change was the
elimination of free checking for customers who maintain low balances in their accounts. This was not a change
that was taken lightly. With increasing regulatory costs and the high expense we incur to operate a checking
account, including online and mobile banking, checking accounts with low balances have become increasingly
unprofitable. We concluded that we had little choice but to ask customers with such accounts to pay a nominal
fee. We respect, value and thank all of our customers for their business.
Before concluding, it was with mixed emotions that we moved our corporate headquarters from Troy to Southern
Pines, North Carolina. First Bank had been headquartered in Troy since 1935 and Troy was an integral part of our
success. Most of our board members were raised in small towns like Troy and understand the special connection
that a local business has with its citizens. However, the opportunity to purchase an ideal building in nearby
Southern Pines presented itself, and when we looked at future growth plans and recognized that many of our
employees were already commuting from the Southern Pines market to Troy, the board decided that a move
made sense. But we continue to have a large presence in Troy and still maintain our operations centers there
with over 150 employees. And as discussed below, we will hold our upcoming shareholders’ meeting in Troy.
We accomplished many things in 2013 and look forward to achieving even more in 2014. One of the exciting
events for our area in 2014 will be the back-to-back US Opens in golf for men and women being held in nearby
Pinehurst in June. This is the first time that those championships will occur in consecutive weeks and should
be beneficial to our economy. If you are visiting the area, I invite you to drop by for a visit to our corporate
headquarters on Broad Street in Southern Pines. If you need banking services during your stay, please visit one
of our many Southern Pines/Pinehurst branches.
Accompanying the mailing of this letter is our proxy statement and the notice of our Annual Shareholders
Meeting, which is being held at the James H. Garner Conference Center in Troy, North Carolina at 3:00 PM on
May 8, 2014. There is important information regarding your company contained within the proxy statement, and
I encourage you to read it closely. On the back of the proxy statement is a location map for your convenience.
I invite you to attend this meeting, which will give you an opportunity to meet the management and board of
directors of your company. One of our directors who you will want to give special thanks to is David Burns. David
is retiring from the board after serving as a director for 25 years. David has provided wise counsel to our board
since 1988 and he will be missed.
Your support is appreciated, and I welcome your comments and suggestions.
Sincerely,
Richard H. Moore
President and Chief Executive Officer
March 20, 2014
04
B O A R D O F D I R E C T O R S
Daniel T. Blue, Jr.
Jack D. Briggs
David L. Burns
Mary Clara Capel
CHAIRMAN
FIRST BANCORP
James Crawford III
James G. Hudson, Jr.
Richard H. Moore
PRESIDENT AND CEO
FIRST BANCORP
George R. Perkins, Jr.
Thomas F. Phillips
Frederick L. Taylor, II
Virginia C. Thomasson
Dennis A. Wicker
John C. Willis
05
F I R S T B A N C O R P
Form 10-K
2013
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
North Carolina
(State of Incorporation)
56-1421916
(I.R.S. Employer Identification Number)
300 SW Broad Street, Southern Pines, North Carolina
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code:
28387
(Zip Code)
(910) 246-2500
Title of each class
Common Stock, No Par Value
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
of 1933. [ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934. [ ] YES [X] NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
[ ] Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] YES [X] NO
The aggregate market value of the Common Stock, no par value, held by non-affiliates of the registrant, based on the
closing price of the Common Stock as of June 30, 2013 as reported by The NASDAQ Global Select Market, was
approximately $253,572,158.
The number of shares of the registrant’s Common Stock outstanding on February 28, 2014 was 19,679,659.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement to be filed pursuant to Regulation 14A are incorporated herein by
reference into Part III.
TABLE OF CONTENTS
Forward-Looking Statements
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5
Market for Registrant’s Common Stock, Related Shareholder Matters, and Issuer
Item 6
Item 7
Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview – 2013 Compared to 2012
Overview – 2012 Compared to 2011
Outlook for 2014
Critical Accounting Policies
Merger and Acquisition Activity
FDIC Indemnification Asset
Statistical Information
Net Interest Income
Provision for Loan Losses
Noninterest Income
Noninterest Expenses
Income Taxes
Stock-Based Compensation
Distribution of Assets and Liabilities
Securities
Loans
Nonperforming Assets
Allowance for Loan Losses and Loan Loss Experience
Deposits
Borrowings
Liquidity, Commitments, and Contingencies
Capital Resources and Shareholders’ Equity
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Return on Assets and Equity
Interest Rate Risk (Including Quantitative and Qualitative Disclosures about
Market Risk)
Inflation
Current Accounting Matters
Item 7A
Item 8
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Income (Loss) for each of the years in the
three-year period ended December 31, 2013
Consolidated Statements of Comprehensive Income (Loss) for each of the years in
the three-year period ended December 31, 2013
Consolidated Statements of Shareholders’ Equity for each of the years in the
three-year period ended December 31, 2013
3
Begins on
Page(s)
5
5
21
27
27
28
28
29, 72
31, 72
32
35
37
39
41
41
46, 73
47, 83
49, 74
52, 75
53, 75
53
55, 76
56, 76
57, 78
59, 80
62, 82
64, 85
65
66, 87
67, 89
69
69, 88
69, 86
71
71
71
91
92
93
94
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2013
Notes to the Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Selected Consolidated Financial Data
Quarterly Financial Summary
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9
Disclosures
Item 9A
Item 9B
Controls and Procedures
Other Information
PART III
Item 10
Item 11
Item 12
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
Item 13
Item 14
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
PART IV
SIGNATURES
Begins on
Page(s)
95
96
156
72
90
158
158
159
159
159
159
159
160
160
164
*
Information called for by Part III (Items 10 through 14) is incorporated herein by reference to the Registrant’s definitive
Proxy Statement for the 2014 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 2014.
4
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to
risks and uncertainties. Forward-looking statements are statements that include projections, predictions,
expectations or beliefs about future events or results or otherwise are not statements of historical fact. Further,
forward-looking statements are intended to speak only as of the date made. Such statements are often
characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,”
“plan,” “project,” or other statements concerning our opinions or judgment about future events. Our actual
results may differ materially from those anticipated in any forward-looking statements, as they will depend on
many factors about which we are unsure, including many factors which are beyond our control. Factors that
could influence the accuracy of such forward-looking statements include, but are not limited to, the financial
success or changing strategies of our customers, our level of success in integrating acquisitions, actions of
government regulators, the level of market interest rates, and general economic conditions. For additional
information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors”
section in Item 1A of this report.
PART I
Item 1. Business
General Description
First Bancorp (the “Company”) is a bank holding company. Our principal activity is the ownership and operation
of First Bank (the “Bank”), a state-chartered bank with its main office in Southern Pines, North Carolina. The
Company is also the parent to a series of statutory business trusts organized under the laws of the State of
Delaware that were created for the purpose of issuing trust preferred debt securities. Our outstanding debt
associated with these trusts was $46.4 million at December 31, 2013 and 2012.
The Company was incorporated in North Carolina on December 8, 1983, as Montgomery Bancorp, for the
purpose of acquiring 100% of the outstanding common stock of the Bank through a stock-for-stock exchange.
On December 31, 1986, the Company changed its name to First Bancorp to conform its name to the name of the
Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the Bank of Montgomery, named for
the county in which it operated. Until September 2013, the Bank’s main office was in Troy, North Carolina,
located in the center of Montgomery County. In September 2013, the Company and the Bank moved their main
offices approximately 45 miles to Southern Pines, North Carolina, in Moore County. As of December 31, 2013,
we conducted business from 96 branches covering a geographical area from Florence, South Carolina to the
southeast, to Wilmington, North Carolina to the east, to Kill Devil Hills, North Carolina to the northeast, to
Salem, Virginia to the north, to Abingdon, Virginia to the northwest, and to Asheville, North Carolina to the west.
We also have loan production offices in Charlotte, Greenville, and Fayetteville, all in North Carolina. Of the
Bank’s 96 branches, 81 branches are in North Carolina, seven branches are in South Carolina and eight branches
are in Virginia (where we operate under the name “First Bank of Virginia”). Ranked by assets, the Bank was the
fifth largest bank headquartered in North Carolina as of December 31, 2013.
On June 19, 2009, we acquired substantially all of the assets and liabilities of Cooperative Bank, which had been
closed earlier that day by regulatory authorities. Cooperative Bank operated through twenty-four branches
located primarily in the coastal region of North Carolina. In connection with the acquisition, we assumed assets
with a book value of $959 million, including $829 million in loans and $706 million in deposits. The loans and
5
foreclosed real estate purchased in the acquisition are covered by loss share agreements between the Federal
Deposit Insurance Corporation (FDIC) and First Bank which affords the Bank significant loss protection. We
recorded a gain of $67.9 million as a result of this acquisition. Additional information regarding this transaction
is contained in the Company’s 2009 Annual Report on Form 10-K.
On January 21, 2011, we acquired substantially all of the assets and liabilities of The Bank of Asheville, which had
been closed earlier that day by regulatory authorities. The Bank of Asheville operated through five branches
located in or near Asheville, North Carolina. In connection with the acquisition, we assumed assets with a book
value of $190 million, including $154 million in loans and $192 million in deposits. Substantially all of the
acquired loans and foreclosed real estate purchased in the acquisition are covered by loss share agreements
with the FDIC, which affords the Bank significant loss protection. We recorded a gain of $10.2 million as a result
of this acquisition. Additional information regarding this transaction is also contained in Management’s
Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to the consolidated financial
statements.
As of December 31, 2013, the Bank had two wholly owned subsidiaries, First Bank Insurance Services, Inc. (“First
Bank Insurance”) and First Troy SPE, LLC. First Bank Insurance’s primary business activity is the placement of
property and casualty insurance coverage. First Troy SPE, LLC, which was organized in December 2009, is a
holding entity for certain foreclosed properties.
Our principal executive offices are located at 300 SW Broad Street, Southern Pines, North Carolina, 28387, and
our telephone number is (910) 246-2500. Unless the context requires otherwise, references to the “Company,”
“we,” “our,” or “us” in this annual report on Form 10-K shall mean collectively First Bancorp and its consolidated
subsidiaries.
General Business
We engage in a full range of banking activities, with the acceptance of deposits and the making of loans being
our most basic activities. We offer deposit products such as checking, savings, and money market accounts, as
well as time deposits, including various types of certificates of deposits (CDs) and individual retirement accounts
(IRAs). We provide loans for a wide range of consumer and commercial purposes, including loans for business,
agriculture, real estate, personal uses, home improvement and automobiles. We also offer credit cards, debit
cards, letters of credit, safe deposit box rentals and electronic funds transfer services, including wire transfers.
In addition, we offer internet banking, mobile banking, cash management and bank-by-phone capabilities to our
customers, and are affiliated with ATM networks that give our customers access to 67,000 ATMs, with no
surcharge fee. For our business customers, we offer remote deposit capture, which provides them with a
method to electronically transmit checks received from customers into their bank account without having to
visit a branch. We are a member of the Certificate of Deposit Account Registry Service (CDARS), which gives our
customers the ability to obtain FDIC insurance on deposits of up to $50 million, while continuing to work directly
with their local First Bank branch.
Because the majority of our customers are individuals and small to medium-sized businesses located in the
counties we serve, management does not believe that the loss of a single customer or group of customers would
have a material adverse impact on the Bank. There are no seasonal factors that tend to have any material effect
on the Bank’s business, and we do not rely on foreign sources of funds or income. Because we operate primarily
within North Carolina, southwestern Virginia and northeastern South Carolina, the economic conditions of these
areas could have a material impact on the Company. See additional discussion below in the section entitled
“Territory Served and Competition.”
Beginning in 1999, First Bank Insurance began offering non-FDIC insured investment and insurance products,
6
including mutual funds, annuities, long-term care insurance, life insurance, and company retirement plans, as
well as financial planning services (the “investments division”). In May 2001, First Bank Insurance added to its
product line when it acquired two insurance agencies that specialized in the placement of property and casualty
insurance. In October 2003, the “investments division” of First Bank Insurance became a part of the Bank. The
primary activity of First Bank Insurance is now the placement of property and casualty insurance products. In
February 2010, First Bank Insurance acquired The Insurance Center, Inc., a Troy-based property and casualty
insurance agency with approximately 500 customers.
First Bancorp Capital Trust II and First Bancorp Capital Trust III were organized in December 2003 for the
purpose of issuing $20.6 million in debt securities ($10.3 million was issued from each trust). These borrowings
are due on January 23, 2034 and are also structured as trust preferred capital securities in order to qualify as
regulatory capital. These debt securities are 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
weighted average rate of three-month LIBOR plus 2.70%.
First Bancorp Capital Trust IV was organized in April 2006 for the purpose of issuing $25.8 million in debt
securities. These borrowings are due on June 15, 2036 and are also structured as trust preferred capital
securities that qualify as regulatory capital. These debt securities are 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%.
7
Territory Served and Competition
Our headquarters are located in Southern Pines, Moore County, North Carolina, where we also have our highest
concentration of deposits. At the end of 2013, we served primarily the south central region (sometimes called
the Piedmont region), the central mountain region and the eastern coastal region of North Carolina, with
additional operations in northeastern South Carolina and southwestern Virginia. The following table presents,
for each county where we operated as of December 31, 2013, the number of bank branches operated by the
Company within the county, the approximate amount of deposits with the Company in the county as of
December 31, 2013, our approximate deposit market share at June 30, 2013, and the number of bank
competitors located in the county at June 30, 2013.
County
Anson, NC
Beaufort, NC
Bladen, NC
Brunswick, NC
Buncombe, NC
Cabarrus, NC
Carteret, NC
Chatham, NC
Chesterfield, SC
Columbus, NC
Dare, NC
Davidson, NC
Dillon, SC
Duplin, NC
Florence, SC
Guilford, NC
Harnett, NC
Iredell, NC
Lee, NC
Montgomery, NC
Montgomery, VA
Moore, NC
New Hanover, NC
Onslow, NC
Pulaski, VA
Randolph, NC
Richmond, NC
Roanoke, VA
Robeson, NC
Rockingham, NC
Rowan, NC
Scotland, NC
Stanly, NC
Wake, NC
Washington, VA
Wythe, VA
Brokered & Internet Deposits
Total
Number of
Branches
1
3
1
4
4
2
2
2
2
2
1
3
3
3
2
1
3
2
3
5
3
11
5
2
1
4
2
1
5
1
2
2
4
1
1
2
-
96
Deposits
(in millions)
$ 12
39
23
94
81
39
24
71
45
31
14
91
67
117
32
68
109
31
188
101
55
434
148
44
26
69
43
5
181
28
52
61
89
20
27
75
117
$ 2,751
Market
Share
4.8%
3.4%
8.6%
6.0%
2.2%
2.1%
2.3%
10.3%
14.4%
4.9%
1.9%
3.8%
24.4%
23.0%
1.6%
0.7%
12.9%
1.4%
24.1%
38.1%
3.3%
26.9%
3.9%
4.1%
6.6%
4.9%
10.5%
0.3%
19.6%
2.8%
3.6%
18.1%
10.1%
0.1%
2.5%
13.4%
Number of
Competitors
4
7
5
11
18
11
8
10
6
5
10
10
3
7
13
20
9
20
9
4
13
10
17
10
8
13
5
13
9
11
13
6
6
29
16
11
Our branches and facilities are primarily located in small communities whose economies are based primarily on
services, manufacturing and light industry. Although our market is predominantly small communities and rural
areas, the market area is not dependent on agriculture. Textiles, furniture, mobile homes, electronics, plastic
and metal fabrication, forest products, food products, and chicken hatcheries are among the leading
8
manufacturing industries in the trade area. Leading producers of lumber and rugs are located in Montgomery
County, North Carolina. The Pinehurst area within Moore County, North Carolina, is a widely known golf resort
and retirement area. The High Point, North Carolina, area is widely known for its furniture market. New
Hanover and Brunswick Counties, located in the southeastern coastal region of North Carolina, are popular with
tourists and have significant retirement populations. Buncombe County, located in the western region of North
Carolina, is a highly diverse area with industries in manufacturing, service, and tourism. Additionally, several of
the communities served by the Company are “bedroom” communities of large cities like Charlotte, Raleigh and
Greensboro, while several branches are located in medium-sized cities such as Albemarle, Asheboro, High Point,
Southern Pines and Sanford. We also have branches in small communities such as Bennett, Polkton, Vass, and
Harmony.
In addition to the branches shown above, in the second half of 2013, we established loan production offices in
the markets of Charlotte, Greenville and Fayetteville, all in North Carolina. These are new, yet contiguous,
markets to our branch footprint. We have experienced lenders working out of these offices and are expecting to
achieve loan growth from these offices in 2014.
Approximately 16% of our deposit base is in Moore County. Accordingly, material changes in competition, the
economy or population of Moore County could materially impact the Company. No other county comprises
more than 10% of our deposit base.
We compete in our various market areas with, among others, several large interstate bank holding companies.
These large competitors have substantially greater resources than us, including broader geographic markets,
higher lending limits and the ability to make greater use of large-scale advertising and promotions. A significant
number of interstate banking acquisitions have taken place in the past decade, thus further increasing the size
and financial resources of some of our competitors, some of which are among the largest bank holding
companies in the nation. In many of our markets, we also compete against smaller, local banks, many of which
were formed within the past ten to fifteen years. Until recently, these new banks often focused on loan and
deposit balance sheet growth, and not necessarily on earnings profitability, which often resulted in them
offering more attractive terms on loans and deposits than we were willing to offer in light of our profitability
goals. Due to capital considerations and increased regulatory costs, many of these banks are no longer seeking
high balance sheet growth and are now seeking higher profitability. This has increased our ability to compete
for loans. The pricing competition for deposits has also lessened. However, at any given time in many of our
markets, there are smaller banks offering higher rates on deposits than we are willing to match. This has
resulted in our bank losing the deposits of some price-sensitive customers, which has been primarily responsible
for the declines in our time deposit accounts that are discussed below in Management’s Discussion and Analysis
of Financial Condition and Results of Operation. Moore County, which as noted above comprises a
disproportionate share of our deposits, is a particularly competitive market, with at least ten other financial
institutions having a physical presence within the county.
We compete not only against banking organizations, but also against a wide range of financial service providers,
including federally and state-chartered savings and loan institutions, credit unions, investment and brokerage
firms and small-loan or consumer finance companies. One of the credit unions in our market area is among the
largest in the nation. Competition among financial institutions of all types is virtually unlimited with respect to
legal ability and authority to provide most financial services. We also experience competition from internet
banks, particularly in the area of time deposits.
Despite the competitive market, we believe we have certain advantages over our competition in the areas we
serve. We are large enough to be able to more easily absorb higher costs being experienced in the banking
industry, particularly regulatory costs and technology costs, than the smaller banks we compete with. But we
attempt to maintain a banking culture associated with smaller banks – a culture that has a personal and local
9
flavor that appeals to many retail and small business customers. Specifically, we seek to maintain a distinct local
identity in each of the communities we serve and we actively sponsor and participate in local civic affairs. Most
lending and other customer-related business decisions can be made without the delays often associated with
larger institutions. Additionally, employment of local managers and personnel in various offices and low
turnover of personnel enable us to establish and maintain long-term relationships with individual and corporate
customers.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting standards are high priorities of the
Bank. Loans are approved under our written loan policy, which provides that lending officers, principally branch
managers, have authority to approve loans of various amounts up to $350,000, with lending limits varying
depending upon the experience of the lending officer and whether the loan is secured or unsecured. Each of
our regional senior lending officers has discretion to approve secured loans of various principal amounts up to
$500,000. Loans up to $4,000,000 are approved by a committee of the bank’s regional credit officers. Loans
above $4,000,000 must be approved by the Executive Committee of the Company’s board of directors.
A committee of our board of directors reviews and approves loans that exceed management’s lending authority,
loans to executive officers, directors, and their affiliates and, in certain instances, other types of loans. New
credit extensions are reviewed daily by our senior management and at least monthly by our board committee.
We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action.
Lending officers and the board of directors meet periodically to review past due loans and portfolio quality,
while assuring that the Bank is appropriately meeting the credit needs of the communities it serves. Individual
lending officers are responsible for monitoring any changes in the financial status of borrowers and pursuing
collection of early-stage past due amounts. For certain types of loans that exceed our established parameters of
past due status, we engage a third-party firm to assist in collection efforts.
We also contract with an independent consulting firm to review new loan originations meeting certain criteria,
as well as to assign risk grades to existing credits meeting certain thresholds. The consulting firm’s observations,
comments, and risk grades, including variances with the Bank’s risk grades, are shared with the audit committee
of the Company’s board of directors and are considered by management in setting Bank policy, as well as in
evaluating the adequacy of our allowance for loan losses. The consulting firm also provides training on a
periodic basis to our lending officers to keep them updated on current developments in the marketplace. For
additional information, see “Allowance for Loan Losses and Loan Loss Experience” under Item 7 below.
Investment Policy and Procedures
We have adopted an investment policy designed to maximize our income from funds not needed to meet loan
demand, in a manner consistent with appropriate liquidity and risk objectives. Pursuant to this policy, we may
invest in federal, state and municipal obligations, federal agency obligations, public housing authority bonds,
industrial development revenue bonds, Federal Home Loan Bank bonds, Fannie Mae bonds, Government
National Mortgage Association bonds, Freddie Mac bonds, Small Business Administration bonds, and, to a
limited extent, corporate bonds. In making investment decisions, we do not solely rely on credit ratings to
determine the credit-worthiness of an issuer of securities, but we use credit ratings in conjunction with other
information when performing due diligence prior to the purchase of a security. Securities rated below Moody’s
BAA or Standard and Poor’s BBB generally will not be purchased. Securities rated below A are periodically
reviewed for credit-worthiness. We may purchase non-rated municipal bonds only if such bonds are in our
general market area and we determine these bonds have a credit risk no greater than the minimum ratings
referred to above. Industrial development authority bonds, which normally are not rated, are purchased only if
10
they are judged to possess a high degree of credit soundness to assure reasonably prompt sale at a fair value.
We are also authorized by our board of directors to invest a portion of our securities portfolio in high quality
corporate bonds, with the amount of such bonds not to exceed 15% of the entire securities portfolio. Prior to
purchasing a corporate bond, the Company’s management performs due diligence on the issuer of the bond,
and the purchase is not made unless we believe that the purchase of the bond bears no more risk to the
Company than would an unsecured loan to the same company.
Our Chief Investment Officer implements the investment policy, monitors the investment portfolio,
recommends portfolio strategies and reports to the Company’s Investment Committee. The Investment
Committee generally meets on a quarterly basis to review investment activity and to assess the overall position
of the securities portfolio. The Investment Committee compares our securities portfolio with portfolios of other
companies of comparable size. In addition, reports of all purchases, sales, issuer calls, net profits or losses and
market appreciation or depreciation of the securities portfolio are reviewed by our board of directors. Once a
quarter, our interest rate risk exposure is evaluated by our board of directors. Each year, the written investment
policy is approved by the board of directors.
Mergers and Acquisitions
As part of our operations, we have pursued an acquisition strategy over the years to augment our internal
growth. We regularly evaluate the potential acquisition of, or merger with, various financial institutions. Our
acquisitions have generally fallen into one of three categories - 1) an acquisition of a financial institution or
branch thereof within a market in which we operate, 2) an acquisition of a financial institution or branch thereof
in a market contiguous or nearly contiguous to a market in which we operate, or 3) an acquisition of a company
that has products or services that we do not currently offer. Historically, we have paid for our acquisitions with
cash and/or common stock and any operating income or loss has been fully borne by the Company beginning on
the closing date of the acquisition.
In 2009, FDIC-assisted acquisitions began to occur frequently as banking regulators closed problem banks. In
FDIC-assisted transactions, the acquiring bank often does not pay any consideration for the failed bank, and in
some cases receives cash from the FDIC as part of the transaction. In addition, the acquiring bank usually enters
into one or more loss share agreements with the FDIC, which affords the acquiring bank significant loss
protection. As discussed below, we completed FDIC-assisted transactions in 2009 and 2011.
We believe that we can enhance our earnings by pursuing these types of acquisition opportunities through any
combination or all of the following: 1) achieving cost efficiencies, 2) enhancing the acquiree’s earnings or
gaining new customers by introducing a more successful banking model with more products and services to the
acquiree’s market base, 3) increasing customer satisfaction or gaining new customers by providing more
locations for the convenience of customers, and 4) leveraging the customer base by offering new products and
services. There is also the possibility, especially in a FDIC-assisted transaction, to record a gain on the acquisition
date arising from the difference between the purchase price and the acquisition date fair value of the acquired
assets and liabilities.
Since becoming a public company in 1987, we have completed numerous acquisitions in each of the three
categories described above. We have completed several whole-bank traditional acquisitions in our existing and
contiguous markets; we have purchased numerous bank branches from other banks (both in existing market
areas and in contiguous/nearly contiguous markets) and we have acquired several insurance agencies, which has
provided us with the ability to offer property and casualty insurance coverage.
In addition to the traditional acquisitions discussed above, in both 2009 and 2011 we acquired the operations of
failed banks in FDIC-assisted transactions. On June 19, 2009, we acquired substantially all of the assets and
11
liabilities of Cooperative Bank in a FDIC-assisted transaction. Cooperative Bank operated through twenty-one
branches in North Carolina and three branches in South Carolina in the same markets in which the Bank was
already operating, as well as in several new, mostly contiguous markets. In connection with the acquisition, the
Bank assumed assets with a book value of $959 million, including $829 million in loans and $706 million in
deposits. See the Company’s 2009 Annual Report on Form 10-K for more information on this acquisition.
On January 21, 2011, we acquired substantially all of the assets and liabilities of The Bank of Asheville in a FDIC-
assisted transaction. The Bank of Asheville operated through five branches in or near Asheville, North Carolina.
This market was a new market for the Bank. In connection with the acquisition, the Bank assumed assets with a
book value of $190 million, including $154 million in loans and $192 million in deposits. See Note 2 to the
consolidated financial statements for more information on this acquisition.
The following paragraphs describe the other acquisitions that we have completed in the past three years.
On August 24, 2012, we completed the purchase of a branch of Gateway Bank & Trust Co. located in
Wilmington, North Carolina. We assumed the branch’s $9 million in deposits. No loans were acquired in this
transaction. We also did not purchase the branch building, but instead transferred the acquired accounts to one
of our nearby existing branches.
On March 22, 2013, we completed the purchase of two branches from Four Oaks Bank & Trust Company located
in Southern Pines and Rockingham, North Carolina. We acquired $57 million in deposits and $16 million in loans
in the acquisition. We purchased the Rockingham branch building, but did not purchase the Southern Pines
branch building and instead transferred the acquired accounts to one of the Company’s nearby existing
branches.
There are many factors that we consider when evaluating how much to offer for potential acquisition candidates
(including FDIC-assisted transactions) with a few of the more significant factors being projected impact on
earnings per share, projected impact on capital, and projected impact on book value and tangible book value.
Significant assumptions that affect this analysis include the estimated future earnings stream of the acquisition
candidate, estimated credit and other losses to be incurred, the amount of cost efficiencies that can be realized,
and the interest rate earned/lost on the cash received/paid. In addition to these primary factors, we also
consider other factors including (but not limited to) marketplace acquisition statistics, location of the candidate
in relation to our expansion strategy, market growth potential, management of the candidate, potential
integration issues (including corporate culture), and the size of the acquisition candidate.
We plan to continue to evaluate acquisition opportunities that could potentially benefit the Company and its
shareholders. These opportunities may include acquisitions that do not fit the categories discussed above.
For a further discussion of recent acquisition activity, see “Merger and Acquisition Activity” under Item 7 below.
Employees
As of December 31, 2013, we had 837 full-time and 36 part-time employees. We are not a party to any
collective bargaining agreements, and we consider our employee relations to be good.
Supervision and Regulation
As a bank holding company, we are subject to supervision, examination and regulation by the Board of
Governors of the Federal Reserve System (the “Federal Reserve Board”) and the North Carolina Office of the
Commissioner of Banks (the “Commissioner”). The Bank is subject to supervision and examination by the FDIC
12
and the Commissioner. For additional information, see Note 16 to the consolidated financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as
amended. The Company is also regulated by the Commissioner under the North Carolina Bank Holding
Company Act of 1984.
A bank holding company is required to file quarterly reports and other information regarding its business
operations and those of its subsidiaries with the Federal Reserve Board. It is also subject to examination by the
Federal Reserve Board and is required to obtain Federal Reserve Board approval prior to making certain
acquisitions of other institutions or voting securities. The Federal Reserve Board requires the Company to
maintain certain levels of capital - see “Capital Resources and Shareholders’ Equity” under Item 7 below. The
Federal Reserve Board also has the authority to take enforcement action against any bank holding company that
commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing
by the Federal Reserve Board. The Federal Reserve Board generally prohibits a bank holding company from
declaring or paying a cash dividend that would impose undue pressure on the capital of subsidiary banks or
would be funded only through borrowing or other arrangements which might adversely affect a bank holding
company’s financial position. Under the Federal Reserve Board policy, a bank holding company is not permitted
to continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset
quality and overall financial condition.
The Commissioner is empowered to regulate certain acquisitions of North Carolina banks and bank holding
companies, issue cease and desist orders for violations of North Carolina banking laws, and promulgate rules
necessary to effectuate the purposes of the North Carolina Bank Holding Company Act of 1984.
Regulatory authorities have cease and desist powers over bank holding companies and their nonbank
subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a
subsidiary bank. Those authorities may compel holding companies to invest additional capital into banking
subsidiaries upon acquisitions or in the event of significant loan losses or rapid growth of loans or deposits.
The United States Congress and the North Carolina General Assembly have periodically considered and adopted
legislation that has impacted the Company.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial institutions, among other things: (i) provide
federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict
preferential loans by banks to “insiders” of banks; (iii) require banks to keep information on loans to major
shareholders and executive officers and (iv) bar certain director and officer interlocks between financial
institutions.
As a state-chartered bank, the Bank is subject to the provisions of the North Carolina banking statutes and to
regulation by the Commissioner. The Commissioner has a wide range of regulatory authority over the activities
and operations of the Bank, and the Commissioner’s staff conducts periodic examinations of the Bank and its
affiliates to ensure compliance with state banking regulations and to assess the safety and soundness of the
Bank. Among other things, the Commissioner regulates the merger and consolidation of state-chartered banks,
the payment of dividends, loans to officers and directors, recordkeeping, types and amounts of loans and
investments, and the establishment of branches. The Commissioner also has cease and desist powers over
13
state-chartered banks for violations of state banking laws or regulations and for unsafe or unsound conduct that
is likely to jeopardize the interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to legal limitations under North Carolina
law. In addition, regulatory authorities may restrict dividends that may be paid by the Bank or the Company’s
other subsidiaries. The ability of the Company to pay dividends to its shareholders is largely dependent on the
dividends paid to the Company by the Bank.
The FDIC is authorized to approve conversions, mergers, consolidations and assumptions of deposit liability
transactions between insured banks and uninsured banks or institutions, and to prevent capital or surplus
diminution in such transactions if the resulting, continuing, or assumed bank is an insured nonmember bank. In
addition, the FDIC monitors the Bank’s compliance with several banking statutes, such as the Depository
Institution Management Interlocks Act and the Community Reinvestment Act of 1977. The FDIC also conducts
periodic examinations of the Bank to assess its safety and soundness and its compliance with banking laws and
regulations, and it has the power to implement changes to, or restrictions on, the Bank’s operations if it finds
that a violation is occurring or is threatened.
U.S. Treasury Capital Purchase Program (TARP)
On October 3, 2008, in response to the financial crises affecting the banking system and financial markets and
going concern threats to investment banks and other financial institutions, the Emergency Economic
Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury was given the
authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and
certain other financial instruments from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets.
On October 14, 2008, the Secretary of the U.S. Department of the Treasury announced that the Treasury would
purchase equity stakes in a wide variety of banks and thrifts. Under the program, known as the Capital Purchase
Program (also known as “TARP”), the Treasury made $250 billion of capital available from EESA to U.S. financial
institutions in the form of purchases of preferred stock. In addition to the preferred stock, the Treasury
received, from participating financial institutions, warrants to purchase common stock with an aggregate market
price equal to 15% of the preferred investment. Participating financial institutions were required to adopt the
Treasury’s standards for executive compensation and corporate governance for the period during which the
Treasury holds equity issued under the Capital Purchase Program.
Although we believed that our capital position was sound, we concluded that the Capital Purchase Program
would allow us to raise additional capital on favorable terms in comparison with other available alternatives.
Accordingly, we applied to participate in the Capital Purchase Program. The Treasury approved our application
in December 2008, and we received $65 million in proceeds from the sale of 65,000 shares of Series A
Cumulative Perpetual Preferred Stock with a liquidation value of $1,000 per share to the Treasury on January 9,
2009. The terms of the preferred stock issued to the Treasury required a dividend of 5% for the first five years
and 9% thereafter. As part of the transaction, we also granted the Treasury a ten-year warrant to purchase up
to 616,308 shares of our common stock at an exercise price of $15.82 per share.
On September 1, 2011, we redeemed the 65,000 shares of outstanding Series A Preferred Stock from the
Treasury for a redemption price of $65 million, plus unpaid dividends. We funded the majority of this
transaction by simultaneously issuing Series B Preferred Stock to the Treasury in connection with our
participation in the Small Business Lending Fund (see below). In November 2011, we repurchased the
outstanding common stock warrant from the Treasury at a price of $1.50 per common share for a total of
$924,000. See Note 19 to the consolidated financial statements for more information on these transactions.
14
Small Business Lending Fund
In December 2010, the U.S. Treasury announced the creation of the Small Business Lending Fund (SBLF)
program, which was established under the Small Business Jobs Act of 2010. The SBLF was created to encourage
lending to small businesses by providing capital to qualified community banks at favorable rates.
Interested financial institutions were required to submit an application and a small business lending plan. Less
than half of the financial institutions that applied for the SBLF were approved. We were one of the institutions
approved, and on September 1, 2011, we completed the sale of $63.5 million of Series B Preferred Stock to the
Treasury under the SBLF. Under the terms of the stock purchase agreement, the Treasury received 63,500
shares of Series B non-cumulative perpetual preferred stock with a liquidation value of $1,000 per share, in
exchange for $63.5 million. As noted above, we used the $63.5 million received from this issuance along with
$1.5 million of existing Company funds to redeem the $65 million of cumulative preferred stock issued to the
Treasury as part of the Capital Purchase Program. The initial dividend rate on SBLF preferred stock was 5%. The
terms of the stock provided that our dividend rate could decrease to as low as 1% for a period of time
depending on our success in meeting certain loan growth targets to small businesses. Based on our increases in
small business lending, we achieved the minimal dividend rate of 1% as of March 31, 2013. The increase in the
amount of small business loans remained at a level corresponding to a 1% dividend rate at September 30, 2013,
at which point the terms of the preferred stock provide that the dividend rate remains fixed until December 31,
2015. Accordingly, we expect that our dividend rate will remain at an annualized rate of 1% until January 1,
2016 unless the Series B Preferred Stock is redeemed at an earlier date. If this stock remains outstanding
beyond January 1, 2016, the dividend rate increases to 9% thereafter. See Note 19 to the consolidated financial
statements for more information.
FDIC Insurance
As a member of the FDIC, the Bank’s deposits are insured by the FDIC. For this protection, each member bank
pays a quarterly statutory assessment (which is based on average total assets less average tangible equity) and is
subject to the rules and regulations of the FDIC.
We recognized approximately $2.6 million, $2.7 million, and $3.0 million in FDIC insurance expense in 2013,
2012, and 2011, respectively.
Legislative and Regulatory Developments
Given the ongoing financial crisis and the current presidential administration, legislation that would affect
regulation in the banking industry is introduced in most legislative sessions. The most significant recent
legislative and regulatory developments impacting the Company are 1) the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, 2) Automated Overdraft Payment Regulation, and 3) Basel III, each of which is
discussed below.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act has had and will continue to have a
broad impact on the financial services industry, including significant regulatory and compliance changes
including, among other things,
• enhanced authority over troubled and failing banks and their holding companies;
• increased capital and liquidity requirements;
• increased regulatory examination fees;
15
• specific provisions designed to improve supervision and safety and soundness by imposing
restrictions and limitations on the scope and type of banking and financial activities.
In addition, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial
system that will be enforced by new and existing federal regulatory agencies, including the Financial Stability
Oversight Council (FSOC), the Federal Reserve Bank (FRB), the Office of Comptroller of the Currency, the FDIC,
and the Consumer Financial Protection Bureau (CFPB). The following description briefly summarizes aspects of
the Dodd-Frank Act that could impact the Company, both currently and prospectively.
Deposit Insurance. The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured
deposits, which was an increase from the previous limit of $100,000. Amendments to the Federal Deposit
Insurance Act also revised the assessment base against which an insured depository institution’s deposit
insurance premiums paid to the FDIC’s Deposit Insurance Fund (DIF) will be calculated. Under the amendments,
which became effective on April 1, 2011, the FDIC assessment base is no longer the institution’s deposit base,
but rather its average consolidated total assets less its average tangible equity. The Dodd-Frank Act also
changed the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the
estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to
depository institutions when the reserve ratio exceeds certain thresholds by September 30, 2020.
Interest on Demand Deposits. The Dodd-Frank Act provided that beginning July 21, 2011 depository institutions
were permitted to pay interest on business demand deposits with no limit on the number of monthly
withdrawals. Prior to July 21, 2011, we entered into securities repurchase agreements with business customers
in order to allow them to earn interest on their excess funds. With the prohibition of paying interest now
removed, we have been able to pay interest on our customers’ deposits without the need to enter into a
securities repurchase agreement. During 2011, approximately $38 million in liabilities previously classified as
“securities sold under agreements to repurchase” were moved to the “interest-bearing checking accounts”
category. The remaining $17 million were moved during 2012. We did not experience a material increase in
total interest expense, but rather only an insignificant amount of reclassification among interest expense
categories as a result of these changes.
Trust Preferred Securities. The Dodd-Frank Act prohibits bank holding companies from including in their
regulatory Tier I capital hybrid debt and equity securities issued on or after May 19, 2010. Among the hybrid
debt and equity securities included in this prohibition are trust preferred securities, which we have issued in the
past in order to raise additional Tier I capital and otherwise improve our regulatory capital ratios. Although we
may continue to include our existing trust preferred securities as Tier I capital, the prohibition on the use of
these securities as Tier I capital may limit our ability to raise capital in the future.
The Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent federal agency
called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and
enforcement powers under various federal consumer financial protection laws, including the Equal Credit
Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair
Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other
statutes. The CFPB will have examination and primary enforcement authority with respect to depository
institutions with $10 billion or more in assets. Depository institutions with less than $10 billion in assets, such as
the Bank, will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by
federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair,
deceptive or abusive practices in connection with the offering of consumer financial products.
The Dodd-Frank Act also authorizes the CFPB to establish certain minimum standards for the origination of
16
residential mortgages, including a determination of the borrower's ability to repay. Under the Dodd-Frank Act,
financial institutions may not make a residential mortgage loan unless they make a “reasonable and good faith
determination” that the consumer has a “reasonable ability” to repay the loan. In addition, the Dodd-Frank Act
will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified
mortgage” as defined by the CFPB. On January 10, 2013, the CFPB published final rules to, among other things,
define “qualified mortgage” and specify the types of income and assets that may be considered in the ability-to-
repay determination, the permissible sources for verification, and the required methods of calculating the loan's
monthly payments. For example, the rules extend the requirement that creditors verify and document a
borrower's “income and assets” to include all “information” that creditors rely on in determining repayment
ability. The rules also provide further examples of third-party documents that may be relied on for such
verification, such as government records and check-cashing or funds-transfer service receipts. The new rules
took effect on January 10, 2014. In response to these new rules, we centralized all residential loan origination to
our mortgage banking department. The employees in this department are well-trained in the new rules. In
addition, on November 20, 2013, the CFPB issued its final rule on integrated mortgage disclosures under the
Truth in Lending Act and the Real Estate Settlement Procedures Act, for which compliance is required by August
1, 2015. We are evaluating these integrated mortgage disclosure rules to determine their impact on the
Company.
The Dodd-Frank Act also permits states to adopt consumer protection laws and standards that are more
stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general
to enforce compliance with both the state and federal laws and regulations. Compliance with any such new
regulations established by the CFPB and/or states could reduce our revenue, increase our cost of operations,
and limit our ability to expand into certain products and services.
Debit Card Interchange Fees. The Dodd-Frank Act gives the FRB the authority to establish rules regarding
interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion
and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of
a transaction to the issuer. While we are not directly subject to these rules for so long as our assets do not
exceed $10 billion, our activities as a debit card issuer may nevertheless be indirectly impacted by the change in
the applicable debit card market caused by these regulations, which may require us to match any new lower fee
structure implemented by larger financial institutions in order to remain competitive in the future. The new
caps on interchange fees for banks with assets greater than $10 billion became effective October 1, 2011. To
date, the Company has not noted any significant indirect negative effects of the interchange fee caps that are
applicable to the larger financial institutions.
Increased Capital Standards and Enhanced Supervision. The Dodd-Frank Act requires the federal banking
agencies to establish minimum leverage and risk-based capital requirements for banks and bank holding
companies. These new standards will be no less strict than existing regulatory capital and leverage standards
applicable to insured depository institutions and may, in fact, become higher once the agencies promulgate the
new standards. Compliance with heightened capital standards may reduce our ability to generate or originate
revenue-producing assets and thereby restrict revenue generation from banking and non-banking operations.
Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with
affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of
“covered transactions,” and an increase in the amount of time for which collateral requirements regarding
covered transactions must be maintained.
Transactions with Insiders. The Dodd-Frank Act expands insider transaction limitations through the
strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the
various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and
17
securities lending and borrowing transactions. The Dodd-Frank Act also places restrictions on certain asset sales
to and from an insider of an institution, including requirements that such sales be on market terms and, in
certain circumstances, receive the approval of the institution’s board of directors.
Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit
exposure to one borrower. Federal banking law currently limits a national bank’s ability to extend credit to one
person or group of related persons to an amount that does not exceed certain thresholds. The Dodd-Frank Act
expands the scope of these restrictions to include credit exposure arising from derivative transactions,
repurchase agreements and securities lending and borrowing transactions. It also will eventually prohibit state-
chartered banks from engaging in derivative transactions unless the state lending limit laws take into account
credit exposure to such transactions.
Corporate Governance. The Dodd-Frank Act addresses many corporate governance and executive compensation
matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act:
• grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation;
• enhances independence requirements for compensation committee members;
•
requires companies listed on national securities exchanges to adopt clawback policies for incentive-
based compensation plans applicable to executive officers; and
• provides the SEC with authority to adopt proxy access rules that would allow shareholders of publicly
traded companies to nominate candidates for election as directors and require such companies to
include such nominees in its proxy materials.
Many of the requirements of the Dodd-Frank Act will be subject to implementation over the course of several
years. While we do not currently expect the final requirements of the Dodd-Frank Act to have a material
adverse impact on the Company, we do expect them to negatively impact our profitability, require changes to
certain of our business practices, including limitations on fee income opportunities, and impose more stringent
capital, liquidity and leverage requirements upon the Company. These changes may also require us to invest
significant management attention and resources to evaluate and make any changes necessary to comply with
the new statutory and regulatory requirements.
Automated Overdraft Payment Regulation
In recent years, the Federal Reserve and FDIC have enacted consumer protection regulations related to
automated overdraft payment programs offered by financial institutions. In November 2009, the Federal
Reserve amended its Regulation E to prohibit financial institutions, including the Company, from charging
consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless
a consumer consents, or opts in, to the overdraft service for those types of transactions. The Regulation E
amendments also require financial institutions to provide consumers with a notice that explains the financial
institution’s overdraft services, including the fees associated with the service and the consumer’s choices. We
have completed implementation of the changes as required by the Regulation E amendments, which resulted in
reductions to overdraft fees that we were able to collect beginning in the second half of 2010.
In November 2010, the FDIC supplemented the Regulation E amendments by requiring FDIC-supervised
institutions, including the Bank, to implement additional changes relating to automated overdraft payment
programs by July 1, 2011. The most significant of these changes require financial institutions to monitor
overdraft payment programs for “excessive or chronic” customer use and undertake “meaningful and effective”
follow-up action with customers that overdraw their accounts more than six times during a rolling 12-month
period. The additional guidance also imposes daily limits on overdraft charges, requires institutions to review
and modify check-clearing procedures, prominently distinguish account balances from available overdraft
coverage amounts and requires increased board and management oversight regarding overdraft payment
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programs. We have now implemented the supplemental requirements of the Regulation E amendments, which
resulted in further reductions to the amount of overdraft fees we were able to collect beginning in July 2011.
Recent Amendments to Regulatory Capital Requirement under Basel III
In July 2013, the federal banking agencies approved amendments to their regulatory capital rules to conform
U.S. regulatory capital rules with the international regulatory standards agreed to by the Basel Committee on
Banking Supervision in the accord referred to as “Basel III.” The revisions establish new higher capital ratio
requirements, narrow the definitions of capital, impose new operating restrictions on banking organizations
with insufficient capital buffers and increase the risk weighting of certain assets. The new capital requirements
apply to all banks, savings associations, bank holding companies with more than $500 million in assets and all
savings and loan holding companies regardless of asset size. The rules will become effective for institutions with
assets over $250 billion and internationally active institutions starting in January 2014 and will become effective
for all other institutions beginning in January 2015. The following discussion summarizes the changes we believe
are most likely to affect the Company and the Bank.
• New and Increased Capital Requirements. The regulations establish a new capital measure called
“Common Equity Tier I Capital” consisting of common stock and related surplus, retained earnings,
accumulated other comprehensive income and, subject to certain adjustments, minority common equity
interests in subsidiaries. Unlike the current rules which exclude unrealized gains and losses on available-
for-sale debt securities from regulatory capital, the amended rules generally require accumulated other
comprehensive income to flow through to regulatory capital unless a one-time, irrevocable opt-out
election is made in the first regulatory reporting period under the new rule. Depository institutions and
their holding companies will be required to maintain Common Equity Tier I Capital equal to 4.5% of risk-
weighted assets by 2015.
The regulations also increase the required ratio of Tier I Capital to risk-weighted assets from the current
4% to 6% by 2015. Tier I Capital will consist of Common Equity Tier I Capital plus Additional Tier I Capital
which will include non-cumulative perpetual preferred stock. Cumulative preferred stock (other than
cumulative preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program or the
Small Business Lending Fund) will no longer qualify as Additional Tier I Capital. Trust preferred securities
and other non-qualifying capital instruments issued prior to May 19, 2010 by bank and savings and loan
holding companies with less than $15 billion in assets as of December 31, 2009, may continue to be
included in Tier I Capital, but these instruments will be phased out over 10 years beginning in 2016 for
all other banking organizations. These non-qualified capital instruments, however, may be included in
Tier II Capital which could also include qualifying subordinated debt. The amended regulations also
require a minimum Tier I leverage ratio of 4% for all institutions, eliminating the 3% option for
institutions with the highest supervisory ratings. The minimum required ratio of total capital to risk-
weighted assets will remain at 8%.
• Capital Buffer Requirement. In addition to increased capital requirements, depository institutions and
their holding companies will be required to maintain a capital buffer of at least 2.5% of risk-weighted
assets over and above the minimum risk-based capital requirements. Institutions that do not maintain
the required capital buffer will become subject to progressively more stringent limitations on the
percentage of earnings that can be paid out in dividends or used for stock repurchases and on the
payment of discretionary bonuses to senior executive management. The capital buffer requirement will
be phased in over a four-year period beginning in 2016. The capital buffer requirement effectively raises
the minimum required risk-based capital ratios to 7% Common Equity Tier I Capital, 8.5% Tier I Capital
and 10.5% Total Capital on a fully phased-in basis.
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• Changes to Prompt Corrective Action Capital Categories. The Prompt Corrective Action rules will be
amended effective January 1, 2015 to incorporate a Common Equity Tier I Capital requirement and to
raise the capital requirements for certain capital categories. In order to be adequately capitalized for
purposes of the prompt corrective action rules, a banking organization will be required to have at least
an 8% Total Risk-Based Capital Ratio, a 6% Tier I Risk-Based Capital Ratio, a 4.5% Common Equity Tier I
Risk Based Capital Ratio and a 4% Tier I Leverage Ratio. To be well capitalized, a banking organization
will be required to have at least a 10% Total Risk-Based Capital Ratio, an 8% Tier I Risk-Based Capital
Ratio, a 6.5% Common Equity Tier I Risk-Based Capital Ratio and a 5% Tier I Leverage Ratio.
• Additional Deductions from Capital. Banking organizations will be required to deduct goodwill and
certain other intangible assets, net of associated deferred tax liabilities, from Common Equity Tier I
Capital. Deferred tax assets arising from temporary timing differences that cannot be realized through
net operating loss (“NOL”) carrybacks will continue to be deducted. Deferred tax assets that can be
realized through NOL carrybacks will not be deducted but will be subject to 100% risk weighting.
Defined benefit pension fund assets, net of any associated deferred tax liability, will be deducted from
Common Equity Tier I Capital unless the banking organization has unrestricted and unfettered access to
such assets. Reciprocal cross-holdings of capital instruments in any other financial institutions will now
be deducted from capital, not just holdings in other depository institutions. For this purpose, financial
institutions are broadly defined to include securities and commodities firms, hedge and private equity
funds and non-depository lenders. Banking organizations will also be required to deduct non-significant
investments (less than 10% of outstanding stock) in other financial institutions to the extent these
exceed 10% of Common Equity Tier I Capital subject to a 15% of Common Equity Tier I Capital
cap. Greater than 10% investments must be deducted if they exceed 10% of Common Equity Tier I
Capital. If the aggregate amount of certain items excluded from capital deduction due to a 10%
threshold exceeds 17.65% of Common Equity Tier I Capital, the excess must be deducted.
• Changes in Risk-Weightings. The amended regulations will continue to follow the current capital rules
which assign a 50% risk-weighting to “qualifying mortgage loans” which generally consist of residential
first mortgages with an 80% loan-to-value ratio (or which carry mortgage insurance that reduces the
bank’s exposure to 80%) that are not more than 90 days past due. All other mortgage loans will have a
100% risk weight. The revised regulations apply a 250% risk-weighting to mortgage servicing rights,
deferred tax assets that cannot be realized through NOL carrybacks and investments in the capital
instruments of other financial institutions that are not deducted from capital. The revised regulations
also create a new 150% risk-weighting category for “high volatility commercial real estate loans” which
are credit facilities for the acquisition, construction or development of real property other than for
certain community development projects, agricultural land and one- to four-family residential properties
or commercial real projects where: (i) the loan-to-value ratio is not in excess of interagency real estate
lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real
estate’s “as completed” value before the loan was made.
The final rules become effective January 1, 2015 for the Company. The capital conservation buffer requirement
will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully
implemented at 2.5% on January 1, 2019.
We are currently evaluating the impact of these rules on both the Company and the Bank; however, based on
our current analyses, we believe that both the Company and the Bank would meet all capital adequacy
requirements under the final rules.
Neither the Company nor the Bank can predict what other legislation might be enacted or what other
regulations or assessments might be adopted.
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See “Capital Resources and Shareholders’ Equity” under Item 7 below for a discussion of regulatory capital
requirements.
Available Information
We maintain a corporate Internet site at www.LocalFirstBank.com, which contains a link within the “Investor
Relations” section of the site to each of our filings with the Securities and Exchange Commission, including our
annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934. These filings are available, free of charge, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and Exchange Commission. These filings can also be accessed
at the Securities and Exchange Commission’s website located at www.sec.gov. Information included on our
Internet site is not incorporated by reference into this annual report.
Item 1A. Risk Factors
An investment in our common stock involves certain risks. Before you invest in our common stock, you should
be aware that there are various risks, including those described below, which could affect the value of your
investment in the future. The trading price of our common stock could decline due to any of these risks, and
you may lose all or part of your investment. The risk factors described in this section, as well as any cautionary
language in this report, provide examples of risks, uncertainties and events that could have a material adverse
effect on our business, including our operating results and financial condition. In addition to the risks and
uncertainties described below, other risks and uncertainties not currently known to us, or that we currently
deem to be immaterial, also may materially or adversely affect our business, financial condition, and results of
operations. The value or market price of our common stock could decline due to any of these identified or other
unidentified risks.
Difficult market conditions and economic trends have adversely affected our industry and our business.
A general economic downturn began in the latter half of 2007. Dramatic declines in the housing market, with
decreasing home prices and increasing delinquencies and foreclosures, negatively impacted the credit
performance of mortgage loans, especially land development loans, and resulted in significant write-downs of
assets by many financial institutions. In addition, the value of real estate collateral supporting many loans
declined and may continue to decline. General downward economic trends, reduced availability of commercial
credit and high unemployment rates negatively impacted the credit performance of commercial and consumer
credit, resulting in additional write-downs. Although the U.S. economy has emerged from the most severe
aspects of the recession that occurred in 2008 and 2009, the economy remains fragile, with economic growth
slow and uneven, and unemployment levels remaining high. And while there have been recent signs of recovery
in the national economy, the economic conditions in our market area do not seem to have improved at the
same rate. The unemployment rates in most of our markets exceed the national average. We believe that the
economic downtrends are largely responsible for the deterioration in loan quality that we have experienced
over the past five years, including higher levels of loan charge-offs, higher levels of nonperforming assets, and
higher provisions for loan losses. The market turmoil led to increased commercial and consumer delinquencies,
lack of confidence, increased market volatility and widespread reduction in general business activity. Financial
institutions, including us, have experienced a decrease in access to borrowings. The resulting economic pressure
on consumers and businesses and the lack of confidence in the financial markets have adversely affected, and
may continue to adversely affect, our business, financial condition, results of operations and stock price.
As a result of the foregoing factors, there have been numerous new or proposed federal or state laws and
regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are
21
expected to be very aggressive in responding to concerns and trends identified in examinations. This increased
governmental action may increase our costs and limit our ability to pursue certain business opportunities.
Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit
exposure is made more complex by these prolonged difficult market and economic conditions. A worsening of
these conditions would likely exacerbate the adverse effects of these difficult market and economic conditions
on us, our customers and the other financial institutions in our market. As a result, we may experience
additional increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access
to funds.
We are vulnerable to the economic conditions within the fairly small geographic region in which we operate.
Like many businesses, our overall success is partially dependent on the economic conditions in the marketplace
where we operate. Our marketplace is concentrated in the central Piedmont and coastal regions of North
Carolina. Although some improvement has been noted, these regions continue to experience challenging
economic conditions, which we believe is a factor in the elevated amounts of borrower delinquencies,
nonperforming assets, and loan losses we have experienced during the past few years. If economic conditions in
our marketplace worsen, it would likely have an adverse impact on us. In particular, if economic conditions
related to real estate values in our marketplace were to worsen, our loan losses would likely increase. At
December 31, 2013, approximately 90% of our loans were secured by real estate collateral, which means that
additional decreases in real estate values would have an adverse impact on our operations.
If our goodwill becomes impaired, we may be required to record a significant charge to earnings.
We have goodwill recorded on our balance sheet as an asset with a carrying value as of December 31, 2013 of
$65.8 million. Under generally accepted accounting principles, goodwill is required to be tested for impairment
at least annually and between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount. The test for goodwill impairment
involves comparing the fair value of a company’s reporting units to their respective carrying values. For our
company, our community banking operation is our only material reporting unit. The price of our common stock
is one of several measures available for estimating the fair value of our community banking operations.
Although the price of our common stock has recently traded above the book value, for most of the last several
years, it has traded below the book value of our company. Subject to the results of other valuation techniques,
if this situation were to return and persist, it could indicate that our goodwill is impaired. Accordingly, we may
be required to record a significant charge to earnings in our financial statements during the period in which any
impairment of our goodwill is determined, which could have a negative impact on our results of operations.
We may be subject to more stringent capital requirements.
We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts
and types of capital which we must maintain. From time to time, the regulators implement changes to these
regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and other regulatory
requirements, our financial condition would be materially and adversely affected. Based on recent regulatory
capital requirements contained in the Dodd-Frank Act and the regulatory accords on international banking
institutions formulated by the Basel Committee and implemented by the Federal Reserve, we will be required to
satisfy additional, more stringent, capital adequacy standards. These requirements and any other new
regulations, could adversely affect our ability to pay dividends, or could require us to reduce business levels or
raise capital, including in ways that may adversely affect our financial condition or results of operations.
22
We might be required to raise additional capital in the future, but that capital may not be available or may
not be available on terms acceptable to us when it is needed.
We are required to maintain adequate capital levels to support our operations. In the future, we might need to
raise additional capital to support growth, absorb loan losses, or meet more stringent capital requirements. Our
ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside
our control, and on our financial performance. Accordingly, we cannot be certain of our ability to raise
additional capital in the future if needed or on terms acceptable to us. If we cannot raise additional capital
when needed, our ability to conduct our business could be materially impaired.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services companies are interrelated as a result of trading,
clearing, counterparty or other relationships. We have exposure to many different industries and
counterparties, and we routinely execute transactions with counterparties in the financial services industry,
including brokers and dealers, commercial banks, and investment banks. Defaults by, or even rumors or
questions about, one or more financial services companies, or the financial services industry generally, have led
to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. We can
make no assurance that any such losses would not materially and adversely affect our business, financial
condition or results of operations.
We are subject to extensive regulation, which could have an adverse effect on our operations.
We are subject to extensive regulation and supervision from the North Carolina Commissioner of Banks, the
FDIC, and the Federal Reserve Board. This regulation and supervision is intended primarily for the protection of
the FDIC insurance fund and our depositors and borrowers, rather than for holders of our equity securities. In
the past, our business has been materially affected by these regulations. This trend is likely to continue in the
future.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the
imposition of restrictions on operations, the classification of our assets and the determination of the level of
allowance for loan losses. Changes in the regulations that apply to us, or changes in our compliance with
regulations, could have a material impact on our operations.
Financial reform legislation enacted by the U.S. Congress, and further changes in regulation to which we are
exposed, will result in additional new laws and regulations that are expected to increase our costs of
operations.
The Dodd-Frank Act has and will continue to significantly change bank regulatory structure and affect lending,
deposit, investment, and operating activities of financial institutions and their holding companies. The Dodd-
Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare
numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting and
implementing the rules and regulations, and consequently, many of the details and much of the impact of the
Dodd-Frank Act may not be known for many months or years. See “Legislative and Regulatory Developments –
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” above for additional information
regarding the Dodd-Frank Act.
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The Dodd-Frank Act also created the Consumer Financial Protection Bureau and gave it broad rule-making
authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including
the authority to prohibit “unfair, deceptive or abusive” acts and practices. Additionally, the Consumer Financial
Protection Bureau has examination and enforcement authority over all banks and savings institutions with more
than $10 billion in assets.
Proposals for further regulation of the financial services industry are continually being introduced in the United
States Congress. The agencies regulating the financial services industry also periodically adopt changes to their
regulations. It is possible that additional legislative proposals may be adopted or regulatory changes may be
made that would have an adverse effect on our business. In addition, it is expected that such regulatory
changes will increase our operating and compliance cost. We can provide no assurance regarding the manner in
which new laws and regulations will affect us.
We are subject to interest rate risk, which could negatively impact earnings.
Net interest income is the most significant component of our earnings. Our net interest income results from the
difference between the yields we earn on our interest-earning assets, primarily loans and investments, and the
rates that we pay on our interest-bearing liabilities, primarily deposits and borrowings. When interest rates
change, the yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities
do not necessarily move in tandem with each other because of the difference between their maturities and
repricing characteristics. This mismatch can negatively impact net interest income if the margin between yields
earned and rates paid narrows. Interest rate environment changes can occur at any time and are affected by
many factors that are outside our control, including inflation, recession, unemployment trends, the Federal
Reserve’s monetary policy, domestic and international disorder and instability in domestic and foreign financial
markets.
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for probable losses caused by
customer loan defaults. The allowance for loan losses may not be adequate to cover actual loan losses, and in
this case additional and larger provisions for loan losses would be required to replenish the allowance.
Provisions for loan losses are a direct charge against income.
We establish the amount of the allowance for loan losses based on historical loss rates, as well as estimates and
assumptions about future events. Because of the extensive use of estimates and assumptions, our actual loan
losses could differ, possibly significantly, from our estimate. We believe that our allowance for loan losses is
adequate to provide for probable losses, but it is possible that the allowance for loan losses will need to be
increased for credit reasons or that regulators will require us to increase this allowance. Either of these
occurrences could materially and adversely affect our earnings and profitability.
In the normal course of business, we process large volumes of transactions involving millions of dollars. If our
internal controls fail to work as expected, if our systems are used in an unauthorized manner, or if our
employees subvert our internal controls, we could experience significant losses.
We process large volumes of transactions on a daily basis and are exposed to numerous types of operational
risk. Operational risk includes the risk of fraud by persons inside or outside the Company, the execution of
unauthorized transactions by employees, errors relating to transaction processing and systems and breaches of
the internal control system and compliance requirements. This risk also includes potential legal actions that
could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory
standards.
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We establish and maintain systems of internal operational controls that provide us with timely and accurate
information about our level of operational risk. Although not foolproof, these systems have been designed to
manage operational risk at appropriate, cost-effective levels. Procedures exist that are designed to ensure that
policies relating to conduct, ethics, and business practices are followed. From time to time, losses from
operational risk may occur, including the effects of operational errors. We continually monitor and improve our
internal controls, data processing systems, and corporate-wide processes and procedures, but there can be no
assurance that future losses will not occur.
Negative public opinion regarding our company and the financial services industry in general, could damage
our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public opinion regarding our
company and the financial services industry in general, is inherent in our business. Negative public opinion can
result from actual or alleged conduct in any number of activities, including lending practices, corporate
governance and acquisitions, and from actions taken by government regulators and community organizations in
response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients
and employees and can expose us to litigation and regulatory action. Although we have taken steps to minimize
reputation risk in dealing with our clients and communities, this risk will always be present given the nature of
our business.
Our reported financial results are impacted by management’s selection of accounting methods and certain
assumptions and estimates.
Our accounting policies and methods are fundamental to the way we record and report our financial condition
and results of operations. Our management must exercise judgment in selecting and applying many of these
accounting policies and methods so they comply with generally accepted accounting principles and reflect
management’s judgment of the most appropriate manner to report our financial condition and results. In some
cases, management must select the accounting policy or method to apply from two or more alternatives, any of
which may be reasonable under the circumstances, yet may result in reporting materially different results than
would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results. They require
management to make difficult, subjective or complex judgments about matters that are uncertain. Materially
different amounts could be reported under different conditions or using different assumptions or estimates.
These critical accounting policies include: the allowance for loan losses; intangible assets; and the fair value and
discount accretion of loans acquired in FDIC-assisted transactions.
There can be no assurance that we will continue to pay cash dividends.
Although we have historically paid cash dividends, there is no assurance that we will continue to pay cash
dividends. Future payment of cash dividends, if any, will be at the discretion of our board of directors and will
be dependent upon our financial condition, results of operations, capital requirements, economic conditions,
and such other factors as the board may deem relevant.
Our business continuity plans or data security systems could prove to be inadequate, resulting in a material
interruption in, or disruption to, our business and a negative impact on our results of operations.
We rely heavily on communications and information systems to conduct our business. Our daily operations
depend on the operational effectiveness of our technology. We rely on our systems to accurately track and
25
record our assets and liabilities. Any failure, interruption or breach in security of our computer systems or
outside technology, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity
or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship
management, and other systems leading to inaccurate financial records. This could materially affect our
business operations and financial condition. While we have disaster recovery and other policies and procedures
designed to prevent or limit the effect of any failure, interruption or security breach of our information systems,
there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do
occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches
of our information systems could damage our reputation, result in a loss of customer business, subject us to
additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could
have a material adverse effect on our results of operations.
In addition, the Bank provides its customers the ability to bank online. The secure transmission of confidential
information over the Internet is a critical element of online banking. While we use qualified third party vendors
to test and audit our network, our network could become vulnerable to unauthorized access, computer viruses,
phishing schemes and other security issues. The Bank may be required to spend significant capital and other
resources to alleviate problems caused by security breaches or computer viruses. To the extent that the Bank
activities or the activities of its customers involve the storage and transmission of confidential information,
security breaches and viruses could expose the Bank to claims, litigation, and other potential liabilities. Any
inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence
in the Bank’s systems and could adversely affect its reputation and its ability to generate deposits.
Additionally, we outsource the processing of our core data system, as well as other systems such as online
banking, to third party vendors. Prior to establishing an outsourcing relationship, and on an ongoing basis
thereafter, management monitors key vendor controls and procedures related to information technology, which
includes reviewing reports of service auditor’s examinations. If our third party provider encounters difficulties
or if we have difficulty in communicating with such third party, it will significantly affect our ability to adequately
process and account for customer transactions, which would significantly affect our business operations.
We rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-
day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in
accordance with applicable contractual arrangements or service level agreements. We maintain a system of
policies and procedures designed to monitor vendor risks including, among other things, (i) changes in the
vendor’s organizational structure, (ii) changes in the vendor’s financial condition and (iii) changes in the vendor’s
support for existing products and services. While we believe these policies and procedures help to mitigate risk,
and our vendors are not the sole source of service, the failure of an external vendor to perform in accordance
with applicable contractual arrangements or the service level agreements could be disruptive to our operations,
which could have a material adverse impact on the our business and its financial condition and results of
operations.
Our potential inability to integrate companies we may acquire in the future could expose us to financial,
execution, and operational risks that could negatively affect our financial condition and results of operations.
Acquisitions may be dilutive to common shareholders and FDIC-assisted transactions have additional
compliance risk that other acquisitions do not have.
On occasion, we may engage in a strategic acquisition when we believe there is an opportunity to strengthen
and expand our business. In addition, such acquisitions may involve the issuance of stock, which may have a
dilutive effect on earnings per share. To fully benefit from such acquisition, however, we must integrate the
administrative, financial, sales, lending, collections, and marketing functions of the acquired company. If we are
26
unable to successfully integrate an acquired company, we may not realize the benefits of the acquisition, and
our financial results may be negatively affected. A completed acquisition may adversely affect our financial
condition and results of operations, including our capital requirements and the accounting treatment of the
acquisition. Completed acquisitions may also lead to exposure from potential asset quality issues, losses of key
employees or customers, difficulty and expense of integrating operations and systems, and significant
unexpected liabilities after the consummation of these acquisitions. In addition, if we were to conclude that the
value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion
would result in a goodwill impairment charge, which would adversely affect our results of operations.
We may have opportunities to acquire the assets and liabilities of failed banks in FDIC-assisted transactions.
Although these transactions typically provide for FDIC assistance to an acquirer to mitigate certain risks, such as
sharing exposure to loan losses and providing indemnification against certain liabilities of the failed institution,
we are (and would be in future transactions) subject to many of the same risks we would face in acquiring
another bank in a negotiated transaction, including risks associated with maintaining customer relationships and
failure to realize the anticipated acquisition benefits in the amounts and within the time frames we expect. In
addition, ongoing compliance risk under the loss-share agreement with the FDIC is considerable and the event of
noncompliance could result in coverage under the loss-share being disallowed, thus increasing the actual losses
to the Bank. Our inability to overcome these risks could have a material adverse effect on our business, financial
condition and results of operations.
Our FDIC loss share agreement related to a high risk loan portfolio acquired in a failed-bank acquisition
expires on June 19, 2014, and therefore we will bear the full risk of losses for assets currently under that
agreement subsequent to that date.
On June 19, 2009, we acquired Cooperative Bank in a FDIC failed-bank acquisition. As part of the terms of the
acquisition, we entered into two loss share agreements with the FDIC – 1) a loss share agreement related to
single-family home loans, which has a ten year term, and 2) a loss share agreement for all non-single family
loans, which has a five year term. The loss share agreements generally provide us with an 80% reimbursement
for all losses incurred and thus they limit our risk. The non-single family loss share agreement related to
Cooperative Bank expires on June 19, 2014. The assets covered by the non-single family portfolio include a high
percentage of commercial real estate and land development loans, loan types which experienced high loss rates
during the economic downturn.
At December 31, 2013, the carrying value of the assets covered by the Cooperative Bank non-single family loss-
share agreement was approximately $79 million in loans, of which $24 million were on nonaccrual status
because of collection problems, and $12 million in foreclosed properties. Accounting regulations require us to
record losses as they occur, and thus we believe that we have recorded all probable losses associated with that
portfolio as of each period end. However, the value of the underlying collateral for many of the loans, as well as
the foreclosed properties, is volatile and has experienced significant declines in recent years. Beginning June 20,
2014, we will incur 100% of the loss related to further deterioration of the Cooperative Bank non-single family
assets.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The main offices of the Company and the Bank are owned by the Bank and are located in a three-story building
in the central business district of Southern Pines, North Carolina. The building houses administrative facilities.
The Bank’s Operations Division, including customer accounting functions, offices for information technology
27
operations, and offices for loan operations, are housed in two one-story steel frame buildings in Troy, North
Carolina. Both of these buildings are owned by the Bank. The Company operates 96 bank branches. The
Company owns all of its bank branch premises except eight branch offices for which the land and buildings are
leased and ten branch offices for which the land is leased but the building is owned. The Company also leases
three loan production offices. There are no options to purchase or lease additional properties. The Company
considers its facilities adequate to meet current needs and believes that lease renewals or replacement
properties can be acquired as necessary to meet future needs.
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and may be pending or threatened
against the Company and its subsidiaries. However, neither the Company nor any of its subsidiaries is involved
in any pending legal proceedings that management believes are material to the Company or its consolidated
financial position. If an exposure were to be identified, it is the Company’s policy to establish and accrue
appropriate reserves during the accounting period in which a loss is deemed to be probable and the amount is
determinable.
There were no tax shelter penalties assessed by the Internal Revenue Service against the Company during the
year ended December 31, 2013.
Item 4. Mine Safety Disclosure
Not applicable.
28
PART II
Item 5. Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of
Equity Securities
Our common stock trades on The NASDAQ Global Select Market under the symbol FBNC. Table 22, included in
“Management’s Discussion and Analysis” below, sets forth the high and low market prices of our common stock
as traded by the brokerage firms that maintain a market in our common stock and the dividends declared for
the periods indicated. We paid a cash dividend of $0.08 per share for each quarter of 2013. For the foreseeable
future, it is our current intention to continue to pay cash dividends of $0.08 per share on a quarterly basis. See
“Business - Supervision and Regulation” above and Note 16 to the consolidated financial statements for a
discussion of other regulatory restrictions on the Company’s payment of dividends. As of December 31, 2013,
there were approximately 2,400 shareholders of record and another 3,200 shareholders whose stock is held in
“street name.”
There were no sales of unregistered securities during the year ended December 31, 2013.
Additional Information Regarding the Registrant’s Equity Compensation Plans
At December 31, 2013, the Company had three equity-based compensation plans. The Company’s 2007 Equity
Plan is the only one of three plans under which new grants of equity-based awards are possible.
The following table presents information as of December 31, 2013 regarding shares of the Company’s stock that
may be issued pursuant to the Company’s equity based compensation plans. At December 31, 2013, the
Company had no warrants or stock appreciation rights outstanding under any compensation plans.
(a)
(b)
(c)
As of December 31, 2013
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities available for
future issuance under equity
compensation plans (excluding
securities reflected in column (a))
463,813
$ 17.92
─
463,813
─
$ 17.92
761,538
─
761,538
Plan category
Equity compensation
plans approved by
security holders (1)
Equity compensation
plans not approved
by security holders
Total
(1) Consists of (A) the Company’s 2007 Equity Plan, which is currently in effect; (B) the Company’s 2004 Stock
Option Plan; and (C) the Company’s 1994 Stock Option Plan, each of which was approved by our shareholders.
29
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the
five-year period commencing December 31, 2008 and ending December 31, 2013, with the cumulative total
return of the Russell 2000 Index (reflecting overall stock market performance of small-capitalization companies),
and an index of banks with between $1 billion and $5 billion in assets, as constructed by SNL Securities, LP
(reflecting changes in banking industry stocks). The graph and table assume that $100 was invested on
December 31, 2008 in each of the Company’s common stock, the Russell 2000 Index, and the SNL Bank Index,
and that all dividends were reinvested.
First Bancorp
Comparison of Five-Year Total Return Performances (1)
Five Years Ending December 31, 2013
Total Return Performance
First Bancorp
Russell 2000
SNL Bank $1B-$5B
300
250
200
150
100
50
e
u
l
a
V
x
e
d
n
I
0
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
First Bancorp
Russell 2000
SNL Index-Banks between $1
2008
$ 100.00
100.00
Total Return Index Values (1)
December 31,
2009
77.81
127.17
2010
87.20
161.32
2011
65.39
154.59
2012
77.41
179.86
2013
102.58
249.69
billion and $5 billion
100.00
71.68
81.25
74.10
91.37
132.87
Notes:
(1) Total return indices were provided from an independent source, SNL Securities LP, Charlottesville, Virginia, and assume
initial investment of $100 on December 31, 2008, reinvestment of dividends, and changes in market values. Total
return index numerical values used in this example are for illustrative purposes only.
30
Issuer Purchases of Equity Securities
Pursuant to authorizations by the Company’s board of directors, the Company has from time to time
repurchased shares of common stock in private transactions and in open-market purchases. The most recent
board authorization was announced on July 30, 2004 and authorized the repurchase of 375,000 shares of the
Company’s stock. The Company did not repurchase any shares of its common stock during the quarter ended
December 31, 2013.
Issuer Purchases of Equity Securities
Total Number of Shares
Purchased (2)
Average Price
Paid Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
Maximum Number of
Shares That May Yet Be
Purchased Under the Plans
or Programs (1)
─
─
─
─
$ ─
─
─
$ ─
─
─
─
─
214,241
214,241
214,241
214,241
Period
Month #1 (October 1,
2013 to October 31,
2013)
Month #2 (November 1,
2013 to November
30, 2013)
Month #3 (December 1,
2013 to December
31, 2013)
Total
Footnotes to the Above Table
(1) All shares available for repurchase are pursuant to publicly announced share repurchase authorizations.
On July 30, 2004, the Company announced that its board of directors had approved the repurchase of
375,000 shares of the Company’s common stock. The repurchase authorization does not have an
expiration date. There are no plans or programs the Company has determined to terminate prior to
expiration, or under which the Company does not intend to make further purchases.
(2) The table above does not include shares that were used by option holders to satisfy the exercise price of
the call options issued by the Company to its employees and directors pursuant to the Company’s stock
option plans. There were no such exercises during the three months ended December 31, 2013.
Item 6. Selected Consolidated Financial Data
Table 1 on page 72 of this report sets forth the selected consolidated financial data for the Company.
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis is intended to assist readers in understanding our results of operations
and changes in financial position for the past three years. This review should be read in conjunction with the
consolidated financial statements and accompanying notes beginning on page 91 of this report and the
supplemental financial data contained in Tables 1 through 22 included with this discussion and analysis.
Overview - 2013 Compared to 2012
We returned to profitability in 2013 after a loss in 2012. Earnings for 2012 were significantly impacted by
charges associated with a loan disposition and foreclosed property write-down that occurred in the fourth
quarter of 2012.
Financial Highlights
($ in thousands except per share data)
2013
2012
Change
Earnings
Net interest income
Provision for loan losses - non-covered
Provision for loan losses - covered
Noninterest income
Noninterest expenses
Income (loss) before income taxes
Income tax (benefit) expense
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
$ 136,526
18,266
12,350
23,489
96,619
32,780
12,081
20,699
(895)
$ 19,804
135,200
69,993
9,679
1,389
97,275
(40,358)
(16,952)
(23,406)
(2,809)
(26,215)
Net income (loss) per common share
Basic
Diluted
$ 1.01
0.98
(1.54)
(1.54)
1.0%
-73.9%
27.6%
1591.1%
-0.7%
n/m
n/m
n/m
n/m
n/m
n/m
Balances At Year End
Assets
Loans
Deposits
$ 3,185,070
2,463,194
2,751,019
3,244,910
2,376,457
2,821,360
-1.8%
3.6%
-2.5%
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent)
0.62%
6.78%
4.92%
(0.79%)
(9.29%)
4.78%
The following is a more detailed discussion of our results for 2013 compared to 2012:
For the year ended December 31, 2013, we reported net income available to common shareholder of $19.8
million, or $0.98 per diluted common share, compared to a net loss of $26.2 million, or ($1.54) per diluted
common share, for the year ended December 31, 2012.
The following significant factors occurred in 2012 that impacted comparability between 2012 and 2013:
•
In the fourth quarter of 2012, we reported the completion of a capital raise totaling $33.8 million. A
combination of common and preferred stock was issued, including 2,656,294 shares of common stock
and 728,706 shares of non-voting preferred stock, each at the same price of $10.00 per share.
32
• Also in the fourth quarter of 2012, we identified a $68 million pool of non-covered higher-risk loans that
were targeted for sale to a third-party investor. Based on an offer to purchase these loans that was
received in December 2012, we wrote the loans down by approximately $38 million in the fourth
quarter of 2012, which required an incremental provision for loan losses of $33.6 million. The loans had
a remaining carrying value of approximately $30 million and were reclassified as “loans held for sale.”
Of the $68 million in loans targeted for sale, approximately $38.2 million had been classified as
nonaccrual loans, and $10.5 million had been classified as accruing troubled-debt-restructurings. The
sale of substantially all of these loans was completed on January 23, 2013.
•
•
In the fourth quarter of 2012, we recorded write-downs totaling $10.6 million on substantially all of our
non-covered foreclosed properties in connection with efforts to accelerate the sale of these assets.
In the first quarter of 2012, we recorded a provision for loan loss on non-covered loans of $18.6 million,
which was significantly higher than any prior quarterly provision for loan loss for non-covered loans.
This higher provision was the result of an internal review of non-covered loans that occurred in the first
quarter of 2012 that applied more conservative assumptions to estimate the probable losses associated
with some of our nonperforming loan relationships, which we believed could lead to a more timely
resolution of the related credits. Many of these same loans were included in the loans transferred to
the held-for-sale category in the fourth quarter of 2012.
We note that our results of operation are significantly affected by the on-going accounting for two FDIC-assisted
failed bank acquisitions. In the discussion in this document, the term “covered” is used to describe assets
included as part of FDIC loss share agreements, which generally result in the FDIC reimbursing the Company for
80% of losses incurred on those assets during the terms of the agreements. The term “non-covered” refers to
our legacy assets, which are not included in any type of loss share arrangement.
For covered loans that deteriorate in terms of repayment expectations, we record immediate allowances
through the provision for loan losses. For covered loans that experience favorable changes in credit quality
compared to what was expected at the acquisition date, including loans that payoff, we record positive
adjustments to interest income over the life of the respective loan – also referred to as loan discount accretion.
For covered foreclosed properties that are sold at gains or losses or that are written down to lower values, we
record the gains/losses within noninterest income.
The adjustments discussed above are recorded within the income statement line items noted without
consideration of the FDIC loss share agreements. Because favorable changes in covered assets result in lower
expected FDIC claims, and unfavorable changes in covered assets result in higher expected FDIC claims, the FDIC
indemnification asset is adjusted to reflect those expectations. The net increase or decrease in the
indemnification asset is reflected within noninterest income.
The adjustments noted above can result in volatility within individual income statement line items. Because of
the FDIC loss share agreements and the associated indemnification asset, pretax income resulting from amounts
recorded as provisions for loan losses on covered loans, discount accretion, and losses from covered foreclosed
properties is generally only impacted by 20% of these amounts due to the corresponding adjustments made to
the indemnification asset.
Total assets at December 31, 2013 amounted to $3.2 billion, a 1.8% decrease from a year earlier. Total loans at
December 31, 2013 amounted to $2.5 billion, a 3.6% increase from a year earlier, and total deposits amounted
to $2.8 billion at December 31, 2013, a 2.5% decrease from a year earlier.
Total loans increased in 2013, as growth in non-covered loans exceeded the steady decline in covered loans.
Excluding acquired loans of $16 million that were added in a March 2013 branch acquisition, our non-covered
33
loans increased by $142 million in 2013, representing growth of 6.8%. We are seeing improved loan demand as
the economy in our market areas improves.
Total deposit balances decreased 2.5% in 2013 as a result of declines in all categories of time deposits. Strong
growth in transaction deposit accounts offset a majority of the time deposit declines. In 2013, total transaction
deposit accounts increased $113 million or 6.8%, while time deposits declined by $183 million or 15.6%. We
generally pay lower interest rates on transaction accounts compared to time deposits, and thus the favorable
change in the mix of deposits played a factor in our overall cost of funds declining from 0.59% in 2012 to 0.39%
in 2013.
A portion of our loan and deposit growth during 2013 was the result of the acquisition of two branches from a
competitor bank, which resulted in the addition of $16 million in loans and $57 million in deposits.
Net interest income for the year ended December 31, 2013 amounted to $136.5 million, a 1.0% increase from
the $135.2 million recorded in 2012. The higher net interest income in 2013 was primarily caused by an increase
in the amount of discount accretion on loans purchased in failed bank acquisitions. Loan discount accretion
amounted to $20.2 million for 2013 compared to $16.5 million in 2012, an increase of $3.7 million. As
previously discussed, the impact of the changes in discount accretion on pretax income is only 20% of the gross
amount of the change. The higher amount of discount accretion was due to increased expectations regarding
the collectability of the loans. See “Net Interest Income” below for additional information.
Our net interest margin (tax-equivalent net interest income divided by average earning assets) was 4.92% for
2013 compared to 4.78% for 2012. The higher margin was primarily a result of a higher amount of discount
accretion as noted above, as well as lower overall funding costs. As noted previously, our cost of funds has
steadily declined from 0.59% in 2012 to 0.39% in 2013.
We recorded total provisions for loan losses on our covered and non-covered loans of $30.6 million in 2013
compared to $79.7 million for 2012. The provision for loan losses on non-covered loans amounted to $18.3
million in 2013 compared to $70.0 million for 2012. The decrease in 2013 was primarily due to the incremental
provision for loan losses in December 2012 of $33.6 million recorded in connection with the aforementioned
loan sale. For the year ended December 31, 2013, the provision for loan losses on covered loans amounted to
$12.4 million compared to $9.7 million for 2012. The increase in 2013 was primarily caused by several large
credits that deteriorated during the first quarter of 2013.
Our non-covered nonperforming assets amounted to $82.0 million at December 31, 2013 (2.78% of total non-
covered assets) compared to $106.1 million at December 31, 2012. The decrease in 2013 compared to 2012 was
primarily due to the loan sale that was completed in the first quarter of 2013, as discussed above, which
resulted in the disposition of $21.9 million in nonperforming loans.
Total covered nonperforming assets steadily declined in 2013, amounting to $70.6 million at December 31, 2013
compared to $96.2 million at December 31, 2012, a decline of 26.6%, which was primarily the result of a
combination of loan paydowns, loan charge-offs, and sales of foreclosed properties.
For the year ended December 31, 2013, noninterest income amounted to $23.5 million compared to $1.4 million
for the year ended December 31, 2012. The significant increase in 2013 is primarily the result of a high level of
covered and non-covered foreclosed property losses that occurred in 2012 that reduced noninterest income
compared to gains in both categories in 2013.
Noninterest expenses for the year ended December 31, 2013 amounted to $96.6 million, which was relatively
unchanged from the $97.3 million recorded in 2012.
34
Preferred stock dividends amounted to $0.9 million for 2013 compared to $2.8 million for 2012. The decrease in
2013 is the result of an increase in our small business lending which resulted in a favorable dividend rate change
related to preferred stock that was issued in September 2011 to the US Treasury as part of the Company’s
participation in the Treasury’s Small Business Lending Fund.
Overview - 2012 Compared to 2011
Earnings for 2012 were significantly impacted by charges associated with a loan disposition and foreclosed
property write-down that occurred in the fourth quarter of 2012, as previously discussed. Additionally, in the
first quarter of 2012, we recorded a significant provision for loan losses resulting from an internal review of
certain nonperforming loan relationships (see discussion below). Our 2011 results were impacted by a bargain
purchase gain and accelerated accretion on our preferred stock discount (see discussion below).
Financial Highlights
($ in thousands except per share data)
2012
2011
Change
Earnings
Net interest income
Provision for loan losses - non-covered
Provision for loan losses - covered
Noninterest income
Noninterest expenses
Income (loss) before income taxes
Income tax (benefit) expense
Net income (loss)
Preferred stock dividends
Accretion of preferred stock discount
Net income (loss) available to common shareholders
$ 135,200
69,993
9,679
1,389
97,275
(40,358)
(16,952)
(23,406)
(2,809)
−
$ (26,215)
132,203
28,525
12,776
26,216
96,106
21,012
7,370
13,642
(3,234)
(2,932)
7,476
Net income (loss) per common share
Basic
Diluted
$ (1.54)
(1.54)
0.44
0.44
2.3%
145.4%
-24.2%
-94.7%
1.2%
n/m
n/m
n/m
n/m
n/m
n/m
Balances At Year End
Assets
Loans
Deposits
$ 3,244,910
2,376,457
2,821,360
3,290,474
2,430,386
2,755,037
-1.4%
-2.2%
2.4%
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent)
(0.79%)
(9.29%)
4.78%
0.23%
2.59%
4.72%
The following is a more detailed discussion of our results for 2012 compared to 2011:
For the year ended December 31, 2012, we reported a net loss available to common shareholders of $26.2
million, or ($1.54) per diluted common share, compared to net income of $7.5 million, or $0.44 per diluted
common share, for the year ended December 31, 2011.
Our results for 2012 were significantly impacted by a capital raise and an asset disposition initiative (comprised
of a loan sale and foreclosed property write-down) that both occurred in the fourth quarter of 2012, as
previously discussed.
35
Other significant factors that affect the comparability of the full year 2012 and 2011 results are:
•
•
•
In the first quarter of 2012, we recorded a provision for loan loss on non-covered loans of $18.6 million,
which was significantly higher than any prior quarterly provision for loan loss for non-covered loans.
This higher provision was the result of an internal review of non-covered loans that occurred in the first
quarter of 2012 that applied more conservative assumptions to estimate the probable losses associated
with some of our nonperforming loan relationships, which we believed could lead to a more timely
resolution of the related credits. Many of these same loans were included in the loans transferred to
the held-for-sale category in the fourth quarter of 2012.
In the third quarter of 2011, we recorded $2.3 million in accelerated accretion of the discount remaining
on preferred stock that was redeemed that quarter. Total discount accretion of the preferred stock in
2011 was $2.9 million. There was no remaining preferred stock discount after the redemption
transaction in September 2011, and therefore we did not record any discount accretion on preferred
stock in 2012.
In the first quarter of 2011, we realized a $10.2 million bargain purchase gain related to the acquisition
of The Bank of Asheville in Asheville, North Carolina.
Total assets at December 31, 2012 amounted to $3.2 billion, a 1.4% decrease from a year earlier. Total loans at
December 31, 2012 amounted to $2.4 billion, a 2.2% decrease from a year earlier, and total deposits amounted
to $2.8 billion at December 31, 2012, a 2.4% increase from a year earlier.
During 2012, we continued to originate new loans within our non-covered loan portfolio. However, due to the
aforementioned loan sale, we wrote-down and transferred a total of $68 million from this category in the fourth
quarter of 2012. Even with the transfer, our non-covered loans increased by $25.0 million, or 1.2%, for the year
and amounted to $2.1 billion at December 31, 2012.
While our total deposit increase was 2.4% for the year, there was a significant shift in the mix of our deposits.
Our level of non-interest bearing checking accounts amounted to $413.2 million at December 31, 2012, a 23.0%
increase from a year earlier, while interest-bearing checking accounts amounted to $519.6 million, an increase
of 22.7% from a year earlier. The overall growth in checking and other transaction accounts allowed us to
reduce our reliance on higher cost time deposits and borrowings. Time deposits declined by 12% and
borrowings declined by 65%.
Net interest income for the year ended December 31, 2012 amounted to $135.2 million, a 2.3% increase from
the $132.2 million recorded 2011. The higher net interest income was primarily caused by an increase in 2012 in
the amount of discount accretion on loans purchased in failed bank acquisitions. Loan discount accretion
amounted to $16.5 million for 2012 compared to $11.6 million in 2011, an increase of $4.9 million. As
previously discussed, the impact of changes in discount accretion on pretax income is only 20% of the gross
amount of the change. See “Net Interest Income” below for additional information.
Our net interest margin (tax-equivalent net interest income divided by average earning assets) for 2012 was
4.78% compared to 4.72% for 2011. The higher margin was primarily a result of a higher amount of discount
accretion as noted above, as well as lower overall funding costs. The higher amount of discount accretion was
due to increased expectations regarding the collectability of the loans. Our cost of funds declined from 0.80%
for 2011 to 0.59% in 2012.
Our total provisions for loan losses amounted to $79.7 million compared to $41.3 million for 2011. For 2012,
the provision for loan losses on non-covered loans amounted to $70.0 million compared to $28.5 million for
36
2011. The higher provision was primarily a result of the loan sale initiative and an elevated provision for loan
losses we recorded in the first quarter of 2012, both of which were described above.
We recorded provisions for loan losses for covered loans amounting to $9.7 million and $12.8 million for the
years ended December 31, 2012 and 2011, respectively. The lower provision for the year ended 2012 was due
to stabilization in our assessment of the losses associated with our nonperforming covered loans.
Our non-covered nonperforming assets amounted to $106.1 million at December 31, 2012 (3.64% of non-
covered total assets) a decrease of $16.2 million from the $122.3 million recorded at December 31, 2011. The
decrease was due to the write-downs associated with the loan sale, as well as the foreclosed property write-
downs previously discussed. Upon the January 23, 2013 completion of the loan sale, nonperforming assets
declined by an additional $21.9 million, which was the amount of nonperforming loans held for sale at
December 31, 2012.
Total covered nonperforming assets steadily declined during 2012, amounting to $96.2 million at December 31,
2012 compared to $141.0 million at December 31, 2011, a decline of 31.7%.
For the years ended December 31, 2012 and 2011, we recorded noninterest income of $1.4 million and $26.2
million, respectively. The significant decrease in noninterest income for 2012 compared to 2011 is primarily the
result of covered and non-covered foreclosed property write-downs recorded in 2012 and the $10.2 million
bargain purchase gain recorded in the 2011 acquisition of The Bank of Asheville.
Noninterest expenses for the twelve months ended December 31, 2012 amounted to $97.3 million, a 1.2%
increase from the $96.1 million recorded in 2011. The increase primarily relates to an increase in personnel
expense, as we hired additional employees in order to build our infrastructure, expand wealth management
capabilities, and prepare the Company for future growth.
Outlook for 2014
We have begun to see signs of a recovering economy in most of our market area. However, the recovery in our
market area appears to be lagging and less robust than that of the national economy. Unemployment rates in
our market area continue to be above the national average, and our local economic conditions remain
challenging. We continue to have an elevated level of past due and adversely classified assets compared to
historic averages. In fact, over the past year, we have experienced a steady increase in our non-covered
nonperforming and adversely classified assets. Despite the higher levels of these problem assets, based on our
analysis, we believe the severity of the loss rate inherent in our classified loans is less than in recent years. In
addition, we believe that our allowance for loan losses is sufficient to absorb the probable losses inherent in our
portfolio at December 31, 2013. Accordingly, at the present time and based on current conditions, we do not
expect our 2014 provision for loan losses related to non-covered assets to be materially greater than the
amount recorded in 2013.
Because interest rates have progressively declined to historic lows, the rates we have realized on newly
originated loans and newly purchased investment securities have generally decreased. As it relates to our
funding costs, the yields on many of our deposits are already very low and the ability to lower them further is
limited. Accordingly, we believe that compression of our net interest margin is likely.
We believe that regulatory reform will negatively impact our earnings. The regulatory climate is not favorable
for banks. We expect additional overhead costs will be necessary to comply with the new regulations expected
to arise directly or indirectly from the Dodd-Frank Act (see additional discussion in the “Legislative and
Regulatory Developments” section).
37
In 2009 and 2011 we acquired failed banks with approximately $959 and $193 million in assets, respectively.
These acquisitions resulted in significant volatility to our earnings subsequent to the acquisitions, primarily as a
result of the bargain purchase gains recorded on the acquisition dates that increased earnings and write-downs
of foreclosed properties that negatively impacted earnings. While the volatility caused by these acquisitions on
our earnings has generally lessened over the years, they may continue to add volatility to our reported earnings
in 2014. The volatility may be positive to earnings, which would most likely occur if the credit quality of the
acquired loans continues to stabilize or improves, or negative to earnings, which would most likely occur if the
credit quality of the acquired loans deteriorates or if the properties we have foreclosed on continue to decline in
value.
As discussed in the Risk Factors section above, one of our non-single family loss share agreements with the FDIC
expires in June 2014, which will result in our company absorbing 100% of all losses related to those assets that
occur subsequent to the expiration date. We are working diligently to resolve that portfolio of assets as
prudently as possible. In addition, property values for most types of real estate appear to have generally
stabilized. Accordingly, while concern remains, we do not currently expect that the expiration of the loss share
agreement will have a material impact on our financial results for 2014.
We are expecting solid loan growth in 2014 as a result of a recovering economy in many of our market areas,
enhanced credit processes that we recently implemented that allow us to be more responsive to our customers,
and the growth we expect from our three newly establish loan production offices in Charlotte, Greenville and
Fayetteville, which we believe are attractive markets in North Carolina.
In December 2013, we introduced a new deposit product line-up. In addition to simplifying our product offering,
which was a primary goal, other significant changes included the elimination of our free checking account for
customers maintaining low account balances and the elimination of paper statement fees and certain overdraft
fees. As a result of these changes, we expect a significant net increase in our service charges on deposit
accounts in 2014 over 2013.
Due to increases in our level of lending to small businesses, we expect that the dividend rate on the $63.5
million of preferred stock that was issued to the US Treasury in connection with our participation in the Small
Business Lending Fund will be 1.0% until 2016, unless the preferred stock is redeemed at an earlier date.
38
Critical Accounting Policies
The accounting principles we follow and our methods of applying these principles conform with accounting
principles generally accepted in the United States of America and with general practices followed by the banking
industry. Certain of these principles involve a significant amount of judgment and may involve the use of
estimates based on our best assumptions at the time of the estimation. The allowance for loan losses,
intangible assets, and the fair value and discount accretion of loans acquired in FDIC-assisted transactions
are three policies we have identified as being more sensitive in terms of judgments and estimates, taking into
account their overall potential impact to our consolidated financial statements.
Allowance for Loan Losses
Due to the estimation process and the potential materiality of the amounts involved, we have identified the
accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy
critical to our consolidated financial statements. The provision for loan losses charged to operations is an
amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb
losses inherent in the portfolio.
Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates
the appropriate allowance for loan losses. This model has three components. The first component involves the
estimation of losses on individually significant “impaired loans”. A loan is considered to be impaired when,
based on current information and events, it is probable we will be unable to collect all amounts due according to
the contractual terms of the loan agreement. A loan is specifically evaluated for an appropriate valuation
allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality,
accruing status, and type of collateral) and the loan is determined to be impaired. The estimated valuation
allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as
determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted
at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.
The second component of the allowance model is the estimation of losses for impaired loans that have common
risk characteristics and are aggregated to measure impairment. These impaired loans generally have loan
balances below the thresholds that result in an individual review discussed above. For these impaired loans, we
aggregate loans among similar loan types and apply loss rates that are derived from historical statistics.
The third component of the allowance model is the estimation of losses for loans that are not considered to be
impaired loans. Loans not considered to be impaired are segregated by loan type, and estimated loss
percentages are assigned to each loan type, based on historical losses, current economic conditions, and
operational conditions specific to each loan type. For loans with more than standard risk, loss percentages are
based on a multiple of the estimated loss rate for loans of a similar loan type with normal risk. The multiples
assigned vary by type of loan, depending on risk, and we have consulted with an external credit review firm in
assigning those multiples.
The reserves estimated for impaired loans (specifically reviewed and aggregate) are then added to the reserve
estimated for all other loans. This becomes our “allocated allowance.” In addition to the allocated allowance
derived from the model, we also evaluate other data such as the ratio of the allowance for loan losses to total
loans, net loan growth information, nonperforming asset levels and trends in such data. Based on this additional
analysis, we may determine that an additional amount of allowance for loan losses is necessary to reserve for
probable losses. This additional amount, if any, is our “unallocated allowance.” The sum of the allocated
allowance and the unallocated allowance is compared to the actual allowance for loan losses recorded on our
books and any adjustment necessary for the recorded allowance to equal the computed allowance is recorded
as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded.
39
Loans covered under loss share agreements (referred to as “covered loans”) are recorded at fair value at
acquisition date. Therefore, amounts deemed uncollectible at acquisition date become a part of the fair value
calculation and are excluded from the allowance for loan losses. Subsequent decreases in the amount expected
to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan
losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of
the loan. Proportional adjustments are also recorded to the FDIC indemnification asset.
Although we use the best information available to make evaluations, future material adjustments may be
necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review our allowance for loan losses. Such agencies may
require us to recognize additions to the allowance based on the examiners’ judgment about information
available to them at the time of their examinations.
For further discussion, see “Nonperforming Assets” and “Summary of Loan Loss Experience” below.
Intangible Assets
Due to the estimation process and the potential materiality of the amounts involved, we have also identified the
accounting for intangible assets as an accounting policy critical to our consolidated financial statements.
When we complete an acquisition transaction, the excess of the purchase price over the amount by which the
fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible
asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount
classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized
over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not
systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a
lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a
higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill.
The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch
acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency, the
primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of
identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically
determined by performing a discounted cash flow analysis, which involves a combination of any or all of the
following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and
discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and
bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a
life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency
acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten
to fifteen years, with amortization occurring on a straight-line basis.
Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the
identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an
annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their
related carrying value, including goodwill (our community banking operation is our only material reporting unit).
If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the
implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the
goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment
loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis
40
would involve the significant use of estimates and assumptions.
In our 2013 goodwill impairment evaluation, we engaged a consulting firm that used various valuation
techniques to assist us in concluding that our goodwill was not impaired.
We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the
difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted
future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of
multiple estimates and assumptions, such as those listed above.
Fair Value and Discount Accretion of Loans Acquired in FDIC-Assisted Transactions
We consider the determination of the initial fair value of loans acquired in FDIC-assisted transactions, the initial
fair value of the related FDIC indemnification asset, and the subsequent discount accretion of the purchased
loans to involve a high degree of judgment and complexity. We determine fair value accounting estimates of
newly assumed assets and liabilities in accordance with relevant accounting guidance. However, the amount
that we realize on these assets could differ materially from the carrying value reflected in our financial
statements, based upon the timing of collections on the acquired loans in future periods. To the extent the
actual values realized for the acquired loans are different from the estimates, the FDIC indemnification asset will
generally be impacted in an offsetting manner due to the loss-sharing support from the FDIC.
Because of the inherent credit losses associated with the acquired loans in a failed bank acquisition, the amount
that we record as the fair values for the loans is generally less than the contractual unpaid principal balance due
from the borrowers, with the difference being referred to as the “discount” on the acquired loans. We have
applied the cost recovery method of accounting to all purchased impaired loans due to the uncertainty as to the
timing of expected cash flows. This will generally result in the recognition of interest income on these impaired
loans only when the cash payments received from the borrower exceed the recorded net book value of the
related loans.
For nonimpaired purchased loans, we accrete the discount over the lives of the loans in a manner consistent
with the guidance for accounting for loan origination fees and costs.
Merger and Acquisition Activity
In 2011, we completed the acquisition of The Bank of Asheville, an FDIC-assisted transaction previously
discussed. In 2012, we completed a small branch acquisition, consisting of approximately $9 million in deposits,
which were transferred to a First Bank branch located nearby. In 2013, we completed an acquisition of two
branches with $57 million in deposits and $16 million in loans. In the 2013 acquisition, we purchased one of the
branch buildings, while transferring the accounts of the other branch to an existing branch located nearby. The
results of each acquired company/branch are included in our financial statements beginning on their respective
acquisition dates. See Note 2 to the consolidated financial statements for additional information regarding
these acquisitions.
FDIC Indemnification Asset
As previously discussed, on June 19, 2009 and January 21, 2011, we acquired substantially all of the assets and
liabilities of Cooperative Bank and The Bank of Asheville, respectively, in FDIC-assisted transactions. For each
transaction, the loans and foreclosed real estate purchased are covered by two loss share agreements with the
FDIC, which afford First Bank significant loss protection. Under the Cooperative Bank loss share agreements, the
FDIC will cover 80% of covered loan and foreclosed real estate losses up to $303 million, and 95% of losses in
41
excess of that amount. Under The Bank of Asheville loss share agreements, the FDIC will cover 80% of all
covered loan and foreclosed real estate losses. For both transactions, the loss share reimbursements are
applicable for ten years for single family home loans and five years for all other loans.
We have recorded a FDIC indemnification asset related to the two transactions to account for payments that we
expect to receive from the FDIC related to the loss share agreements. The carrying value of this receivable at
each period end is the sum of: 1) actual claims that have been incurred and are in the process of submission to
the FDIC for reimbursement, but have not yet been received and 2) our estimated amount of claimable loan and
other real estate losses covered by the agreements multiplied by the FDIC reimbursement percentage.
At December 31, 2013 and 2012, the FDIC indemnification asset was comprised of the following components:
($ in thousands)
Receivable related to claims incurred, not yet received
Receivable related to estimated future claims on loans
Receivable related to estimated future claims on other real estate owned
FDIC indemnification asset
2013
$ 12,649
33,398
2,575
$ 48,622
2012
33,040
62,044
7,475
102,559
As of each acquisition date, based on the losses inherent in the covered assets and what we estimated we would
receive as payments from the FDIC, we recorded a “FDIC Indemnification Asset.” Since that time, we have
recorded adjustments to the indemnification asset as discussed below.
The FDIC indemnification asset has generally been adjusted upwards in the following circumstances:
1) Deterioration of credit quality of covered loans – As of the acquisition dates, we recorded the loans
acquired from Cooperative Bank and The Bank of Asheville on our books at a fair value that was $227.9 million
and $51.7 million, respectively, less than the contractual amounts due from the borrowers, which was our
estimate of the loan losses inherent in the portfolio. As the credit quality of these portfolios change and better
information is obtained about likely losses, some loans have better repayment expectations than we originally
projected and some loans have worse repayment expectations than originally projected. For loans with worse
repayment expectations, we generally record provisions for loan losses with corresponding increases to the FDIC
indemnification asset by recording noninterest income in proportion to the reimbursement percentage.
However, beginning in the fourth quarter of 2012, we began recording some provisions for loan losses without
corresponding increases to the indemnification asset because we believe certain loan losses will occur after the
June 2014 expiration of the Cooperative Bank non-single family share agreement and after the January 2016
expiration of the Bank of Asheville non-single family share agreement. In 2013, 2012 and 2011, we recorded
total provisions for loan losses on covered loans amounting to $12.4 million, $9.7 million and $12.8 million,
respectively, which resulted in upward adjustments to the FDIC indemnification asset of $9.6 million, $6.6
million and $10.2 million, respectively. In 2013 and 2012, we recorded provisions for loan losses on covered
loans without a corresponding increase to the indemnification asset of $0.3 million and $1.5 million,
respectively.
2) Write-downs and losses on foreclosed properties – When we foreclose on delinquent borrowers, we
initially record the foreclosed property at the lower of book or fair value (based on current appraisals), with any
deficiency recorded as a loan charge-off. Subsequent to the foreclosure, we periodically order updated
appraisals and if the appraisal indicates a fair value lower than our carrying value, we must write the property
down. We also sell foreclosed properties that frequently result in losses. Each of these situations results in the
Company recording losses on other real estate owned with a corresponding increase to the FDIC indemnification
asset by recording noninterest income in proportion to the reimbursement percentage. If we sell foreclosed
properties that result in gains, then we record a corresponding decrease to the FDIC indemnification asset to
reflect the fact that reimbursements from loss claims will be reduced by the gains. In 2013, we recorded net
42
gains on covered foreclosed properties amounting to $0.4 million, which resulted in a downward adjustment to
the FDIC indemnification asset of $0.3 million. In 2012 and 2011, we recorded net losses and write downs on
covered foreclosed properties amounting to $13.0 million and $24.5 million, respectively, which resulted in
upward adjustments to the FDIC indemnification asset of $10.4 million and $19.6 million, respectively.
3) Expenses incurred related to collection activities on covered assets – As a result of our collection efforts,
we incur expenses such as legal fees, property taxes and appraisal costs. Many of these expenses are
reimbursable by the FDIC. These expenses are recorded as “other” noninterest expenses and a corresponding
increase is made to increase the FDIC indemnification asset by reducing the gross collection expenses by the
amount expected to be reimbursed by the FDIC for eligible expenses. In 2013, 2012, and 2011, we incurred $6.5
million, $9.5 million, and $8.5 million, in gross collection expenses related to covered assets, respectively, and
reduced that amount by $5.4 million, $6.9 million, and $5.7 million in FDIC reimbursements, respectively.
The FDIC indemnification asset has generally been adjusted downwards in the following circumstances:
1) Receipt of cash from the FDIC related to claims submitted – On at least a quarterly basis, we submit
eligible loss share claims to the FDIC. After reviewing and approving the claims, the FDIC wires us cash, which
reduces the amount of the FDIC indemnification asset. In 2013, 2012, and 2011, we received $49.6 million,
$29.8 million, and $69.3 million, in FDIC reimbursements, respectively.
2) Accretion of discount on acquired loans – As noted above, we recorded the acquired loans of the two
transactions on our books at a fair value that was $280 million (in total) less than the contractual amounts due
from the borrowers (the “discount”), which was our estimate of the loan losses inherent in the portfolio. As the
credit quality of this portfolio changes and better information is obtained about likely losses, some loans have
better repayment expectations than we originally projected and some loans have worse repayment
expectations than originally projected (discussed above). For loans with improved repayment expectations, we
are systematically reducing the discount over the life of the loan. For some loans, we have received complete
payoffs at the contractual balance and the discount must be reduced to zero. When we reduce/accrete the
discount, we do so by recognizing interest income in that same amount. When the expected losses on loans
with improved repayment expectations becomes less than the original estimate, our expected reimbursement
from the FDIC declines as well. Accordingly, we reduce the FDIC indemnification asset by the corresponding
reimbursement percentage. In 2013, 2012, and 2011, we recorded discount accretion of $20.2 million, $16.5
million, and $11.6 million, respectively, which resulted in a reduction of FDIC indemnification asset and
indemnification expense of $16.2 million, $13.2 million, and $9.3 million, respectively.
In summary, circumstances that result in adjustments to the FDIC indemnification asset are recorded within the
income statement line items noted without consideration of the FDIC loss share agreements. Because favorable
changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets
generally result in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those
expectations. The net increase or decrease in the indemnification asset is reflected within noninterest income.
The adjustments can result in volatility within individual income statement line items. Because of the FDIC loss
share agreements and the associated indemnification asset, amounts recorded as provisions for loan losses,
discount accretion, and losses from foreclosed properties generally only impact pretax income by 20% of those
amounts, due to the corresponding adjustments made to the indemnification asset.
43
The following presents a rollforward of the FDIC indemnification asset since the date of the Cooperative Bank
acquisition on June 19, 2009.
($ in thousands)
Balance at June 19, 2009
Decrease related to favorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Balance at December 31, 2009
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Balance at December 31, 2010
Increase related to acquisition of The Bank of Asheville
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2011
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2012
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2013
$ 185,112
(1,516)
1,300
(40,500)
(1,175)
143,221
30,419
2,900
(46,721)
(6,100)
123,719
42,218
29,814
5,725
(69,339)
(9,278)
(1,182)
121,677
16,984
6,947
(29,796)
(13,173)
(80)
102,559
9,312
5,352
(49,572)
(16,160)
(2,869)
$ 48,622
44
The following table presents additional information regarding our covered loans, loan discounts, allowances for
loan losses and the corresponding FDIC indemnification asset:
($ in thousands)
At December 31, 2013
Expiration of loss share agreement
Nonaccrual covered loans
Unpaid principal balance
Carrying value prior to loan discount*
Loan discount
Net carrying value
Allowance for loan losses
Indemnification asset recorded
All other covered loans
Unpaid principal balance
Carrying value prior to loan discount*
Loan discount
Net carrying value
Allowance for loan losses
Indemnification asset recorded
All covered loans
Unpaid principal balance
Carrying value prior to loan discount*
Loan discount
Net carrying value
Allowance for loan losses
Indemnification asset recorded
* Reflects partial charge-offs
Cooperative
Single Family
Loss Share
Loans
6/19/2019
Cooperative
Non-Single
Family Loss
Share Loans
Bank of
Asheville Single
Family Loss
Share Loans
6/19/2014
1/21/2021
Bank of
Asheville Non-
Single Family
Loss Share
Loans
1/21/2016
12,342
12,192
2,564
9,628
764
2,662
118,353
118,269
16,046
102,223
129
12,940
130,695
130,461
18,610
111,851
893
15,602
40,473
26,998
3,030
23,968
942
3,042
38,504
38,032
2,504
35,528
1,905
2,418
518
403
279
124
―
223
12,052
11,971
3,528
8,443
22
2,840
7,061
5,661
2,165
3,496
208
1,898
36,410
36,390
9,491
26,899
272
7,593
78,977
65,030
5,534
59,496
2,847
5,460
43,471
42,051
11,656
30,395
480
9,491
Adjustments
Total indemnification asset recorded related to loans
12,570
12,374
3,807
8,567
22
3,063
Total
60,394
45,254
8,038
37,216
1,914
7,825
205,319
204,662
31,569
173,093
2,328
25,791
265,713
249,916
39,607
210,309
4,242
33,616
(218)
33,398
As noted in the table above, our loss share agreement related to Cooperative Bank’s non-single family assets
expires in June 2014 and our loss share agreement related to Bank of Asheville’s non-single family assets expires
in January 2016. We continue to make progress in winding down these portfolios, and we do not currently
expect that the upcoming expiration of the Cooperative non-single family agreement will have a material impact
on our company. As it relates to those portions of covered loans, we expect accelerated amounts of loan
discount accretion and corresponding indemnification asset expense until the expiration dates and the loss
share attributes of the loan portfolio is resolved.
45
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the “spread” between earnings on interest-earning assets and the interest paid on interest-
bearing liabilities, constitutes the largest source of our earnings. Other factors that significantly affect operating
results are the provision for loan losses, noninterest income such as service fees and noninterest expenses such
as salaries, occupancy expense, equipment expense and other overhead costs, as well as the effects of income
taxes.
Net Interest Income
Net interest income on a reported basis amounted to $136.5 million in 2013, $135.2 million in 2012, and $132.2
million in 2011. For internal purposes and in the discussion that follows, we evaluate our net interest income on
a tax-equivalent basis by adding the tax benefit realized from tax-exempt securities to reported interest income.
Net interest income on a tax-equivalent basis amounted to $138.0 million in 2013, $136.7 million in 2012, and
$133.8 million in 2011. Management believes that analysis of net interest income on a tax-equivalent basis is
useful and appropriate because it allows a comparison of net interest amounts in different periods without
taking into account the different mix of taxable versus non-taxable investments that may have existed during
those periods. The following is a reconciliation of reported net interest income to tax-equivalent net interest
income.
($ in thousands)
Net interest income, as reported
Tax-equivalent adjustment
Net interest income, tax-equivalent
2013
$ 136,526
1,511
$ 138,037
Year ended December 31,
2012
135,200
1,527
136,727
2011
132,203
1,556
133,759
Table 2 analyzes net interest income on a tax-equivalent basis. Our net interest income on a tax-equivalent
basis increased by 1.0% in 2013 and 2.2% in 2012. There are two primary factors that cause changes in the
amount of net interest income we record - 1) our net interest margin (tax-equivalent net interest income divided
by average interest-earning assets), and 2) changes in our loans and deposits balances.
The minor increases in net interest income over the past two years have been primarily due to an increase in our
net interest margin during those periods. “Net interest margin” is a ratio we use to measure the spread
between the yield on our earning assets and the cost of our funding and is calculated by taking tax-equivalent
net interest income and dividing by average earning assets. Our net interest margin increased from 4.72% in
2011 to 4.78% in 2012 to 4.92% in 2013.
For the past several years, the nation has been in a very low interest rate environment with maturing assets and
liabilities originated in prior periods generally repricing at progressively lower interest rates at renewal/maturity.
The primary reasons for the increases in our net interest margin has been – 1) yields on our interest-earning
assets have declined by a smaller amount than the rates we have paid on our interest bearing liabilities, and 2)
favorable changes in the mix of our deposit base. From 2011 to 2013, the yield we earned on our interest-
earning assets declined 24 basis points, from 5.55% to 5.31%, while the average rate paid on interest-bearing
liabilities declined by 44 basis points, from 0.90% to 0.46%. Positively impacting our yield on assets has been the
continued use of interest rate floors on loans, as well as higher levels of loan discount accretion – see below.
As it relates to our interest-bearing liabilities, we have been able to lower interest rates on maturing time
deposits that were originated in prior periods, and we have also been able to progressively lower interest rates
on various types of interest-bearing checking, savings, and money market accounts. The average interest rate
paid on our interest bearing deposits declined from 0.88% in 2011 to 0.43% in 2013. Also, the funding mix of
46
our liabilities had a positive impact on our net interest margin. As calculated from Table 2, the average amount
of our lower cost deposits, comprised of checking accounts (non-interest bearing and interest bearing), money
market accounts and savings accounts, steadily increased from $1.4 billion in 2011 to $1.7 billion in 2013, an
increase of 27%, while the average amount of our higher cost funding, comprised of time deposits and
borrowings, declined from $1.6 billion to $1.1 billion over that same period, a change of 29%.
The net interest margin for all periods benefited, by varying amounts, from the net accretion of purchase
accounting premiums/discounts associated with the Cooperative Bank acquisition in June 2009 and, to a lesser
degree, The Bank of Asheville acquisition in January 2011. As can be seen in the table below, we recorded $19.8
million in 2013, $16.1 million in 2012, and $11.6 million in 2011, in net accretion of purchase accounting
premiums/discounts that increased net interest income.
($ in thousands)
Year Ended
December 31,
2013
Year Ended
December 31,
2012
Year Ended
December 31,
2011
Interest income – reduced by premium amortization on loans
Interest income – increased by accretion of loan discount
Interest expense – reduced by premium amortization of deposits
Interest expense – reduced by premium amortization of borrowings
Impact on net interest income
$ (386)
20,200
29
̶
$ 19,843
(464)
16,466
85
30
16,117
(453)
11,598
337
146
11,628
The biggest component of the purchase accounting adjustments was loan discount accretion, which amounted
to $20.2 million in 2013, $16.5 million in 2012 and $11.6 million in 2011. The higher amounts of discount
accretion are due to payoffs of loans with loan discounts and increased expectations regarding the collectability
of other loans.
Table 3 presents additional detail regarding the estimated impact that changes in loan and deposit volumes and
changes in the interest rates we earned/paid had on our net interest income in 2012 and 2013. Table 3
indicates that in 2012, changes in interest rates were the primary reason for the increase in net interest income,
with the impact of the lower rates reducing interest expense by $5.0 million, while interest income was only
reduced by $1.5 million due to rates. Thus, lower interest rates were the primary reason that net interest
income increased by $3 million during the year. In 2013, an almost equal combination of changes in the mix of
our liability volumes, primarily our deposit mix, and lower interest rates resulted in interest expense declining by
$6.3 million. Interest income declined in 2013, primarily due to lower interest rates, by only $5.0 million. This
combination of factors resulted in net interest income increasing by $1.3 million in 2013 compared to 2012. As
noted previously, for both years, average interest rates on assets benefitted from interest rate floors on loans
and higher levels of loan discount accretion, while interest expense benefited from a shifting funding mix and
lower rates that we paid on our deposit accounts.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”
Provision for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses
to an estimated balance considered appropriate to absorb probable losses inherent in our loan portfolio.
Management’s determination of the adequacy of the allowance is based on our level of loan growth, an
evaluation of the loan portfolio, current economic conditions, historical loan loss experience and other risk
factors.
Our provisions for loan losses and nonperforming assets remain at what we believe to be elevated levels,
primarily due to challenging economic conditions, including high unemployment rates that impact borrower
47
repayment ability and lower property values that negatively impact collateral dependent real estate loans. For
2013, 2012, and 2011, our total provisions for loan losses were $30.6 million, $79.7 million, and $41.3 million,
respectively. The total provision for loan losses is comprised of provision for loan losses for non-covered loans
and provision for loan losses for covered loans, as discussed in the following paragraphs.
We recorded $18.3 million, $70.0 million, and $28.5 million in provisions for loan losses related to non-covered
loans for the years ended December 31, 2013, 2012, and 2011, respectively. The lower provision in 2013
compared to the level in 2012 was primarily a result of 1) a $32.9 incremental provision for losses recorded in
the fourth quarter of 2012 in connection with a loan sale, and 2) a first quarter of 2012 internal review of non-
covered loans that applied more conservative assumptions to estimate the probable losses associated with
some of our nonperforming loan relationships. We recorded a provision for loan losses on non-covered loans of
$18.6 million in the first quarter of 2012, of which approximately $11 million related specifically to the special
internal review.
As it relates to the loan sale, in late 2012, we identified approximately $68 million of non-covered higher-risk
loans that we solicited bids for from several third-party investors. Based on an offer to purchase these loans
that was received in December, we wrote the loans down by approximately $38 million to their estimated
liquidation value of approximately $30 million and reclassified them as “loans held for sale.” The sale of
substantially the same pool of loans was completed on January 23, 2013. The incremental provision for loan
losses that was necessary as a result of this transaction was approximately $32.9 million, which included the net
impact of several factors affecting our calculation of the allowance for loan losses.
The aforementioned special internal review related to non-covered loans and was initiated due to refinements
to our loan loss model and internal control changes occurring in the first quarter of 2012 that resulted in a
realignment of departmental responsibilities for determining our allowance for loan losses. As a result of the
changes, an internal review of selected nonperforming loan relationships was conducted, which applied more
conservative assumptions to estimate the probable losses and to allow for a more timely resolution of the
related credits. The review identified approximately 30 loan relationships in which additional provisions for loan
losses were necessary when more conservative judgments were applied to the repayment assumptions
associated with the borrowers. The majority of the additional provision was concentrated in construction and
land development real estate, commercial real estate, and residential real estate loan categories. Many of
these same loans were included in the loans transferred to the “loans held for sale” category in the fourth
quarter of 2012 and were sold in January 2013.
If not for the impact of the two 2012 events discussed above, our provisions for loan losses on non-covered
loans would have been $26-28 million in both 2011 and 2012 compared to $18.3 million in 2013. We believe the
lower provision for loan losses in 2013 was largely due to the 2012 loan sale that resulted in the disposition of
some of the largest, highest risk loans in our portfolio, many of which would likely have resulted in losses in
2013 had they not been sold. As discussed below in the section “Nonperforming Assets,” despite the loan sale,
our classified and nonperforming loans steadily increased in 2013. However, we believe this increase is due
partially to recent senior management additions to our credit administration department, who are taking a
more conservative approach to assessing loans than had been past practice, as opposed to any significant level
of overall credit deterioration. Additionally, based on our review of the underlying classified and nonperforming
credits, we believe that, on average, the severity of the loss rate inherent in our classified loans is less than in
recent years. Accordingly, at the present time and based on current conditions, we do not expect a material
increase in our provision for loan losses in 2014 compared to 2013.
As it relates to covered loans, we recorded $12.4 million, $9.7 million and $12.8 million in provisions for loan
losses during 2013, 2012 and 2011, respectively. These provisions were necessary to provide for loans that
showed signs of collection problems during the respective periods, as well as to provide for collateral dependent
48
nonaccrual loans for which we received updated appraisals during the year that reflected lower collateral
valuations. The increase in provisions for loan losses on covered loans from 2012 to 2013 was primarily the
result of several large credits that deteriorated during the first quarter of 2013 and were placed on nonaccrual
status. The decline in the provision for loan losses on covered loans from 2011 to 2012 was primarily due to
lower levels of covered nonperforming loans during the period and stabilization in the underlying collateral
values of nonperforming loans. Because of the FDIC loss share agreements in place for these loans, the FDIC
indemnification asset was adjusted upwards by recording noninterest income of $9.6 million, $6.6 million, and
$10.2 million in 2013, 2012, and 2011, respectively, or 80% of the amount of the provisions. For $0.3 million and
$1.5 million of the 2013 and 2012 provision for loan losses on covered loans, respectively, we did not record a
corresponding increase to the indemnification asset because we believe that the loan losses will occur after the
expiration of the Cooperative Bank non-single family loss share agreement that expires in June 2014 and after
the expiration of the Bank of Asheville non-single family loss share agreement that expires in January 2016.
Total net charge-offs for the years ended December 31, 2013, 2012, and 2011, were $28.5 million, $74.7 million,
and $49.3 million, respectively. These amounts were comprised of net charge-offs on both non-covered loans
and on covered loans.
Net-charge offs for non-covered loans were $15.6 million, $64.0 million, and $31.2 million for 2013, 2012, and
2011, respectively. The significant increase in 2012 was due to the loan sale discussed above which resulted in
charge-offs of $37.8 million. The ratio of net charge-offs to average non-covered loans was 0.72%, 3.02%, and
1.52% for 2013, 2012, and 2011, respectively. Notwithstanding the impact of the loan sale, the relatively high
level of net charge-offs during 2012 and 2011 was primarily a result of unfavorable economic conditions,
especially related to real estate, that resulted in higher levels of borrowers not repaying their loans and the
corresponding collateral not being sufficient to pay off the balances. Net charge-offs were lower in 2013, which
is reflective of improving economic conditions and lower levels of our highest-risk loans.
Net charge-offs for covered loans were $12.9 million, $10.7 million, and $18.1 million in 2013, 2012, and 2011,
respectively. The charge-offs of covered loans were primarily a result of declining collateral values on collateral
dependent nonaccrual loans.
As seen in Tables 14 and 14a, in 2013, 2012, and 2011, our provisions for loan losses and net charge-offs for
both covered and non-covered loans were concentrated in loans classified as “real estate – construction, land
development & other land loans.” This category of loans is primarily comprised of land acquisition and
development loans and other types of lot loans. These types of loans were particularly hard hit by the decline in
real estate development and property values that occurred in the recession. As can be seen in Table 10,
although we have reduced our exposure to this category of loans, we continue to have significant exposure to
this sector, and future material losses could result.
See “Nonperforming Assets” below for further discussion of our asset quality, which impacts our provisions for
loan losses.
See the section entitled “Allowance for Loan Losses and Loan Loss Experience” below for a more detailed
discussion of the allowance for loan losses. The allowance is monitored and analyzed regularly in conjunction
with our loan analysis and grading program, and adjustments are made to maintain an adequate allowance for
loan losses.
Noninterest Income
Our noninterest income amounted to $23.5 million in 2013, $1.4 million in 2012, and $26.2 million in 2011.
As shown in Table 4, core noninterest income excludes gains from acquisitions, foreclosed property write-downs
49
and losses, indemnification asset income, securities gains or losses, and other miscellaneous gains and losses.
Core noninterest income amounted to $28.2 million in 2013, a 10.7% increase from the $25.5 million in 2012.
The 2012 core noninterest income of $25.5 million was a 10.0% increase from the $23.2 million recorded in
2011.
See Table 4 and the following discussion for an understanding of the components of noninterest income.
Service charges on deposit accounts amounted to $12.8 million, $11.9 million, and $12.0 million in 2013, 2012
and 2011, respectively. The increase in 2013 was primarily due to higher levels of overdraft fees due to a
change in the fee structure for overdrafts. In comparing 2012 to 2011, our level of service charges on deposit
accounts was relatively unchanged, which reflected the net impact of 1) a decrease in overdraft fees resulting
from regulations that were enacted in the second half of 2011, and 2) the introduction of new fees on deposit
accounts, such as fees for customers that elected to receive paper statements.
In December 2013, we introduced a new deposit product line-up. In addition to simplifying our product offering,
which was a primary goal, other significant changes included the elimination of our free checking account for
customers maintaining low account balances and the elimination of paper statement fees and certain overdraft
fees. As a result of these changes, we expect a significant net increase in our service charges on deposits
accounts in 2014 over 2013.
Other service charges, commissions and fees amounted to $9.3 million in 2013, a 5.5% increase from the $8.8
million earned in 2012. The 2012 amount of $8.8 million was a 9.5% increase from the $8.1 million earned in
2011. This category of noninterest income includes items such as electronic payment processing revenue (which
includes fees related to credit card transactions by merchants and customers and fees earned from debit card
transactions), ATM charges, safety deposit box rentals, fees from sales of personalized checks, and check cashing
fees. The growth in this category for both years was primarily attributable to increased debit card usage by our
customers, as we earn a small fee each time our customers make a debit card transaction. Also, part of the
increase in this category is due to the overall growth in our total customer base, including growth achieved from
corporate acquisitions.
Fees from presold mortgages amounted to $2.9 million in 2013, $2.4 million in 2012, and $1.6 million in 2011.
The increases from 2011 to 2013 were due to high mortgage refinance activity resulting from low interest rates
on home mortgages, as well as increased volume resulting from additional mortgage loan personnel we have
added since 2012. While mortgage fees increased in 2013, mortgage refinance activity slowed towards the end
of 2013 due to increases in interest rates on home mortgages that has persisted in 2014. Accordingly, we are
expecting a decline in these fees in 2014.
Commissions from sales of insurance and financial products amounted to $2.1 million in 2013, $1.8 million in
2012, and $1.5 million in 2011. This line item includes commissions we receive from three sources - 1) sales of
credit life insurance associated with new loans, 2) commissions from the sales of investment, annuity, and long-
term care insurance products, and 3) commissions from the sale of property and casualty insurance. The
following table presents the contribution of each of the three sources to the total amount recognized in this line
item:
($ in thousands)
Commissions earned from:
Sales of credit life insurance
Sales of investments, annuities, and long term care insurance
Sales of property and casualty insurance
Total
50
2013
2012
2011
$ 58
60
70
1,353
721
$ 2,132
1,068
704
1,832
760
682
1,512
As can be seen in the above table, sales of investments, annuities and long term care insurance have almost
doubled from 2011 to 2013. This was the result of an initiative and a renewed emphasis on this line of business
that began in 2011. We hired a wealth management executive in 2011 who has steadily built a team of financial
advisors that have grown this business.
Table 4 shows earnings from bank owned life insurance income were $1.1 million in 2013, $0.6 million in 2012,
and less than $0.1 million in 2011. In the second quarters of 2013 and 2012, we purchased $15.0 million and
$25.0 million, respectively, in bank-owned life insurance on certain employees. Income related to the growth of
the cash value of the insurance was $1.1 million in 2013 and $0.6 million for 2012. We had minimal amounts of
bank-owned life insurance prior to 2012.
Noninterest income not considered to be “core” resulted in a net reduction to total noninterest income of $4.7
million in 2013, a net reduction to noninterest income of $24.1 million in 2012, and a net contribution to total
noninterest income of $3.0 million in 2011. The components of non-core noninterest income are shown in Table
4 and the significant components thereof are discussed below.
We recorded net gains on non-covered foreclosed properties of $1.3 million in 2013 compared to net losses on
non-covered foreclosed properties of $15.3 million for 2012 and $3.4 million for 2011. As previously discussed,
in the fourth quarter of 2012, we recorded write-downs totaling $10.6 million on substantially all of our non-
covered foreclosed properties in connection with efforts to accelerate the sale of these assets. On average, the
write-downs amounted to 29% of the carrying value of the properties. Stabilization in real estate market values
and lower carrying values following the December 2012 write-down impacted the variance in 2013.
We recorded $0.4 million of net gains on covered foreclosed properties in 2013. In the fourth quarter of 2013,
we realized several sizeable gains on sales of foreclosed properties, with the largest single gain being
approximately $2.7 million. Losses on covered foreclosed properties amounted to $13.0 million and $24.5
million for the years ended December 31, 2012 and 2011, respectively. The lower level of losses on covered
properties over the past two years has been primarily a result of lower levels of covered foreclosed properties,
as well as stabilization in real estate market values in the coastal region of North Carolina, with some types of
properties showing signs of appreciation over the past year. As discussed earlier and illustrated in the table
below, there was a corresponding entry to indemnification asset income (expense) amounting to 80% of the
losses (gains) recorded, that resulted in the bottom line impact of the covered asset gains or losses being 20% of
the gross gains or losses.
Indemnification asset income (expense) for 2013, 2012, and 2011 amounted to ($6.8 million), $4.1 million, and
$20.5 million, respectively. In 2013 and 2012, higher loan discount accretion and lower levels of loan and
foreclosed property losses on covered assets resulted in less indemnification asset income (expense in 2013) in
comparison to prior periods. Indemnification asset income and expense primarily relates to adjustments to the
amount expected to be received from the FDIC under loss share agreements as a result of changes in anticipated
loan losses and foreclosed property losses and write-downs, as follows:
($ in millions)
Higher expected FDIC claims for covered loans experiencing a deterioration in quality
Lower expected FDIC claims for covered loans – loan discount accretion
Foreclosed property (gains) losses and write-downs – covered
Other, net
Total adjustment to expected FDIC loss-share claims
Expected reimbursement rate
Indemnification asset income (expense)
2013
$ 12.0
(20.2)
(0.4)
0.1
(8.5)
80%
$ (6.8)
2012
$ 8.2
(16.5)
13.0
0.4
5.1
80%
$ 4.1
2011
$ 12.7
(11.6)
24.5
―
25.6
80%
$ 20.5
In 2011, as previously discussed, we realized a gain from the FDIC-assisted acquisition of a failed bank
51
amounting to $10.2 million, which was the amount by which the fair value of the assets purchased exceeded the
fair value of liabilities assumed in the transaction.
We recorded $0.5 million, $0.6 million, and $0.1 million in gains on sales of securities during 2013, 2012, and
2011, respectively.
The line item “Other gains (losses)” was negatively impacted in 2012 by $0.5 million in prepayment penalties
associated with paying off $65 million in borrowings prior to their maturity dates, while the amounts for the
other two years presented were insignificant.
Noninterest Expenses
Total noninterest expenses over each of the past three years have been relatively flat, totaling $96.6 million,
$97.3 million and $96.1 million for 2013, 2012 and 2011, respectively. Table 5 presents the components of our
noninterest expense during the past three years. Line items with the largest fluctuations are discussed below.
Total personnel expense increased from $53.3 million in 2012 to $54.8 million in 2013, an increase of $1.4
million or 2.7%. Salaries expense increased $3.8 million, which was primarily associated with the hiring of
employees in the three loan production offices that we opened in the second half of 2013, as well as additions
to the mortgage, wealth management, and credit administration departments of the company. The new
employees in mortgage and wealth management were hired in order to grow those lines of business throughout
our footprint, while the hiring in our credit administration department was initiated to better manage our loan
portfolio and to enhance our loan processes in ways that we believe will be more responsive to our customers
and enhance our future growth. The increase in salaries expense in 2013 was largely offset by a decrease in
employee benefits expense. Employee benefits expense decreased by $2.4 million, or 19.7%, in comparing 2013
to 2012, which is primarily attributable to the freezing of two pension plans as of December 31, 2012. Pension
expense for the year ended December 31, 2012 was $2.6 million in comparison to pension income of $0.6
million recorded in 2013. The pension income we recorded in 2013 relates to investment income from the
pension plan’s assets.
For 2012, total personnel expense increased from $51.4 million to $53.3 million, an increase of approximately
$1.9 million, or 3.7%, from 2011. Salaries expense totaled $1.5 million of this increase, which was primarily
associated with the hiring of additional key employees in order to build our infrastructure and to expand our
wealth management capabilities. Employee benefits expense increased by approximately $0.4 million in 2012,
which was a 3.4% increase from 2011 and corresponds to the increase in salaries expense.
Net occupancy expenses have remained relatively stable over the past three years, amounting to $7.1 million in
2013, $7.0 million in 2012, and $6.6 million in 2011. The largest component of occupancy expense is
depreciation expense for our buildings. Our number of branches grew from 92 at the beginning of 2011 to 97 by
the end of 2012, resulting in an increase in occupancy expense from 2011 to 2012.
Equipment related expenses were $4.4 million, $4.8 million, and $4.3 million, in 2013, 2012, and 2011,
respectively. The increase in 2012 primarily related to an increase in ATM maintenance expenses, primarily due
to additional regulatory requirements for ATMs.
In 2011, we incurred acquisition expenses of approximately $0.6 million in connection with The Bank of Asheville
acquisition. These expenses consisted primarily of professional fees.
Collection expenses remain elevated due to relatively high levels of delinquencies, although our collection
expenses on both non-covered and covered assets have declined in each of the past two years. Collection
52
expenses on non-covered assets amounted to $2.2 million in 2013, $3.1 million in 2012, and $3.5 million in
2011. The significant decrease in 2013 was primarily a result of the loan sale that eliminated our collection
responsibilities for those loans. Collection expenses on covered loans, net of FDIC reimbursement, amounted to
$0.7 million in 2013, $1.6 million in 2012, and $2.0 million in 2011. The decreases over each of the past two
years are a result of the steady declines in our level of covered assets.
Outside consultant expense increased to $2.5 million in 2013 from approximately $1.9 million in each of the
prior two years as a result of a new engagement of a third-party consultant to assist us in many areas of our
business.
In the second half of 2012, we began an initiative to review and reduce overhead expenses wherever possible.
This included assistance from the consulting firm noted above, which assisted us in negotiating certain
contracts. Largely as a result of this expense initiative, we experienced the declines shown in Table 5 in
stationery and supplies, telephone, and other operating expenses.
We recorded $1.9 million in severance expenses in 2013 due to the separation from service of several
employees during the year, including our former chief executive officer. In 2012, severance expenses amounted
to $0.5 million, while we did not record any such expenses in 2011.
Income Taxes
Table 6 presents the components of income tax expense and the related effective tax rates. We recorded
income tax expense of $12.1 million in 2013, which resulted in an effective tax rate of 36.9%. Impacting our
effective tax rate in 2013 was the recording of incremental tax expense of $0.5 million to reduce the value of our
deferred tax asset as a result of statutory decreases in North Carolina’s state income tax rate. We recorded an
income tax benefit of $17.0 million for 2012 due to the net loss reported for the period, which was
approximately 42.0% of the reported net loss. We recorded income tax expense of $7.4 million in 2011, which
resulted in an effective tax rate of 35.1% in 2011. The differences in our effective tax rates from the blended
statutory income tax rate of 39% are primarily due to tax-exempt interest income. We expect our effective tax
rate to be approximately 35% in 2014.
Stock-Based Compensation
We recorded stock-based compensation expense of $0.2 million, $0.3 million, and $0.9 million for the years
ended December 31, 2013, 2012, and 2011, respectively. See Note 15 to the consolidated financial statements
for more information regarding stock-based compensation.
53
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
Over the past three years, our total assets have remained fairly stable at approximately $3.2 billion to $3.3
billion. The following table presents detailed information regarding the nature of changes in our loans and
deposits in 2012 and 2013:
($ in thousands)
2013
Loans – Non-covered
Loans – Covered
Total loans
Deposits – Noninterest-bearing
Deposits – Interest-bearing checking
Deposits – Money market
Deposits – Savings
Deposits – Brokered time
Deposits – Internet time
Deposits – Time >$100,000 – retail
Deposits – Time <$100,000 – retail
Total deposits
2012
Loans – Non-covered
Loans – Covered
Total loans
Deposits – Noninterest-bearing
Deposits – Interest-bearing checking
Deposits – Money market
Deposits – Savings
Deposits – Brokered time
Deposits – Internet time
Deposits – Time >$100,000 – retail
Deposits – Time <$100,000 – retail
Total deposits
Balance at
beginning
of period
Internal
growth,
net (1)
Growth from
Acquisitions
Transfer to
Loans Held
for Sale
Balance at
end of
period
Total
percentage
growth
Internal
percentage
growth (1)
$ 2,094,143
282,314
2,376,457
142,317
(72,005)
70,312
413,195
519,573
551,209
158,578
130,836
10,060
530,015
507,894
$ 2,821,360
$ 2,069,152
361,234
$ 2,430,386
$ 335,833
423,452
509,801
146,481
157,408
29,902
575,408
576,752
$ 2,755,037
62,890
30,182
(5,525)
8,864
(14,749)
(8,741)
(102,476)
(98,120)
(127,675)
93,224
(78,920)
14,304
77,072
96,088
37,404
11,974
(26,572)
(19,842)
(48,290)
(70,926)
56,908
16,425
−
16,425
6,565
7,658
1,872
1,581
−
−
24,202
15,456
57,334
−
−
−
−
−
−
−
−
−
−
−
−
2,252,885
210,309
2,463,194
482,650
557,413
547,556
169,023
116,087
1,319
451,741
425,230
2,751,019
−
−
−
(68,233)
−
(68,233)
2,094,143
282,314
2,376,457
290
33
4,004
123
−
−
2,897
2,068
9,415
−
−
−
−
−
−
−
−
−
413,195
519,573
551,209
158,578
130,836
10,060
530,015
507,894
2,821,360
7.6%
-25.5%
3.6%
16.8%
7.3%
-0.7%
6.6%
-11.3%
-86.9%
-14.8%
-16.3%
-2.5%
1.2%
-21.8%
-2.2%
23.0%
22.7%
8.1%
8.3%
-16.9%
-66.4%
-7.9%
-11.9%
2.4%
6.8%
-25.5%
3.0%
15.2%
5.8%
-1.0%
5.6%
-11.3%
-86.9%
-19.3%
-19.3%
-4.5%
4.5%
-21.8%
0.6%
22.9%
22.7%
7.3%
8.2%
-16.9%
-66.4%
-8.4%
-12.3%
2.1%
(1) Excludes the impact of acquisitions in the year of the acquisition, but includes growth or declines in acquired operations after
the date of acquisition.
In 2013, as derived from the table above, our total loans increased by $87 million, or 3.6%. During that period,
we experienced internal growth in our non-covered loan portfolio of $142 million, or 6.8%, while our covered
loans declined by $72 million, or 25.5%. Also impacting growth was the March 2013 acquisition of two branches
with approximately $16 million in loans (see Note 2 to the consolidated financial statements for more
information). In 2013, we charged-off $32 million in total loans and foreclosed on $22 million in loans that
reduced our loan balances. We continue to pursue lending opportunities in order to improve our asset yields.
In 2012, as derived from the table above, our total loans declined $54 million, or 2.2%. We experienced internal
growth in our non-covered loan portfolio of $93 million, or 4.5%, during 2012, while our covered loans declined
by $79 million, or 21.8%. However, much of our non-covered loan growth was offset by the charge-down and
reclassification of approximately $68 million in non-covered higher-risk loans to “loans held for sale” during the
fourth quarter of 2012. Also offsetting our internal growth of loans were normal loan pay-downs, foreclosures,
and loan charge-offs. In 2012, in addition to the $38 million in charge-offs related to the loan sale, we charged-
54
off an additional $39.3 million in loans (resulting in total charge-offs for the year of $77.3 million) and foreclosed
on another $54 million in loans that reduced our loan balances.
During 2013, we experienced a net decline in total deposits of $70.3 million, which was a result of growth in our
low-cost core deposits (checking, money market, and savings) that was more than offset by declines in our time
deposit accounts. For the year, internal growth of $96 million in our core deposit accounts plus acquired growth
of $57 million was more than offset by a $224 million decline in time deposits. The growth in core deposits
along with cash we received during the year from FDIC loss-share reimbursements and foreclosed property sales
allowed us to lessen our reliance on higher cost time deposits. As previously discussed, our net interest margin
benefited from this shift.
For the year ended December 31, 2012, growth in our lower cost core deposit accounts exceeded the decline in
our higher cost time deposits, which resulted in a net increase in internally generated deposits of $57 million, or
2.1%. Our lowest cost deposits, noninterest bearing checking accounts and interest bearing checking accounts,
experienced positive internal growth of $77 million and $96 million, respectively, which allowed us to continue
to lessen our reliance on higher cost sources of funding in 2012, including internet deposits and time deposits,
and benefited our net interest margin.
Our overall liquidity remained relatively unchanged in 2013 compared to 2012. Our liquid assets (cash and
securities) as a percentage of our total deposits and borrowings decreased from 16.2% at December 31, 2012 to
16.1% at December 31, 2013.
Our capital ratios improved in 2013 due to almost $20 million in earnings for 2013. All of our capital ratios have
continually exceeded the regulatory thresholds for “well-capitalized” status for all periods covered by this
report. Our tangible common equity ratio was 7.46% at December 31, 2013, compared to 6.81% at December
31, 2012 and 6.58% at December 31, 2011.
At December 31, 2012, our non-covered nonperforming asset ratios included $22 million in nonperforming loans
that were sold in January 2013. Upon the sale of those loans, our nonperforming asset quality ratios improved
and then remained fairly constant for the remainder of the year. At December 31, 2013, our non-covered
nonperforming assets to total non-covered assets was 2.78% compared to 2.79% at March 31, 2013 (after the
loan sale) and 3.64% at December 31, 2012.
As it relates to the covered assets, it has now been 4.5 years since we acquired Cooperative Bank and 3 years
since we acquired The Bank of Asheville in failed bank acquisitions, and we have worked through many of the
problem assets. Our covered nonperforming assets have steadily declined over the past two years from $141
million at December 31, 2011 to $71 million at December 31, 2013.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components of our balance sheet at December 31,
2013, 2012, and 2011.
Our balance sheet mix has remained relatively stable over the past three years. On the asset side, our loan
percentage has increased while the FDIC indemnification asset and foreclosed real estate percentages have
decreased.
On the liability side, as previously discussed, we have experienced increases in our checking and other
transaction accounts and declines in time deposits.
55
Securities
Information regarding our securities portfolio as of December 31, 2013, 2012, and 2011 is presented in Tables 8
and 9.
The composition of the investment securities portfolio reflects our investment strategy of maintaining an
appropriate level of liquidity while providing a relatively stable source of income. The investment portfolio also
provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a
vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required
collateral for certain deposits. We obtain fair values for the vast majority of our investment securities from a
third-party investment recordkeeper, who specializes in securities purchases and sales, recordkeeping, and
valuation. This recordkeeper provides us with a third-party report that contains an evaluation of internal
controls that includes testwork of securities valuation. We further test the values we receive by comparing the
values for a significant sample of securities to another third-party valuation service on a quarterly basis.
Total securities amounted to $227.0 million, $223.4 million, and $240.6 million at December 31, 2013, 2012, and
2011, respectively.
The majority of our “government-sponsored enterprise” securities are issued by the Federal Home Loan Bank
and carry one maturity date, often with an issuer call feature. At December 31, 2013, of the $18 million
(carrying value) in government-sponsored enterprise securities, $9 million were issued by the Federal Home
Loan Bank system and the remaining $9 million were issued by the Federal Farm Credit Bank system.
Our $147 million of mortgage-backed securities have all been issued by either Freddie Mac, Fannie Mae, Ginnie
Mae, or the Small Business Administration, each of which are government-sponsored corporations. We have no
“private label” mortgage-backed securities. Mortgage-backed securities vary in their repayment in correlation
with the underlying pools of mortgage loans.
At December 31, 2013, our $3.6 million investment in corporate bonds was comprised of the following:
Issuer
($ in thousands)
First Citizens Bancorp (South Carolina) Bond
First Citizens Bancorp (South Carolina) Trust Preferred Security
Total investment in corporate bonds
S&P Issuer
Ratings
Not Rated
Not Rated
Maturity
Date
4/1/15
6/15/34
Amortized
Cost
$ 2,999
1,000
$ 3,999
Market
Value
3,043
555
3,598
We have concluded that the unrealized loss associated with the First Citizens Bancorp trust preferred security is
due to liquidity and coupon rate considerations and not due to credit concerns.
Substantially all of our investment in equity securities at each year end was comprised of capital stock in the
Federal Home Loan Bank of Atlanta (FHLB). The FHLB requires us to hold their stock as a requirement for
membership in the FHLB system. The FHLB also requires us to purchase additional stock when we borrow from
them. At December 31, 2013, our investment in capital stock of the FHLB amounted to $3.9 million of our total
investment in equity securities of $4.0 million.
The fair value of securities held to maturity, which we carry at amortized cost, was $2.7 million more than the
carrying value at December 31, 2013 and $5.4 million more than the carrying value at December 31, 2012. Our
$54.0 million in securities held to maturity are comprised almost entirely of municipal bonds issued by state and
local governments throughout our market area. We have only two municipal bonds with a denomination of $2
million or greater and we have no significant concentration of bond holdings from one government entity, with
the single largest exposure to any one entity being $3.6 million. Management evaluated any unrealized losses
56
on individual securities at each year end and determined them to be of a temporary nature and caused by
fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations.
At December 31, 2013, net unrealized losses of $2.0 million were included in the carrying value of securities
classified as available for sale. At December 31, 2012 and 2011, net unrealized gains of $3.3 million and $3.9
million, respectively, were included in the carrying value of securities classified as available for sale. During the
past three years, interest rates have generally declined, which typically increases the value of our investment
securities. However, during the last half of 2013, long-term interest rates began increasing, resulting in losses in
our available for sale portfolio. Management evaluated any unrealized losses on individual securities at each
year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates
and the overall economic environment, not by concerns about the ability of the issuers to meet their
obligations. Net unrealized gains (losses), net of applicable deferred income taxes, of ($1.2 million), $2.0 million,
and $2.4 million have been reported as part of a separate component of shareholders’ equity (accumulated
other comprehensive income) as of December 31, 2013, 2012, and 2011, respectively.
The weighted average taxable-equivalent yield for the securities available for sale portfolio was 2.01% at
December 31, 2013. The expected weighted average life of the available for sale portfolio using the call date for
above-market callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected
life for mortgage-backed securities, was 4.5 years.
The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 5.75% at
December 31, 2013. The expected weighted average life of the held to maturity portfolio using the call date for
above-market callable bonds and the maturity date for all other securities, was 5.0 years.
The following table provides the names of issuers for which the Company has investment securities totaling in
excess of 10% of shareholders’ equity and the fair value and amortized cost of these investments as of
December 31, 2013. All of these securities are issued by government sponsored corporations.
($ in thousands)
Issuer
Ginnie Mae
Small Business Administration
Total
Amortized Cost
$ 80,994
65,750
$ 146,744
Fair Value
80,713
64,476
145,189
% of
Shareholders’
Equity
21.7%
17.3%
Loans
Table 10 provides a summary of the loan portfolio composition of our total loans at each of the past five year
ends.
As previously discussed, in our acquisitions of Cooperative Bank and The Bank of Asheville, we entered into loss
share agreements with the FDIC, which afford us significant protection from losses on all loans and other real
estate acquired in those acquisitions. Because of the loss protection provided by the FDIC, the financial risk of
the Cooperative Bank and The Bank of Asheville loans is significantly different from assets not covered under the
loss share agreements. Accordingly, we present separately loans subject to the FDIC loss share agreements as
“covered loans” and loans that are not subject to the loss share agreements as “non-covered loans.” Table 10a
presents a breakout of covered and non-covered loans as of December 31, 2013.
The loan portfolio is the largest category of our earning assets and is comprised of commercial loans, real estate
mortgage loans, real estate construction loans, and consumer loans. We restrict virtually all of our lending to
57
our 37 county market area, which is located in western, central and eastern North Carolina, five counties in
southern Virginia and four counties in northeastern South Carolina. The diversity of the region’s economic base
has historically provided a stable lending environment.
In 2013, loans outstanding increased $86.7 million, or 3.6% to $2.5 billion, while in 2012, loans outstanding
decreased $53.9 million, or 2.2% to $2.38 billion. In 2013, the increase in loans outstanding was due to
improved loan demand in our market areas, the effects of which were partially offset by declines in our covered
loan portfolio. In 2012, the decline was due to the previously discussed transfer of $68.2 million in loans to a
“loans held for sale” category and a decline of $79 million in our covered loans, which more than offset $93
million in non-covered loan growth.
The majority of our loan portfolio over the years has been real estate mortgage loans, with loans secured by real
estate consistently comprising 90% to 91% of our outstanding loan balances. Except for real estate construction,
land development and other land loans, the majority of our “real estate” loans are personal and commercial
loans where cash flow from the borrower’s occupation or business is the primary repayment source, with the
real estate pledged providing a secondary repayment source.
Table 10 indicates that the two types of loans that have had the largest variances in the amount outstanding as a
percent of total loans have been construction/land development loans, which have decreased, and commercial
real estate loans, which have increased. In 2005 we expanded our branch network to what was then the fast-
growing southeast coast of North Carolina, which had a high demand for construction and land development
loans and resulted in our construction loan mix peaking to 23% at December 31, 2007. In 2008, due to
recessionary conditions, particularly in the new housing market, loan demand for these types of loans weakened
and we significantly tightened our loan underwriting criteria for these loans and generally did not seek to
originate these types of loans. These same conditions and internal directives continued into 2013, which
resulted in declines in our construction and land development loans. Additionally, these types of loans had high
default rates during the recession, especially those associated with our failed bank acquisitions, thus causing
further reductions in balances. These factors led to the mix of this loan type decreasing from their peak of 23%
in 2007 to 12% of our total loans at December 31, 2013. In 2013, in connection with signs of economic recovery
and continued stabilization of real estate values, we changed our internal directives to be more receptive to
originating construction and land development loans, however with more conservative underwriting standards
than existed prior to the recession.
As shown in Table 10, our commercial real estate loans have increased from 27% of our portfolio at December
31, 2009 to 35% at December 31, 2013. In 2011, our percentage of commercial real estate loans increased
slightly due to The Bank of Asheville acquisition, as that bank’s primary business had been commercial lending.
Since 2011, we have placed emphasis on originating small business loans, which we typically secure with real
estate collateral. The emphasis on this type of loan is consistent with our community banking strategy and has
also assisted us in growing the types of loans that qualified for a reduction in the dividend rate that we pay on
preferred stock issued in connection with our participation in the Small Business Lending Fund.
Table 11 provides a summary of scheduled loan maturities over certain time periods, with fixed rate loans and
adjustable rate loans shown separately. Approximately 16% of our accruing loans outstanding at December 31,
2013 mature within one year and 60% of total loans mature within five years. As of December 31, 2013, the
percentages of variable rate loans and fixed rate loans as compared to total performing loans were 35% and
65%, respectively. We intentionally make a blend of fixed and variable rate loans so as to reduce interest rate
risk. The mix of fixed rate loans has steadily increased over the past several years because many borrowers
desire to lock in an interest rate during the historically low interest rate environment that has been in effect.
While this presents risk to our company if interest rates rise, we measure our interest rate risk closely and, as
discussed in the section “Interest Rate Risk” below, we do not believe that an increase in interest rates would
58
materially negatively impact our net interest income.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, troubled debt restructurings, loans past due 90 or more days
and still accruing interest, nonperforming loans held for sale, and foreclosed real estate. As a matter of policy
we place all loans that are past due 90 or more days on nonaccrual basis, and thus there were no loans at any of
the past five year ends that were 90 days past due and still accruing interest.
Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because
management has determined that the collection of interest is doubtful. Placing loans on nonaccrual status
negatively impacts earnings because (i) interest accrued but unpaid as of the date a loan is placed on nonaccrual
status is reversed and deducted from interest income, (ii) future accruals of interest income are not recognized
until it becomes probable that both principal and interest will be paid and (iii) principal charged-off, if
appropriate, may necessitate additional provisions for loan losses that are charged against earnings. In some
cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms
significantly different from the originally contracted terms.
Table 12 summarizes our nonperforming assets at the dates indicated. Because of the loss protection provided
by the FDIC, we present separately nonperforming assets subject to the loss share agreements as “covered” and
nonperforming assets that are not subject to the loss share agreements as “non-covered.”
Due largely to the economic downturn that began in late 2007 and continued to worsen over succeeding years,
we experienced significant increases in our non-covered nonperforming assets, with total non-covered
nonperforming assets rising steadily from $11 million at December 31, 2007 to their peak of $146 million at
September 30, 2012.
In order to reduce our level of nonperforming assets and lower our overall risk profile, in the fourth quarter of
2012, we identified approximately $68 million of non-covered higher-risk loans, including both performing and
non-performing loans, that we targeted for a sale to a third party investor. Based on an offer to purchase these
loans that was received in December 2012, we wrote-down the loans by approximately $38 million to their
estimated liquidation value of approximately $30 million and reclassified them as “loans held for sale.” Of the
$68 million in loans targeted for sale, approximately $38 million had been classified as nonaccrual loans, $11
million had been classified as accruing troubled debt restructurings and the remaining $19 million performing
classified loans. The completion of the sale of these loans occurred in January 2013 with sales proceeds of
approximately $30 million being received. In the fourth quarter of 2012, we also recorded write-downs totaling
$10.6 million on substantially all of our non-covered foreclosed properties in connection with efforts to
accelerate the sale of these assets.
As a result of the above actions, our non-covered nonperforming assets decreased from their peak level of $146
million at September 30, 2012 to $106 million at December 31, 2012, which reflects the write-downs of the
loans and foreclosed properties, to $83 million at March 31, 2013, which reflects the completion of the January
2013 loan sale. Since that time, our level of non-covered nonperforming assets has not varied significantly and
amounted to $82 million at December 31, 2013. Over the last three quarters of 2013, our nonperforming loans
increased by approximately $7 million and our foreclosed properties declined by $8 million as a result of
increased sales activity, which was consistent with the intent of the write-downs taken in late 2012. At
December 31, 2013, the ratio of non-covered nonperforming assets to total non-covered assets was 2.78%
compared to 3.64% and 4.30% at December 31, 2012 and 2011, respectively.
Total covered nonperforming assets have steadily declined during the past two years, amounting to $70.6
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million at December 31, 2013 compared to $96.2 million and $141.0 million at December 31, 2012 and 2011,
respectively. Within this category, foreclosed real estate has declined to $24.5 million compared to $47.3
million at December 31, 2012 and $85.3 million at December 31, 2011. The Company is experiencing increased
property sales activity, particularly along the North Carolina coast, where most of the Company’s covered
foreclosed properties are located.
Table 12a presents our nonperforming assets at December 31, 2013 by general geographic region and further
segregated into “covered” nonperforming assets and “non-covered” nonperforming assets. The majority of our
nonperforming assets are located in the Eastern North Carolina region, which has experienced the most severe
effects of the recession of any of our regions.
The following is the composition, by loan type, of all of our nonaccrual loans at each period end, as classified for
regulatory purposes:
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land development, and other land loans
Real estate – mortgage – residential (1-4 family) first mortgages
Real estate – mortgage – home equity loans/lines of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total nonaccrual loans
(1)
Includes both covered and non-covered loans.
At December 31,
2013 (1)
$ 5,690
22,688
21,751
4,081
24,568
377
$ 79,155
At December 31,
2012 (1)
2,946
19,468
14,733
3,128
23,378
2,872
66,525
The following segregates our nonaccrual loans at December 31, 2013 into covered and non-covered loans, as
classified for regulatory purposes:
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land development, and other land loans
Real estate – mortgage – residential (1-4 family) first mortgages
Real estate – mortgage – home equity loans/lines of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total nonaccrual loans
Covered
Nonaccrual
Loans
$ 935
13,274
9,447
509
13,050
2
$ 37,217
Non-covered
Nonaccrual
Loans
4,755
9,414
12,304
3,572
11,518
375
41,938
Total
Nonaccrual
Loans
5,690
22,688
21,751
4,081
24,568
377
79,155
The following segregates our nonaccrual loans at December 31, 2012 into covered and non-covered loans, as
classified for regulatory purposes:
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land development, and other land loans
Real estate – mortgage – residential (1-4 family) first mortgages
Real estate – mortgage – home equity loans/lines of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total nonaccrual loans
Covered
Nonaccrual
Loans
$ 212
11,698
9,691
702
11,127
61
$ 33,491
Non-covered
Nonaccrual
Loans
2,734
7,770
5,042
2,426
12,251
2,811
33,034
Total
Nonaccrual
Loans
2,946
19,468
14,733
3,128
23,378
2,872
66,525
Among non-covered loans, the tables above indicate that residential first mortgage loans had the most
significant variance, increasing from $5.0 million at December 31, 2012 to $12.3 million at December 31, 2013,
which was the primary component in the overall increase in non-covered nonaccrual loans over that same
period. This rise was caused by increased efforts to work with home borrowers on repayment plans, increased
60
legal delays in the foreclosure process, and continued challenging economic conditions, especially in some of our
more rural market areas.
The tables above indicate that covered nonaccrual loans increased from $33.5 million at December 31, 2012 to
$37.2 million at December 31, 2013. This increase was due primarily to several large loans that deteriorated
during the first quarter of 2013.
Management routinely monitors the status of certain large loans that, in management’s opinion, have credit
weaknesses that could cause them to become nonperforming loans. In addition to the nonperforming loan
amounts discussed above, management believes that an estimated $5 million of non-covered loans and $11
million of covered loans that were performing in accordance with their contractual terms at December 31, 2013
have the potential to develop problems depending upon the particular financial situations of the borrowers and
economic conditions in general. Management has taken these potential problem loans into consideration when
evaluating the adequacy of the allowance for loan losses at December 31, 2013 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been
disclosed in the problem loan amounts and the potential problem loan amounts discussed above do not
represent or result from trends or uncertainties that management reasonably expects will materially impact
future operating results, liquidity, or capital resources, or represent material credits about which management is
aware of any information that causes management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
We provide additional information regarding the classification status of our loans in tables contained in Note 4
to our consolidated financial statements. As it relates to non-covered loans, those tables indicate that from
December 31, 2012 to December 31, 2013, our special mention loans have increased from $61 million to $93
million, our classified accruing loans have increased from $41 million to $79 million and our nonaccrual loans
have increased from $33 million to $42 million. We believe these increases are primarily due to recent senior
management additions to our credit administration department, who are taking a more conservative approach
to assessing loans than had been past practice, as opposed to any significant deterioration in overall loan
quality. We also believe that the severity of the loss rate inherent in our classified loans is less than in recent
years. In addition, we believe that our allowance for loan losses on non-covered loans, which amounted to
$44.3 million, or 1.96% of total non-covered loans, is sufficient to absorb the probable losses inherent in our
loan portfolio at December 31, 2013. Accordingly, we do not believe that the increase in our special mention
and classified assets is an indicator that our provision for loan losses will be materially higher in 2014 than it was
in 2013.
Foreclosed real estate includes primarily foreclosed properties. Non-covered foreclosed real estate amounted
to $12.3 million, $26.3 million, and $37.0 million at December 31, 2013, 2012, and 2011, respectively. The
decrease in 2013 was the result of strong sales activity during 2013, which was consistent with our strategy
implemented in 2012 to accelerate the disposition of foreclosed properties. The decrease in 2012 was due to
write-downs of $10.6 million that were recorded in the fourth quarter of 2012. We recorded write-downs on
substantially all of our non-covered foreclosed properties in connection with efforts to accelerate the sale of
these assets.
At December 31, 2013, 2012 and 2011, we also held $24.5 million, $47.3 million, and $85.3 million, respectively,
in foreclosed real estate that is subject to loss share agreements with the FDIC. The decrease in 2013 was due to
increased property sales activity, particularly along the North Carolina coast, where most of our covered
foreclosed properties are located. The decrease in 2012 was due to a combination of additional write-downs on
foreclosed properties due to falling market prices and the actual sale of the foreclosed properties. During 2013,
we sold $39 million of covered foreclosed properties, compared to $60 million in 2012 and $37 million in 2011.
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The following table presents the detail of our foreclosed real estate at each of the past two year ends:
Vacant land
1-4 family residential properties
Commercial real estate
Total foreclosed real estate
(1)
Includes both covered and non-covered real estate.
At December 31,
2013 (1)
$ 19,295
7,982
9,471
$ 36,748
At December 31,
2012 (1)
48,838
15,808
8,929
73,575
The following segregates our foreclosed real estate at December 31, 2013 into covered and non-covered:
Vacant land
1-4 family residential properties
Commercial real estate
Total foreclosed real estate
Covered
Foreclosed Real
Estate
$ 14,043
5,102
5,352
$ 24,497
Non-covered
Foreclosed Real
Estate
5,252
2,880
4,119
12,251
Total Foreclosed
Real Estate
19,295
7,982
9,471
36,748
The following segregates our foreclosed real estate at December 31, 2012 into covered and non-covered:
Vacant land
1-4 family residential properties
Commercial real estate
Total foreclosed real estate
Allowance for Loan Losses and Loan Loss Experience
Covered
Foreclosed Real
Estate
$ 36,742
5,620
4,928
$ 47,290
Non-covered
Foreclosed Real
Estate
12,096
10,188
4,001
26,285
Total Foreclosed
Real Estate
48,838
15,808
8,929
73,575
The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses”
for the period in which the charge is taken). Losses on loans are charged against the allowance in the period in
which such loans, in management’s opinion, become uncollectible. The recoveries realized during the period
are credited to this allowance. We consider our procedures for recording the amount of the allowance for loan
losses and the related provision for loan losses to be a critical accounting policy. See the heading “Critical
Accounting Policies” above for further discussion.
The factors that influence management’s judgment in determining the amount charged to operating expense
include past loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and
current economic conditions.
We use a loan analysis and grading program to facilitate our evaluation of probable inherent loan losses and the
adequacy of our allowance for loan losses. In this program, credit risk grades are assigned by management and
tested by an independent third party consulting firm. The testing program includes an evaluation of a sample of
new loans, loans we identify as having potential credit weaknesses, loans past due 90 days or more, loans
originated by new loan officers, nonaccrual loans and any other loans identified during previous regulatory and
other examinations.
We strive to maintain our loan portfolio in accordance with what management believes are conservative loan
underwriting policies that result in loans specifically tailored to the needs of our market areas. Every effort is
made to identify and minimize the credit risks associated with such lending strategies. We have no foreign
62
loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of loans captioned in the tables
discussed below as “real estate” loans are personal and commercial loans where real estate provides additional
security for the loan. Collateral for virtually all of these loans is located within our principal market area.
The allowance for loan losses amounted to $48.5 million at December 31, 2013, compared to $46.4 million at
December 31, 2012, and $41.4 million at December 31, 2011. At December 31, 2013, 2012, and 2011, $4.2
million, $4.8 million, and $5.8 million, respectively, of the allowance for loan losses is attributable to covered
loans that have exhibited credit quality deterioration due to lower collateral valuations, while the allowance for
loan losses for non-covered loans amounted to $44.3 million, $41.6 million, and $35.6 million, respectively, at
those dates. For periods prior to 2010, the entire allowance for loan losses is attributable to non-covered loans.
The ratio of the allowance for non-covered loan losses to non-covered loans was 1.96%, 1.99%, and 1.72%, as of
December 31, 2013, 2012, and 2011, respectively.
Table 13 sets forth the allocation of the allowance for loan losses at the dates indicated. The amount of the
unallocated portion of the allowance for loan losses did not vary materially at any of the past three year ends.
The allowance for loan losses is available to absorb losses in all categories. Table 13a segregates the allocation
of the allowance for loan losses as of December 31, 2013 and 2012 into covered and non-covered categories.
Management considers the allowance for loan losses adequate to cover probable loan losses on the loans
outstanding as of each reporting date. It must be emphasized, however, that the determination of the
allowance using our procedures and methods rests upon various judgments and assumptions about economic
conditions and other factors affecting loans. No assurance can be given that we will not in any particular period
sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan
portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance
for loan losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the
allowance for loan losses and losses on foreclosed real estate. Such agencies may require us to recognize
additions to the allowance based on the examiners’ judgments about information available to them at the time
of their examinations.
For the years indicated, Table 14 summarizes our balances of loans outstanding, average loans outstanding, and
a detailed rollforward of the allowance for loan losses.
Table 14a presents a detailed rollforward of the 2013 and 2012 activity for the allowance for loan losses
segregated into covered and non-covered activity.
Net loan charge-offs of non-covered loans amounted to $15.6 million in 2013, $64.0 million in 2012, and $31.2
million in 2011. Net non-covered charge-offs as a percentage of average non-covered loans represented 0.72%,
3.02%, and 1.52% during 2013, 2012, and 2011, respectively. The high amount/ratio in 2012 reflects the impact
of the charge-offs we recorded in connection with the planned loan sale discussed earlier, which totaled
approximately $37.8 million. The lower amount in 2013 is partially a result of the sale of our highest risk loans,
which likely would have resulted in additional charge-offs in 2013, as well as generally lower loss severity rates
that are associated with improvements in the economy and real estate prices.
We recorded $12.9 million, $10.7 million, and $18.1 million in net charge-offs of covered loans during 2013,
2012, and 2011, respectively, primarily related to collateral dependent nonaccrual loans for which we received
updated appraisals that reflected lower valuations.
63
Deposits
At December 31, 2013, deposits outstanding amounted to $2.751 billion, a decrease of $70 million from the
$2.821 billion at December 31, 2012. During 2013, we experienced strong growth in our noninterest-bearing
and interest-bearing checking accounts, and an increase of $57 million in deposits acquired from two branch
acquisitions. However, these increases were offset by declines in our higher cost time deposits, including
brokered time deposits and internet time deposits. We have been able to lessen our reliance on higher-cost
time deposits due to the continued growth in our transaction accounts and cash generated from our FDIC loss-
share reimbursements and sales of foreclosed properties.
In 2012, deposits increased from $2.755 billion to $2.821 billion, an increase of $66 million, from December 31,
2011. We experienced significant growth in our noninterest-bearing and interest-bearing checking accounts
during 2012. These increases were partially offset by declines in our higher cost time deposits, including
brokered time deposits and internet time deposits.
The nature of our deposit growth is illustrated in the table on page 54. The following table reflects the mix of
our deposits at each of the past three year ends:
Noninterest-bearing checking accounts
Interest-bearing checking accounts
Money market deposits
Savings deposits
Brokered deposits
Internet deposits
Time deposits > $100,000 – retail
Time deposits < $100,000 – retail
Total deposits
Securities sold under agreements to repurchase
2013
18%
20%
20%
6%
4%
0%
16%
16%
100%
2012
15%
18%
19%
6%
5%
0%
19%
18%
100%
2011
12%
15%
19%
5%
6%
1%
21%
21%
100%
as a percent of total deposits
−
−
1%
Our deposit mix has shifted over the past few years to a heavier concentration in transaction accounts and less
concentration in time deposits. The percentages for retail time deposits have declined because of a
combination of 1) customers shifting their matured time deposits into checking accounts because of a steadily
shrinking gap between the interest rates that the two products pay and 2) because of satisfactory levels of
liquidity, we have chosen not to match certain promotional time deposit interest rates being offered by local
competitors.
We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship
banking to new and existing customers, where borrowers are encouraged and normally expected to maintain
deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3)
continually working to identify and introduce new products that will attract customers or enhance our appeal as
a primary provider of financial services.
In December 2013, we rolled out a new deposit product line-up. In addition to simplifying our product offering,
which was a primary goal, other significant changes included the elimination of our free checking account for
customers maintaining low account balances and the elimination of paper statement fees and certain overdraft
fees. We do not expect these changes to have a material impact on our deposit balances in the short-term. In
the long-term, we believe the simplified offering will enhance deposit growth.
Table 15 presents the average amounts of our deposits and the average yield paid for those deposits for the
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years ended December 31, 2013, 2012, and 2011.
As of December 31, 2013, we held approximately $564.5 million in time deposits of $100,000 or more. Table 16
is a maturity schedule of time deposits of $100,000 or more as of December 31, 2013. This table shows that
69% of our time deposits greater than $100,000 mature within one year.
At each of the past three year ends, we have no deposits issued through foreign offices, nor do we believe that
we held any deposits by foreign depositors.
Borrowings
Our borrowings outstanding totaled $46.4 million at both December 31, 2013 and December 31, 2012,
compared to $133.9 million at December 31, 2011. The decrease from 2011 to 2012 was primarily a result of a
$65 million prepayment of FHLB borrowings we completed in the fourth quarter 2012 in order to reduce excess
liquidity. The prepayment resulted in a penalty of $0.5 million that is included in the line item “other gains
(losses), net” in Table 4.
Table 2 shows that average borrowings were $46.4 million in 2013, compared to $119.5 million in 2012 and
$122.7 million in 2011.
At December 31, 2013, the Company had three sources of readily available borrowing capacity – 1) an
approximately $312 million line of credit with the FHLB, of which none was outstanding at December 31, 2013
or 2012, 2) a $50 million overnight federal funds line of credit with a correspondent bank, of which none was
outstanding at December 31, 2013 or 2012, and 3) an approximately $85 million line of credit through the
Federal Reserve Bank of Richmond’s (FRB) discount window, of which none was outstanding at December 31,
2013 or 2012.
Our line of credit with the FHLB can be structured as either short-term or long-term borrowings, depending on
the particular funding or liquidity need, and is secured by our FHLB stock and a blanket lien on most of our real
estate loan portfolio. There were no borrowings under the FHLB line of credit at any month-end during 2013.
In addition to any outstanding borrowings from the FHLB that reduce the available borrowing capacity of the
line of credit, our borrowing capacity was further reduced by $193 million and $143 million at December 31,
2013 and 2012, respectively, as a result of our pledging letters of credit backed by the FHLB for public deposits
at each of those dates.
Our correspondent bank relationship allows us to purchase up to $50 million in federal funds on an overnight,
unsecured basis (federal funds purchased). We had no borrowings under this line at December 31, 2013 or
2012. There were no federal funds purchased outstanding at any month-end during 2013.
We also have a line of credit with the FRB discount window. This line is secured by a blanket lien on a portion of
our commercial and consumer loan portfolio (excluding real estate loans). Based on the collateral that we
owned as of December 31, 2013, the available line of credit was approximately $85 million. At December 31,
2013 and 2012, we had no borrowings outstanding under this line. There were no FRB borrowings outstanding
at any month-end during 2013.
Our outstanding borrowings at December 31, 2013 and 2012 were comprised entirely of $46.4 million in trust
preferred security debt. We have initiated three trust preferred security issuances since 2002 totaling $67.0
million, with one of those issuances for $20.6 million being redeemed in 2007. These borrowings each have 30
year final maturities and were structured in a manner that allows them to qualify as capital for regulatory capital
65
adequacy requirements. We may call these debt securities at par on any quarterly interest payment date five
years after their issue date. We issued $20.6 million of this debt on October 29, 2002 (which we called in 2007),
an additional $20.6 million on December 19, 2003, and $25.8 million on April 13, 2006. The interest rate on
these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.70% for the securities
issued in 2003, and three-month LIBOR plus 1.39% for the securities issued in 2006.
Liquidity, Commitments, and Contingencies
Our liquidity is determined by our ability to convert assets to cash or to acquire alternative sources of funds to
meet the needs of our customers who are withdrawing or borrowing funds, and our ability to maintain required
reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are
net income from operations, cash and due from banks, federal funds sold and other short-term investments.
Our securities portfolio is comprised almost entirely of readily marketable securities which could also be sold to
provide cash.
As noted above, in addition to internally generated liquidity sources, we currently (March 2014) have the ability
to obtain borrowings from the following three sources – 1) an approximately $312 million line of credit with the
FHLB, 2) a $50 million overnight federal funds line of credit with a correspondent bank, and 3) an approximately
$85 million line of credit through the FRB’s discount window.
Our overall liquidity remained relatively unchanged from December 31, 2012 to December 31, 2013. Our liquid
assets (cash and securities) as a percentage of our total deposits and borrowings decreased from 16.2% at
December 31, 2012 to 16.1% at December 31, 2013.
We continue to believe our liquidity sources, including unused lines of credit, are at an acceptable level and
remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our
liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.
In the normal course of business we have various outstanding contractual obligations that will require future
cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend
credit, that may or may not require future cash outflows.
Table 18 reflects our contractual obligations and other commercial commitments outstanding as of December
31, 2013. All of our borrowings at December 31, 2013 consisted of trust preferred securities.
In the normal course of business there are various outstanding commitments and contingent liabilities such as
commitments to extend credit, which are not reflected in the financial statements. The following table presents
a summary of our outstanding loan commitments as of December 31, 2013:
($ in millions)
Type of Commitment
Outstanding closed-end loan commitments
Unfunded commitments on revolving lines of
credit, credit cards and home equity loans
Total
Fixed Rate
$ 57
69
$ 126
Variable Rate
99
187
286
Total
156
256
412
At December 31, 2013 and 2012, we also had $14.5 million and $12.8 million, respectively, in standby letters of
credit outstanding. We had no carrying amount for these standby letters of credit at either of those dates. The
nature of the standby letters of credit is that of a guarantee made on behalf of our 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 of one year, at which time they may be renewed for another year if both parties agree. The
66
payment of the guarantees would generally be triggered by a continued nonpayment of an obligation owed by
the customer to the supplier. The maximum potential amount of future payments (undiscounted) we could be
required to make under the guarantees in the event of nonperformance by the parties to whom credit or
financial guarantees have been extended is represented by the contractual amount of the financial instruments
discussed above. In the event that we are required to honor a standby letter of credit, a note, already executed
by the customer, becomes effective providing repayment terms and any collateral. Over the past two years, we
have had to honor only a few standby letters of credit, which involved insignificant amounts of funds and
without any loss to us. We expect any draws under existing commitments to be funded through normal
operations.
It has been our experience that deposit withdrawals are generally able to be replaced with new deposits when
needed. Based on that assumption, management believes that it can meet its contractual cash obligations and
existing commitments from normal operations.
We are not involved in any legal proceedings that, in management’s opinion, are likely to have a material effect
on the consolidated financial position of the Company.
Capital Resources and Shareholders’ Equity
Shareholders’ equity at December 31, 2013 amounted to $371.9 million compared to $356.1 million at
December 31, 2012 and $345.2 million at December 31, 2011. The two basic components that typically have the
largest impact on our shareholders’ equity are net income (loss), which increases (decreases) shareholders’
equity, and dividends declared, which decreases shareholders’ equity. Additionally, any stock issuances can
significantly increase shareholders’ equity.
In 2013, the most significant factors that impacted our equity were 1) the $20.7 million net income reported for
2013, which increased equity, 2) common stock dividends declared of $6.3 million, which reduced equity, 3)
preferred stock dividends declared of $0.9 million, which reduced equity, and 4) a $3.1 million increase in equity
primarily related to unrealized gains experienced in our two pension plans (see Note 12 to the consolidated
financial statements), which was offset by a $1.0 million decrease in equity related to unrealized losses in our
securities portfolio. See the Consolidated Statements of Shareholders’ Equity within the consolidated financial
statements for disclosure of other less significant items affecting shareholders’ equity.
In 2012, the most significant factors that impacted our equity were 1) the $23.4 million net loss reported for
2012, which reduced equity, 2) a $33.7 million capital raise comprised of a combination of preferred and
common stock (see Note 19 to our consolidated financial statements), which increased equity, 3) an $8.5
adjustment related to the freezing of our two pension plans (see Note 12), which increased equity, 4) common
stock dividends declared of $5.6 million, which reduced equity, and 5) preferred stock dividends declared of $2.8
million, which reduced equity.
In 2011, the most significant factors that impacted our equity were the redemption of $65.0 million of our Series
A Preferred Stock issued under the U.S. Treasury’s Capital Purchase Program (also known as TARP) and the
simultaneous issuance of $63.5 million of Series B Preferred Stock under the Treasury’s Small Business Lending
Fund (SBLF). Net income of $13.6 million for 2011 increased equity, while common stock dividends declared of
$5.4 million and preferred stock dividends declared of $3.2 million reduced equity. We also recorded accretion
of the discount on preferred stock of $2.9 million due to the redemption of the Series A Preferred Stock. (See
Note 19 to the consolidated financial statements for further information on these transactions.) Another
significant factor negatively impacting equity in 2011 was a $4.5 million increase in accumulated other
comprehensive loss that was caused by an increase in our pension liability. The increase in the pension liability
was primarily due to the impact of lower interest rates on the actuarial calculations involved in determining the
67
liability. Our policy is to use the Citigroup Pension Index yield curve in the computation of the pension liability.
At December 31, 2011, that index had a weighted average rate of 4.39%, which was a decline from the rate of
5.59% at December 31, 2010.
We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be
implemented, would have a material effect on our liquidity, capital resources, or operations.
The Company and the Bank must comply with regulatory capital requirements established by the FRB and the
FDIC. 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. These capital standards require the Company and the Bank to maintain minimum ratios of
“Tier I” capital to total risk-weighted assets (“Tier I Capital Ratio”) and total capital to risk-weighted assets
(“Total Capital Ratio”) of 4.00% and 8.00%, respectively. Tier I capital is comprised of total shareholders’ equity,
excluding unrealized gains or losses from the securities available for sale, less intangible assets, and total capital
is comprised of Tier I capital plus certain adjustments, the largest of which for the Company and the Bank is the
allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the
Company and the Bank, adjusted for their related risk levels using formulas set forth in FRB and FDIC
regulations.
In addition to the risk-based capital requirements described above, the Company and the Bank are subject to a
leverage capital requirement, which calls for a minimum ratio of Tier I capital (as defined above) to quarterly
average total assets (“Leverage Ratio) of 3.00% to 5.00%, depending upon the institution’s composite ratings as
determined by its regulators. The FRB has not advised us of any requirement specifically applicable to the
Company.
Table 21 presents our regulatory capital ratios as of December 31, 2013, 2012, and 2011. All of our capital ratios
have significantly exceeded the minimum regulatory thresholds for all periods covered by this report.
In addition to the minimum capital requirements described above, the regulatory framework for prompt
corrective action also contains specific capital guidelines for a bank’s classification as “well capitalized.” The
specific guidelines are as follows – Tier I Capital Ratio of at least 6.00%, Total Capital Ratio of at least 10.00%,
and a Leverage Ratio of at least 5.00%. If a bank falls below “well capitalized” status in any of these three ratios,
it must ask for FDIC permission to originate or renew brokered deposits. The Bank’s regulatory ratios exceeded
the threshold for “well-capitalized” status at December 31, 2013, 2012, and 2011 – see Note 16 to the
consolidated financial statements for a table that presents the Bank’s regulatory ratios.
In addition to shareholders’ equity, we have supplemented our capital in past years with trust preferred security
debt issuances, which because of their structure qualify as regulatory capital. This was necessary in past years
because our balance sheet growth outpaced the growth rate of our capital. Additionally, we have frequently
purchased bank branches over the years that resulted in our recording intangible assets, which negatively
impacted regulatory capital ratios. As discussed in “Borrowings” above, we have issued a total of $67.0 million
in trust preferred securities since 2002, with the most recent issuance being a $25.8 million issuance that
occurred in April 2006. We currently have $46.4 million in trust preferred securities outstanding.
In this economic environment, our goal is to maintain our capital ratios at levels at least 200 basis points higher
than the “well-capitalized” thresholds set for banks. At December 31, 2013, our total risk-based capital ratio
was 16.80% compared to the 10.00% “well-capitalized” threshold.
In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible
assets (“TCE Ratio”). Our TCE ratio was 7.46% at December 31, 2013 compared to 6.81% at December 31, 2012.
68
See “Supervision and Regulation” under “Business” above and Note 16 to the consolidated financial statements
for discussion of other matters that may affect our capital resources.
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant
to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-
balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with
our trust preferred securities.
Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other
financial instruments with similar characteristics. We have not engaged in significant derivatives activities
through December 31, 2013 and have no current plans to do so.
Return on Assets and Equity
Table 20 shows return on average assets (net income available to common shareholders divided by average
total assets), return on average common equity (net income available to common shareholders divided by
average common shareholders’ equity), dividend payout ratio (dividends per share divided by net income per
common share) and shareholders’ equity to assets ratio (average total shareholders’ equity divided by average
total assets) for each of the years in the three-year period ended December 31, 2013.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk – Item 7A.)
Net interest income is our most significant component of earnings. Notwithstanding changes in volumes of
loans and deposits, our level of net interest income is continually at risk due to the effect that changes in general
market interest rate trends have on interest yields earned and paid with respect to our various categories of
earning assets and interest-bearing liabilities. It is our policy to maintain portfolios of earning assets and
interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent
practical, against wide interest rate fluctuations. Our exposure to interest rate risk is analyzed on a regular basis
by management using standard GAP reports, maturity reports, and an asset/liability software model that
simulates future levels of interest income and expense based on current interest rates, expected future interest
rates, and various intervals of “shock” interest rates. Over the years, we have been able to maintain a fairly
consistent yield on average earning assets (net interest margin). Over the past five calendar years, our net
interest margin has ranged from a low of 3.81% (realized in 2009) to a high of 4.92% (realized in 2013). During
that five year period, the prime rate of interest has consistently remained at 3.25% (which was the rate as of
December 31, 2013). The consistency of the net interest margin is aided by the relatively low level of long-term
interest rate exposure that we maintain. At December 31, 2013, approximately 73% of our interest-earning
assets are subject to repricing within five years (because they are either adjustable rate assets or they are fixed
rate assets that mature) and substantially all of our interest-bearing liabilities reprice within five years.
Table 17 sets forth our interest rate sensitivity analysis as of December 31, 2013, using stated maturities for all
fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected
payback) and securities and borrowings with call features that are expected to be called (which are shown in the
period of their expected call). As illustrated by this table, at December 31, 2013, we had $856 million more in
interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This
generally would indicate that net interest income would experience downward pressure in a rising interest rate
environment and would benefit from a declining interest rate environment. However, this method of analyzing
interest sensitivity only measures the magnitude of the timing differences and does not address earnings,
69
market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other types may lag behind changes in
market rates. In addition to the effects of “when” various rate-sensitive products reprice, market rate changes
may not result in uniform changes in rates among all products. For example, included in interest-bearing
liabilities subject to interest rate changes within one year at December 31, 2013 are deposits totaling $1.30
billion comprised of checking, savings, and certain types of money market deposits with interest rates set by
management. These types of deposits historically have not repriced with, or in the same proportion, as general
market indicators.
Overall, we believe that in the near term (twelve months), net interest income will not likely experience
significant downward pressure from rising interest rates. Similarly, we would not expect a significant increase in
near term net interest income from falling interest rates. Generally, when rates change, our interest-sensitive
assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-
sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full
extent of the rate change. In the short-term (less than six months), this results in us being asset-sensitive,
meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a
decrease in interest rates. However, in the twelve-month horizon, the impact of having a higher level of interest-
sensitive liabilities lessens the short-term effects of changes in interest rates.
The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment
in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and
is less applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-
term interest rates are substantially the same as long-term interest rates. As a result of the prolonged negative
economic environment that continued through most of 2012 and into 2013, the Federal Reserve took steps to
suppress long-term interest rates in an effort to boost the housing market, increase employment, and stimulate
the economy, which resulted in a flat interest rate curve. A flat interest rate curve is an unfavorable interest
rate environment for many banks, including the Company, as short-term interest rates generally drive our
deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge, the
profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin.
In June 2013, the economy began to show signs of improvement and the Federal Reserve suggested that they
may lessen their involvement in the economic recovery process in the near future, which could result in a rise in
interest rates, especially longer-term interest rates. The marketplace began to anticipate that result and
accordingly, longer-term interest rates increased in 2013, while short-term rates have remained stable. For
example, from December 31, 2012 to December 31, 2013, the interest rate on three-month Treasury bills
remained stable, but the interest rate for seven-year Treasury notes increased by 127 basis points. These
increases result in a “steepening” of the yield curve and is a more favorable interest rate environment for many
banks, including the Company, because as noted above, short-term interest rates generally drive our deposit
pricing and longer-term interest rates generally drive loan pricing. However, intense competition for high-quality
loans in our market areas has thus far negated the impact of the higher long-term market rates by limiting our
ability to charge higher rates on loans, and thus we continue to experience downward pressure on our loan
yields and net interest margin.
As it relates to deposits, the Federal Reserve has made no changes to the short term interest rates it sets directly
since 2008, and since that time we have been able to reprice many of our maturing time deposits at lower
interest rates. We were also able to generally decrease the rates we paid on other categories of deposits as a
result of declining short-term interest rates in the marketplace and an increase in liquidity that lessened our
need to offer premium interest rates. However, as short-term rates are already near zero, it is unlikely that we
will be able to continue the trend of reducing our funding costs in the same proportion as experienced in recent
years.
70
As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by
certain purchase accounting adjustments related primarily to our acquisitions of Cooperative Bank and The Bank
of Asheville. The purchase accounting adjustments related to the premium amortization on loans, deposits and
borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the
loan discount on loans acquired from Cooperative Bank and The Bank of Asheville, which amounted to $20.2
million and $16.5 million for 2013 and 2012, respectively, is less predictable and could be materially different
among periods. This is because of the magnitude of the discounts that were initially recorded ($280 million in
total) and the fact that the accretion being recorded is dependent on both the credit quality of the acquired
loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans
declines, some, or all, of the remaining discount will cease to be accreted into income. If the underlying loans
experience accelerated paydowns or improved performance expectations, the remaining discount will be
accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be
entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and
susceptible to volatility.
Based on our most recent interest rate modeling, which assumes no changes in interest rates for 2014 (federal
funds rate = 0.25%, prime = 3.25%), we project that our net interest margin for 2014 will experience some
compression. We expect loan yields to continue to trend downwards, while many of our deposit products
already have interest rates near zero.
We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign
currency positions. Table 19 presents the expected maturities of our other than trading market risk sensitive
financial instruments. Table 19 also presents the estimated fair values of market risk sensitive instruments as
estimated in accordance with relevant accounting guidance. Our assets and liabilities have estimated fair values
that do not materially differ from their carrying amounts.
See additional discussion regarding net interest income, as well as discussion of the changes in the annual net
interest margin, in the section entitled “Net Interest Income” above.
Inflation
Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed determinable
amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest
rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be
the same. The effect of inflation on banks is normally not as significant as its influence on those businesses that
have large investments in plant and inventories. During periods of high inflation, there are normally
corresponding increases in the money supply, and banks will normally experience above average growth in
assets, loans and deposits. Also, general increases in the price of goods and services will result in increased
operating expenses.
Current Accounting Matters
We prepare our consolidated financial statements and related disclosures in conformity with standards
established by, among others, the Financial Accounting Standards Board (the “FASB”). Because the information
needed by users of financial reports is dynamic, the FASB frequently issues new rules and proposes new rules for
companies to apply in reporting their activities. See Note 1(u) to our consolidated financial statements for a
discussion of recent rule proposals and changes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information responsive to this Item is found in Item 7 under the caption “Interest Rate Risk.”
71
Table 1 Selected Consolidated Financial Data
($ in thousands, except per share
and nonfinancial data)
Income Statement Data
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Preferred stock dividends
Accretion of preferred stock discount
Net income (loss) available to common shareholders
Earnings (loss) per common share – basic
Earnings (loss) per common share – diluted
2013
2012
2011
2010
2009
Year Ended December 31,
$ 147,511
10,985
136,526
30,616
105,910
23,489
96,619
32,780
12,081
20,699
(895)
—
19,804
1.01
0.98
152,520
17,320
135,200
79,672
55,528
1,389
97,275
(40,358)
(16,952)
(23,406)
(2,809)
—
(26,215)
(1.54)
(1.54)
155,768
23,565
132,203
41,301
90,902
26,216
96,106
21,012
7,370
13,642
(3,234)
(2,932)
7,476
0.44
0.44
159,261
31,907
127,354
54,562
72,792
29,106
86,956
14,942
4,960
9,982
(3,250)
(857)
5,875
155,991
48,895
107,096
20,186
86,910
89,518
78,551
97,877
37,618
60,259
(3,169)
(803)
56,287
0.35
0.35
3.38
3.37
Per Share Data (Common)
Cash dividends declared – common
Market Price
High
Low
Close
Stated book value – common
Tangible book value – common
Selected Balance Sheet Data (at year end)
Total assets
Loans – non-covered
Loans – covered
Total loans
Allowance for loan losses
Intangible assets
Deposits
Borrowings
Total shareholders’ equity
Selected Average Balances
Assets
Loans – non-covered
Loans – covered
Total loans
Earning assets
Deposits
Interest-bearing liabilities
Shareholders’ equity
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent basis)
Tangible common equity to tangible assets
Loans to deposits at year end
Allowance for loan losses to total loans
Allowance for loan losses to total loans – non-covered
Nonperforming assets to total assets at year end
Nonperforming assets to total assets – non-covered
Net charge-offs to average total loans
Net charge-offs to average total loans – non-covered
Nonfinancial Data – number of branches
Nonfinancial Data – number of employees (FTEs)
$ 0.32
0.32
0.32
0.32
0.32
17.39
11.98
16.62
15.30
11.81
$ 3,185,070
2,252,885
210,309
2,463,194
48,505
68,669
2,751,019
46,394
371,922
$ 3,208,458
2,175,023
244,656
2,419,679
2,805,112
2,779,032
2,380,747
362,770
0.62%
6.78%
4.92%
7.46%
89.54%
1.97%
1.96%
4.79%
2.78%
1.18%
0.72%
96
855
72
13.40
7.68
12.82
14.51
11.00
3,244,910
2,094,143
282,314
2,376,457
46,402
68,943
2,821,360
46,394
356,117
3,311,289
2,114,489
322,508
2,436,997
2,857,541
2,809,357
2,553,175
345,981
(0.79%)
(9.29%)
4.78%
6.81%
84.23%
1.95%
1.99%
6.24%
3.64%
3.06%
3.02%
97
831
16.89
8.05
11.15
16.66
12.53
3,290,474
2,069,152
361,234
2,430,386
41,418
69,732
2,755,037
133,925
345,150
3,315,045
2,051,677
410,318
2,461,995
2,834,938
2,758,022
2,606,450
353,588
0.23%
2.59%
4.72%
6.58%
88.22%
1.70%
1.72%
8.00%
4.30%
2.00%
1.52%
97
830
16.90
12.00
15.31
16.64
12.45
19.00
6.87
13.97
16.59
12.35
3,278,932
2,083,004
371,128
2,454,132
49,430
70,358
2,652,513
196,870
344,603
3,545,356
2,132,843
520,022
2,652,865
37,343
70,948
2,933,108
176,811
342,383
3,326,977
2,104,677
449,724
2,554,401
2,927,815
2,807,161
2,655,195
350,908
3,097,137
2,176,153
298,892
2,475,045
2,833,167
2,549,709
2,497,304
313,173
0.18%
2.05%
4.39%
6.52%
92.52%
2.01%
1.84%
8.69%
4.16%
1.66%
1.55%
92
774
1.82%
22.55%
3.81%
5.94%
90.45%
1.41%
1.75%
7.27%
3.10%
0.49%
0.56%
91
764
Table 2 Average Balances and Net Interest Income Analysis
2013
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Year Ended December 31,
2012
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
2011
Avg.
Rate
Interest
Earned
or Paid
$ 2,419,679
175,184
54,785
5.85%
1.95%
6.22%
$ 141,616 $ 2,436,997
161,064
56,625
3,410
3,410
5.97%
2.70%
6.15%
$ 145,554 $ 2,461,995
175,666
57,478
4,352
3,485
6.00%
3.23%
6.19%
$ 147,652
5,680
3,556
155,464
0.38%
586
202,855
0.32%
656
139,799
0.31%
436
2,805,112
80,659
77,252
245,435
$ 3,208,458
5.31%
149,022
2,857,541
64,241
5.39%
154,047
2,834,938
72,628
5.55%
157,324
73,240
316,267
$ 3,311,289
68,930
338,549
$ 3,315,045
$ 530,566 0.09%
0.16%
0.07%
0.96%
0.56%
560,809
166,388
607,028
469,562
$ 476
900
117
5,825
2,642
$ 461,380
536,680
158,014
725,473
550,420
0.16%
0.34%
0.19%
1.12%
0.82%
$ 736
1,804
296
8,132
4,486
$ 355,979 0.22%
0.53%
0.48%
1.31%
1.10%
508,209
152,256
771,165
641,078
$ 776
2,705
731
10,103
7,036
2,334,353
0.43%
9,960
2,431,967
0.64%
15,454
2,428,687
0.88%
21,351
−
46,394
−%
2.21%
−
1,025
1,667
119,541
0.24%
1.56%
4
1,862
55,020
122,743
0.33%
1.65%
184
2,030
2,380,747
0.46%
10,985
2,553,175
0.68%
17,320
2,606,450
0.90%
23,565
444,679
20,262
362,770
377,390
34,743
345,981
329,335
25,672
353,588
$ 3,208,458
$ 3,311,289
$ 3,315,045
$ 138,037
4.92%
4.85%
3.25%
$ 136,727
4.78%
4.71%
3.25%
$ 133,759
4.72%
4.65%
3.25%
($ in thousands)
Assets
Loans (1) (2)
Taxable securities
Non-taxable securities (3)
Short-term investments,
primarily overnight funds
Total interest-
earning assets
Cash and due from banks
Bank premises and
equipment, net
Other assets
Total assets
Liabilities and Equity
Interest-bearing checking
accounts
Money market accounts
Savings accounts
Time deposits >$100,000
Other time deposits
Total interest-bearing
deposits
Securities sold under
agreements to
repurchase
Borrowings
Total interest-
bearing liabilities
Noninterest-bearing
checking accounts
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net yield on interest-
earning assets and
net interest income
Interest rate spread
Average prime rate
(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan
(2)
(3)
fees (costs) in the amounts of ($192,900), $111,400, and ($101,500) for 2013, 2012, and 2011, respectively.
Includes accretion of discount on covered loans of $20,200,000, $16,466,000, and $11,598,000 in 2013, 2012, and 2011, respectively.
Includes tax-equivalent adjustments of $1,511,000, $1,527,000, and $1,556,000 in 2013, 2012, and 2011, respectively, to reflect the federal and state
tax benefit of the tax-exempt securities (using a 39% combined tax rate), reduced by the related nondeductible portion of interest expense.
73
Table 3 Volume and Rate Variance Analysis
($ in thousands)
Interest income (tax-equivalent):
Loans
Taxable securities
Non-taxable securities
Short-term investments, primarily
overnight funds
Total interest income
Interest expense:
Interest-bearing checking accounts
Money market accounts
Savings accounts
Time deposits >$100,000
Other time deposits
Total interest-bearing deposits
Securities sold under agreements to
repurchase
Borrowings
Total interest expense
Year Ended December 31, 2013
Year Ended December 31, 2012
Change Attributable to
Change Attributable to
Changes in
Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$ (1,024)
328
(114)
(166)
(976)
86
60
11
(1,232)
(557)
(1,632)
(2)
(1,378)
(3,012)
(2,914)
(1,270)
39
96
(4,049)
(346)
(964)
(190)
(1,075)
(1,287)
(3,862)
(2)
541
(3,323)
(3,938)
(942)
(75)
(1,496)
(433)
(53)
(602)
(895)
(18)
(70)
(5,025)
200
(1,782)
20
(1,495)
(260)
(904)
(179)
(2,307)
(1,844)
(5,494)
(4)
(837)
(6,335)
199
124
19
(555)
(867)
(1,080)
(153)
(51)
(1,284)
(239)
(1,025)
(454)
(1,416)
(1,683)
(4,817)
(27)
(117)
(4,961)
(2,098)
(1,328)
(71)
220
(3,277)
(40)
(901)
(435)
(1,971)
(2,550)
(5,897)
(180)
(168)
(6,245)
Net interest income (tax-equivalent)
$ 2,036
(726)
1,310
(498)
3,466
2,968
Changes attributable to both volume and rate are allocated equally between rate and volume variances.
Table 4 Noninterest Income
($ in thousands)
Service charges on deposit accounts
Other service charges, commissions, and fees
Fees from presold mortgages
Commissions from sales of insurance and financial products
Bank owned life insurance income
Total core noninterest income
Gain from acquisition
Foreclosed property gains (losses) – non-covered
Foreclosed property gains (losses) – covered
FDIC Indemnification asset income (expense), net
Securities gains (losses), net
Other gains (losses), net
Total
2013
$ 12,752
9,318
2,907
2,132
1,120
28,229
—
1,333
367
(6,824)
532
(148)
$ 23,489
Year Ended December 31,
2012
11,865
8,831
2,378
1,832
591
25,497
—
(15,325)
(13,035)
4,077
638
(463)
1,389
2011
11,981
8,067
1,609
1,512
45
23,214
10,196
(3,355)
(24,492)
20,481
74
98
26,216
74
Table 5 Noninterest Expenses
($ in thousands)
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Amortization of intangible assets
Acquisition expenses
FDIC insurance expense
Stationery and supplies
Telephone
Outside consultants
Legal and audit
Repossession and collection expenses – non-covered
Repossession and collection expenses – covered, net
of FDIC reimbursement and rental income
Non-credit losses
Severance expenses
Other operating expenses
Total
Table 6 Income Taxes
($ in thousands)
Current - Federal
- State
Deferred - Federal
- State
Total tax expense (benefit)
Effective tax rate
2013
$ 45,120
9,644
54,764
7,123
4,364
860
−
2,618
2,078
1,489
2,460
1,204
2,216
726
426
1,895
14,396
$ 96,619
Year Ended December 31,
2012
41,336
12,007
53,343
6,954
4,800
897
−
2,678
2,240
1,683
1,916
1,722
3,107
1,642
1,171
500
14,622
97,275
2011
39,822
11,616
51,438
6,574
4,326
902
636
3,008
2,867
2,127
1,842
1,595
3,492
1,968
1,276
̶
14,055
96,106
2013
$ 9,812
(467)
168
2,568
$ 12,081
2012
(8,401)
(43)
(5,914)
(2,594)
(16,952)
2011
9,204
2,094
(3,234)
(694)
7,370
36.9%
42.0%
35.1%
75
Table 7 Distribution of Assets and Liabilities
2013
2012
2011
As of December 31,
Assets
Interest-earning assets
Net loans
Securities available for sale
Securities held to maturity
Short term investments
Total interest-earning assets
Noninterest-earning assets
Cash and due from banks
Loans held for sale
Premises and equipment
FDIC indemnification asset
Intangible assets
Foreclosed real estate
Bank-owned life insurance
Other assets
Total assets
Liabilities and shareholders’ equity
Noninterest-bearing checking accounts
Interest-bearing checking accounts
Money market accounts
Savings accounts
Time deposits of $100,000 or more
Other time deposits
Total deposits
Securities sold under agreements to repurchase
Borrowings
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Table 8 Securities Portfolio Composition
76%
6
2
4
88
3
−
2
2
2
1
1
1
100%
15%
18
17
5
18
13
86
−
1
1
88
12
100%
72%
5
2
5
84
3
1
2
3
2
2
1
2
100%
13%
16
17
5
20
16
87
−
1
1
89
11
100%
73%
6
2
4
85
2
−
2
4
2
4
−
1
100%
10%
13
16
4
23
18
84
1
4
1
90
10
100%
($ in thousands)
Securities available for sale:
Government-sponsored enterprise securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total securities available for sale
Securities held to maturity:
State and local governments
Total securities held to maturity
2013
$ 18,245
147,187
3,598
4,011
173,041
53,995
53,995
As of December 31,
2012
11,596
146,926
3,813
5,017
167,352
56,064
56,064
2011
34,665
124,105
12,488
11,368
182,626
57,988
57,988
Total securities
$ 227,036
223,416
240,614
Average total securities during year
$ 229,969
217,689
233,144
76
Table 9 Securities Portfolio Maturity Schedule
($ in thousands)
Securities available for sale:
Government-sponsored enterprise securities
Due after one but within five years
Due after five but within ten years
Total
Mortgage-backed securities (2)
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Total
Corporate debt securities
Due after one but within five years
Due after ten years
Total
Equity securities
Total securities available for sale
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Equity securities
Total
Securities held to maturity:
State and local governments
Due after one but within five years
Due after five but within ten years
Due after ten years
Total securities held to maturity
As of December 31,
2013
Book
Value
Fair
Value
Book
Yield (1)
$ 14,500
3,932
18,432
357
72,158
72,837
3,294
148,646
2,999
1,000
3,999
3,984
357
89,657
76,769
4,294
3,984
$ 175,061
$ 5,422
35,346
13,227
$ 53,995
14,369
3,876
18,245
366
71,902
71,504
3,415
147,187
3,043
555
3,598
4,011
366
89,314
75,380
3,970
4,011
173,041
5,822
37,153
13,725
56,700
1.13%
2.07%
1.33%
3.74%
1.90%
1.92%
4.66%
1.97%
6.82%
2.49%
5.74%
2.76%
3.74%
1.94%
1.92%
4.16%
2.76%
2.01%
5.94%
5.70%
5.81%
5.75%
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 39% tax rate.
(2) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment
speeds.
77
Table 10 Loan Portfolio Composition
As of December 31,
2013
2012
2011
2010
2009
% of
Total
Loans
Amount
% of
Total
Loans
Amount
% of
Total
Loans
Amount
Amount
% of
Total
Loans
Amount
% of
Total
Loans
$ 168,469
7%
$ 160,790
7%
$ 162,099
7%
$ 155,016
6%
$ 173,611
7%
305,246
12%
298,458
13%
363,079
15%
437,700
18%
551,714
21%
838,862
34%
815,281
34%
805,542
33%
802,658
33%
849,875
32%
227,907
9%
238,925
10%
256,509
11%
263,529
11%
270,054
10%
855,249
35%
789,746
33%
762,895
31%
710,337
29%
718,723
27%
66,533
2,462,266
3%
100%
71,933
2,375,133
3%
100%
78,982
2,429,106
3%
100%
83,919
2,453,159
3%
100%
88,514
2,652,491
3%
100%
928
$2,463,194
1,324
$2,376,457
1,280
$2,430,386
973
$2,454,132
374
$2,652,865
($ 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
Installment loans to
individuals
Loans, gross
Unamortized net
deferred loan costs
Total loans (1)
(1) Excludes loans held for sale at December 31, 2012
Table 10a Loan Portfolio Composition – Covered versus Non-covered
As of December 31, 2013
Covered Loans
(Carrying Value)
% of
Covered
Loans
Amount
Non-covered Loans
% of
Non-
covered
Loans
Amount
Total Loans
% of
Total
Loans
Amount
Unpaid
Principal
Balance of
Covered Loans
Carrying Value of
Covered Loans as
a Percent of the
Unpaid Balance
Amount
Percentage
$ 4,274
2%
$ 164,195
7%
$ 168,469
7%
$ 5,404
79%
31,834
15%
273,412
12%
305,246
12%
48,356
66%
108,150
52%
730,712
32%
838,862
34%
128,382
84%
14,891
7%
213,016
10%
227,907
9%
50,628
24%
804,621
36%
855,249
35%
18,339
66,672
532
210,309
0%
100%
66,001
2,251,957
3%
100%
66,533
2,462,266
3%
100%
607
$ 267,760
81%
76%
88%
79%
–
$ 210,309
928
$ 2,252,885
928
$2,463,194
($ 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
Installment loans to
individuals
Loans, gross
Unamortized net deferred
loan costs
Total loans
See Note 4 to the Consolidated Financial Statements for tables showing breakout of covered loans versus non-covered loans at December 31, 2012.
78
Table 11 Loan Maturities
($ in thousands)
Variable Rate Loans:
Commercial, financial, and
agricultural
Real estate – construction only
Real estate – all other mortgage
Real estate – home equity
loans/ line of credit
Consumer, primarily installment
loans to individuals
Total at variable rates
Fixed Rate Loans:
Commercial, financial, and
agricultural
Real estate – construction only
Real estate – all other mortgage
Consumer, primarily installment
loans to individuals
Total at fixed rates
As of December 31, 2013
Due within
one year
Due after one year but
within five years
Due after five
years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
$ 45,735
40,401
107,851
5,000
155
5.11%
5.30%
5.25%
5.01%
5.62%
199,142
5.22%
$ 24,534
1,970
246,278
19,629
12,290
304,701
22,680
30,199
126,813
7,200
5.01%
4.88%
5.86%
6.74%
186,892
5.63%
56,153
3,208
652,673
22,975
735,009
5.31%
5.52%
5.22%
4.28%
8.30%
5.29%
5.54%
4.88%
5.37%
7.19%
5.44%
5.40%
$ 413
1,408
139,177
5.25%
5.30%
4.09%
$ 70,682
43,779
493,306
180,221
13,214
334,433
4.19%
5.00%
4.19%
204,850
25,659
838,276
3.68%
4.16%
4.43%
12.28%
96,107
52,300
1,360,275
37,081
17,274
18,893
580,789
6,906
623,862
4.49%
1,545,763
5.08%
5.18%
5.31%
4.90%
4.22%
6.58%
4.83%
5.08%
4.62%
5.02%
8.05%
Subtotal
Nonaccrual loans
Total loans
386,034
79,155
$ 465,189
5.42%
1,039,710
─
$1,039,710
958,295
─
$ 958,295
4.39%
2,384,039
79,155
$2,463,194
4.99%
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in
this table.
79
Table 12 Nonperforming Assets
($ in thousands)
Non-covered nonperforming assets
Nonaccrual loans
Restructured loans - accruing
Accruing loans >90 days past due
Total non-covered nonperforming loans
Nonperforming loans held for sale
Foreclosed real estate
Total non-covered nonperforming assets
Covered nonperforming assets (1)
Nonaccrual loans (2)
Restructured loans - accruing
Accruing loans >90 days past due
Total covered nonperforming loans
Foreclosed real estate
Total covered nonperforming assets
2013
2012
As of December 31,
2011
2010
2009
$ 41,938
27,776
−
69,714
−
12,251
$ 81,965
33,034
24,848
−
57,882
21,938
26,285
106,105
73,566
11,720
−
85,286
−
37,023
122,309
62,326
33,677
−
96,003
−
21,081
117,084
62,206
21,283
−
83,489
−
8,793
92,282
$ 37,217
8,909
−
46,126
24,497
$ 70,623
33,491
15,465
−
48,956
47,290
96,246
41,472
14,218
−
55,690
85,272
140,962
58,466
14,359
−
72,825
94,891
167,716
117,916
−
−
117,916
47,430
165,346
Total nonperforming assets
$ 152,588
202,351
263,271
284,800
257,628
Asset Quality Ratios – All Assets
Nonperforming loans to total loans
Nonperforming assets to total loans and foreclosed real
estate
Nonperforming assets to total assets
Asset Quality Ratios – Based on Non-covered Assets only
Non-covered nonperforming loans to non-covered
loans
Non-covered nonperforming assets to non-covered loans
4.70%
4.50%
5.80%
6.88%
7.59%
6.10%
4.79%
8.26%
6.24%
10.31%
8.00%
11.08%
8.69%
9.51%
7.27%
3.09%
2.76%
4.12%
4.61%
3.91%
and non-covered foreclosed real estate
3.62%
5.00%
5.81%
5.56%
4.31%
Non-covered nonperforming assets to total non-covered
assets
2.78%
3.64%
4.30%
4.16%
3.10%
(1) Covered nonperforming assets consist of assets that are included in loss share agreements with the FDIC.
(2) At December 31, 2013, 2012 and 2011, the contractual balance of the nonaccrual loans covered by the FDIC loss share agreement was $60.4 million,
$64.4 million and $69.0 million, respectively.
80
Table 12a Nonperforming Assets by Geographical Region
($ in thousands)
Nonaccrual loans and
Troubled Debt Restructurings (1)
Eastern Region (NC)
Triangle Region (NC)
Triad Region (NC)
Charlotte Region (NC)
Southern Piedmont Region (NC)
Western Region (NC)
South Carolina Region
Virginia Region
Other
Total nonaccrual loans and
troubled debt restructurings
Foreclosed Real Estate (1)
Eastern Region (NC)
Triangle Region (NC)
Triad Region (NC)
Charlotte Region (NC)
Southern Piedmont Region (NC)
Western Region (NC)
South Carolina Region
Virginia Region
Other
Total foreclosed real estate
As of December 31, 2013
Covered
Non-covered
Total
Total Loans
Nonperforming
Loans to Total
Loans
$ 37,829
–
–
–
2,117
5,891
289
–
–
9,026 46,855
22,859
16,401
2,400
8,004
5,891
5,248
8,182
–
22,859
16,401
2,400
5,887
–
4,959
8,182
–
$ 562,000
767,000
379,000
99,000
242,000
56,000
112,000
234,000
12,000
$ 46,126
69,714
115,840
$ 2,463,000
8.3%
3.0%
4.3%
2.4%
3.3%
10.5%
4.7%
3.5%
0.0%
4.7%
$ 17,152
–
–
–
–
7,327
18
–
–
$ 24,497
1,726 18,878
3,436
3,645
877
1,278
–
689
183
417
12,251
3,436
3,645
877
1,278
7,327
707
183
417
36,748
(1) The counties comprising each region are as follows:
Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Onslow, Carteret, Tyrrell
Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake
Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly
Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg
Southern Piedmont North Carolina Region - Anson, Richmond, Scotland, Robeson, Bladen, Columbus
Western North Carolina Region - Buncombe
South Carolina Region - Chesterfield, Dillon, Florence, Horry
Virginia Region – Wythe, Washington, Montgomery, Pulaski, Roanoke
81
Table 13 Allocation of the Allowance for Loan Losses
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land development
Real estate – residential, commercial,
home equity, multifamily
Installment loans to individuals
Total allocated
Unallocated
Total
2013
2012
As of December 31,
2011
2010
2009
$ 8,635
14,064
4,855
14,103
4,443
14,268
5,154
20,065
4,995
9,286
24,439
1,519
48,657
(152)
$ 48,505
24,554
1,942
45,454
948
46,402
20,818
1,873
41,402
16
41,418
22,077
1,960
49,256
174
49,430
20,845
1,606
36,732
611
37,343
Table 13a Allocation of the Allowance for Loan Losses – Covered versus Non-covered
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land
development
Real estate – residential, commercial,
home equity, multifamily
Installment loans to individuals
Total allocated
Unallocated
Total
As of December 31, 2013
Non-covered
Total
Covered
As of December 31, 2012
Covered
Non-covered
Total
$ 1,203
7,432
8,635
168
4,687
4,855
1,098
12,966
14,064
1,247
12,856
14,103
1,935
6
4,242
−
$ 4,242
22,504
1,513
44,415
(152)
44,263
24,439
1,519
48,657
(152)
48,505
3,341
3
4,759
−
4,759
21,213
1,939
40,695
948
41,643
24,554
1,942
45,454
948
46,402
82
Table 14 Loan Loss and Recovery Experience
($ in thousands)
2013
2012
As of December 31,
2011
2010
2009
Loans outstanding at end of year
$ 2,463,194
2,376,457
2,430,386
2,454,132
2,652,865
Average amount of loans outstanding
$ 2,419,679
2,436,997
2,461,995
2,554,401
2,475,045
Allowance for loan losses, at
beginning of year
Provision for loan losses
Loans charged off: (1)
Commercial, financial, and agricultural
Real estate – construction, land development &
other land loans
Real estate – mortgage – residential (1-4 family)
first mortgages
Real estate – mortgage – home equity loans / lines
of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total charge-offs
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural
Real estate – construction, land development &
other land loans
Real estate – mortgage – residential (1-4 family)
first mortgages
Real estate – mortgage – home equity loans / lines
of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total recoveries
Net charge-offs
Allowance for loan losses, at end of year
Ratios:
Net charge-offs as a percent of average loans
Allowance for loan losses as a percent of loans at
end of year
Allowance for loan losses as a multiple of net
charge-offs
Provision for loan losses as a percent of net
charge-offs
Recoveries of loans previously charged-off as a
$ 46,402
30,616
77,018
41,418
79,672
121,090
49,430
41,301
90,731
37,343
54,562
91,905
29,256
20,186
49,442
(4,667)
(5,000)
(2,358)
(4,481)
(10,582)
(28,613)
(25,604)
(22,665)
(4,764)
(15,490)
(12,045)
(6,032)
(3,143)
(7,027)
(2,253)
(32,436)
198
777
595
(5,921)
(20,317)
(1,932)
(77,273)
152
1,281
91
(3,195)
(7,180)
(1,600)
(51,982)
(4,973)
(2,916)
(2,499)
(43,566)
314
919
492
61
113
357
(2,143)
(1,716)
(4,617)
(1,824)
(516)
(1,973)
(12,789)
18
9
184
199
1,531
623
3,923
(28,513)
$ 48,505
440
318
303
2,585
(74,688)
46,402
375
119
450
2,669
(49,313)
41,418
131
33
396
1,091
(42,475)
49,430
66
129
284
690
(12,099)
37,343
1.18%
1.97%
1.70x
3.06%
1.95%
0.62x
2.00%
1.70%
0.84x
1.66%
2.01%
1.16x
0.49%
1.41%
3.09x
107.38%
106.67%
83.75%
128.46%
166.84%
percent of loans charged-off
12.09%
3.35%
5.13%
2.50%
5.40%
(1)
In the table above, for the period ended December 31, 2012, loan charge-offs include $37.8 million in charge-offs related to loans
that the Company held for sale as of year-end (and subsequently sold in January 2013). The remaining balance of $30.4 million
after the charge-offs were recorded was classified as “Loans held for sale” on the Company’s consolidated balance sheet at
December 31, 2012.
83
Table 14a - Loan Loss and Recovery Experience – Covered versus Non-covered
($ in thousands)
As of December 31, 2013
Non-covered
Covered
Total
Covered
As of December 31, 2012
Non-covered (1)
Total
Loans outstanding at end of year
$ 210,309
2,252,885
2,463,194
282,314
2,094,143
2,376,457
Average amount of loans outstanding
$ 244,656
2,175,023
2,419,679
322,508
2,114,489
2,436,997
Allowance for loan losses, at beginning
of year
Provision for loan losses
Loans charged off:
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential
(1-4 family) first mortgages
Real estate – mortgage – home equity
loans / lines of credit
Real estate – mortgage – commercial
and other
Installment loans to individuals
Total charge-offs
Recoveries of loans previously
charged-off:
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential
(1-4 family) first mortgages
Real estate – mortgage – home equity
loans / lines of credit
Real estate – mortgage – commercial
and other
Installment loans to individuals
Total recoveries
Net charge-offs
Allowance for loan losses, at end of
year
Ratios:
Net charge-offs as a percent of
average loans
Allowance for loan losses as a
percent of loans at end of year
Allowance for loan losses as a
multiple of net charge-offs
Provision for loan losses as a percent
of net charge-offs
Recoveries of loans previously
charged-off as a percent of loans
charged-off
(6,629)
(1,890)
(1,517)
(2,662)
(65)
(13,053)
−
69
−
−
$ 4,759
12,350
17,109
41,643
18,266
59,909
46,402
30,616
77,018
5,808
9,679
15,487
35,610
69,993
105,603
41,418
79,672
121,090
(290)
(4,377)
(4,667)
(39)
(4,961)
(5,000)
(3,953)
(10,582)
(7,352)
(21,261)
(28,613)
(2,874)
(4,764)
(1,091)
(14,399)
(15,490)
(1,626)
(3,143)
(462)
(5,459)
(5,921)
(4,365)
(2,188)
(19,383)
(7,027)
(2,253)
(32,436)
(1,632)
(152)
(10,728)
(18,685)
(1,780)
(66,545)
(20,317)
(1,932)
(77,273)
198
708
595
199
198
777
595
199
−
−
−
−
−
−
−
(10,728)
4,759
152
1,281
91
440
152
1,281
91
440
318
303
2,585
(63,960)
41,643
318
303
2,585
(74,688)
46,402
117
−
186
(12,867)
$ 4,242
1,414
623
3,737
(15,646)
44,263
1,531
623
3,923
(28,513)
48,505
5.26%
2.02%
0.33x
0.72%
1.18%
3.33%
3.02%
3.06%
1.96%
1.97%
1.69%
1.99%
1.95%
2.83x
1.70x
0.44x
0.65x
0.62x
95.98%
116.75%
107.38%
90.22%
109.43%
106.67%
1.42%
19.28%
12.09%
0%
3.88%
3.35%
(1)
In the table above, for the period ended December 31, 2012, non-covered loan charge-offs include $37.8 million in charge-offs
related to loans that the Company held for sale as of year-end (and subsequently sold in January 2013). The remaining balance of
$30.4 million after the charge-offs were recorded was classified as “Loans held for sale” on the Company’s consolidated balance
sheet at December 31, 2012.
84
Table 15 Average Deposits
($ in thousands)
Interest-bearing checking accounts
Money market accounts
Savings accounts
Time deposits >$100,000
Other time deposits
Total interest-bearing deposits
Noninterest-bearing checking accounts
Total deposits
2013
Year Ended December 31,
2012
2011
Average
Amount
Average
Rate
Average
Amount
Average
Rate
Average
Amount
Average
Rate
$ 530,566
560,809
166,388
607,028
469,562
2,334,353
444,679
$2,779,032
0.09%
0.16%
0.07%
0.96%
0.56%
0.43%
−
0.36%
$ 461,380
536,680
158,014
725,473
550,420
2,431,967
377,390
$2,809,357
0.16%
0.34%
0.19%
1.12%
0.82%
0.64%
−
0.55%
$ 355,979
508,209
152,256
771,165
641,078
2,428,687
329,335
$2,758,022
0.22%
0.53%
0.48%
1.31%
1.10%
0.88%
−
0.77%
Table 16 Maturities of Time Deposits of $100,000 or More
($ in thousands)
3 Months
or Less
Over 3 to 6
Months
As of December 31, 2013
Over 6 to 12
Months
Over 12
Months
Total
Time deposits of $100,000 or more
$ 125,449
96,405
167,396
175,277
564,527
85
Table 17 Interest Rate Sensitivity Analysis
Percent of total earning assets
Cumulative percent of total earning assets
37.19%
37.19%
($ in thousands)
Earning assets:
Loans (1)
Securities available for sale
Securities held to maturity
Short-term investments
Total earning assets
Interest-bearing liabilities:
Interest-bearing checking accounts
Money market accounts
Savings accounts
Time deposits of $100,000 or more
Other time deposits
Borrowings
Total interest-bearing liabilities
Percent of total interest-bearing liabilities
Cumulative percent of total interest-
bearing liabilities
Interest sensitivity gap
Cumulative interest sensitivity gap
Cumulative interest sensitivity gap
as a percent of total earning assets
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 2013
Total Within
12 Months
Over 3 to 12
Months
Over 12
Months
3 Months
or Less
Total
$ 870,497
38,900
100
144,815
$ 1,054,312
$ 557,413
551,335
169,023
125,449
140,297
46,394
$ 1,589,911
133,602
21,194
─
─
154,796
5.46%
42.65%
─
─
─
263,801
211,473
─
475,274
1,004,099
60,094
100
144,815
1,209,108
1,459,095
112,947
53,895
─
1,625,937
2,463,194
173,041
53,995
144,815
2,835,045
42.65%
42.65%
57.35%
100.00%
100.00%
100.00%
557,413
551,335
169,023
389,250
351,770
46,394
2,065,185
─
─
─
175,277
74,301
─
249,578
557,413
551,335
169,023
564,527
426,071
46,394
2,314,763
68.69%
20.53%
89.22%
10.78%
100.00%
68.69%
89.22%
89.22%
100.00%
100.00%
$ (535,599)
(535,599)
(320,478)
(856,077)
(856,077)
(856,077)
1,376,359
520,282
520,282
520,282
(18.89%)
(30.20%)
(30.20%)
18.35%
18.35%
66.31%
58.55%
58.55%
122.48%
122.48%
(1) The three months or less category for loans includes $579,657 in adjustable rate loans that have reached their contractual rate floors.
Thus, the interest rates on these loans will not decrease any further. For the majority of these loans, it will take an increase in prime rate
of at least 100 basis points before the loans will reprice higher.
(2) Securities available for sale include government-sponsored enterprise securities, mortgage-backed securities, corporate bonds, and
equity securities. Mortgage-backed principal is assumed to reprice equally over the average life of the underlying security. All other
securities are assumed to reprice based on maturity date or call date.
86
Table 18 Contractual Obligations and Other Commercial Commitments
Contractual
Obligations
As of December 31, 2013
Borrowings
Operating leases
Total contractual cash obligations,
excluding deposits
Deposits
Total contractual cash obligations,
Payments Due by Period ($ in thousands)
On Demand or
Less
than 1 Year
─
958
Total
$ 46,394
4,406
1-3 Years
─
1,349
4-5 Years
─
939
After 5
Years
46,394
1,160
50,800
958
1,349
939
47,554
2,751,019
2,500,440
197,638
50,550
2,391
including deposits
$ 2,801,819
2,501,398
198,987
51,489
49,945
Amount of Commitment Expiration Per Period ($ in thousands)
Other Commercial
Commitments
As of December 31, 2013
Credit cards
Lines of credit and loan commitments
Standby letters of credit
Total commercial commitments
Total
Amounts
Committed
$ 33,203
379,118
14,498
$ 426,819
Less
than 1 Year
16,601
180,635
14,001
211,237
1-3 Years
4-5 Years
16,602
16,361
495
33,458
─
24,219
2
24,221
After 5
Years
─
157,903
─
157,903
87
Table 19 Market Risk Sensitive Instruments
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2013 Occurring in Indicated Year
($ in thousands)
2014
2015
2016
2017
2018
Beyond
Total
Average
Interest
Rate
Estimated
Fair
Value
Due from banks,
interest-bearing
Federal fund sold
Presold mortgages in
process of settlement
Debt Securities - at
amortized cost (1) (2)
Loans – fixed (3) (4)
Loans – adjustable (3) (4)
Total
Interest-bearing checking
accounts
Money market accounts
Savings accounts
Time deposits
Borrowings – adjustable
Total
$ 136,644
2,749
5,422
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
136,644
2,749
0.25%
0.25%
$ 136,644
2,749
5,422
4.17%
5,422
33,205
186,915
199,141
34,980
32,315
96,192 136,501 195,700 306,563
64,981
80,544
$ 564,076 211,716 260,182 305,121 403,859
69,241
40,180
89,824
33,857
50,535
623,892
334,545
1,008,972
225,072
1,545,763
838,276
2,753,926
2.89%
5.08%
4.83%
4.58%
225,730
1,523,404
798,780
$2,692,729
$ 557,413
551,335
169,023
740,020 118,124
−
−
−
−
–
$ 2,017,791 118,124
−
−
−
79,513
–
79,513
−
−
−
32,302
–
32,302
−
−
−
18,248
–
18,248
−
−
−
2,391
46,394
48,785
557,413
551,335
169,023
990,598
46,394
2,314,763
0.06%
0.11%
0.05%
0.67%
2.22%
0.37%
$ 557,413
551,335
169,023
991,954
34,795
$2,304,520
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 39% tax rate.
(2) Securities with call dates within 12 months of December 31, 2013 that have above market interest rates are assumed to mature at
their call date for purposes of this table. Mortgage securities are assumed to mature in the period of their expected repayment
based on estimated prepayment speeds.
(3) Excludes nonaccrual loans.
(4) Loans are shown in the period of their contractual maturity.
Table 20 Return on Assets and Common Equity
Return on average assets
Return on average common equity
Dividend payout ratio – common shares
Average shareholders’ equity to average assets
*n/m = not meaningful
2013
For the Year Ended December 31,
2012
2011
0.62%
6.78%
31.68%
11.31%
(0.79%)
(9.29%)
n/m*
10.45%
0.23%
2.59%
72.73%
10.67%
88
Table 21 Risk-Based and Leverage Capital Ratios
($ in thousands)
Risk-Based and Leverage Capital
Tier I capital:
Shareholders’ equity
Trust preferred securities eligible for Tier I
capital treatment
Intangible assets
Accumulated other
comprehensive income adjustments
Total Tier I leverage capital
Tier II capital:
Allowable allowance for loan losses
Tier II capital additions
Total risk-based capital
2013
As of December 31,
2012
2011
$ 371,922
356,117
345,150
45,000
(68,669)
(1,900)
346,353
45,000
(68,943)
176
332,350
45,000
(69,732)
8,682
329,100
28,127
28,127
$ 374,480
27,204
27,204
359,554
26,790
26,790
355,890
Total risk weighted assets
$ 2,229,776
2,157,146
2,128,565
Adjusted fourth quarter average assets
3,099,007
3,245,490
3,222,762
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets
Minimum required Tier I capital
Total risk-based capital to
Tier II risk-adjusted assets
Minimum required total risk-based capital
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets
Minimum required Tier I leverage capital
15.53%
4.00%
16.79%
8.00%
11.18%
4.00%
15.41%
4.00%
16.67%
8.00%
10.24%
4.00%
15.46%
4.00%
16.72%
8.00%
10.21%
4.00%
89
Table 22 Quarterly Financial Summary (Unaudited)
2013
2012
($ in thousands except
per share data)
Income Statement Data
Interest income, taxable equivalent
Interest expense
Net interest income, taxable
equivalent
Taxable equivalent, adjustment
Net interest income
Provision for loan losses
Net interest income (loss) after
provision for losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Preferred stock dividends and
accretion
Net income (loss) available to
common shareholders
Per Common Share Data
Earnings (loss) per common share –
basic
Earnings (loss) per common share –
diluted
Cash dividends declared
Market Price
High
Low
Close
Stated book value - common
Tangible book value - common
Selected Average Balances
Assets
Loans
Earning assets
Deposits
Interest-bearing liabilities
Shareholders’ equity
Ratios (annualized where applicable)
Return on average assets
Return on average common equity
Equity to assets at end of period
Tangible equity to tangible assets at
end of period
Tangible common equity to tangible
assets at end of period
Average loans to average deposits
Average earning assets to interest-
bearing liabilities
Net interest margin
Allowance for loan losses to gross loans
Nonperforming loans as a percent of
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$ 37,976
2,314
35,662
386
35,276
8,896
26,380
6,286
23,935
8,731
3,053
5,678
36,708
2,601
34,107
380
33,727
4,980
28,747
5,608
23,704
10,651
4,318
6,333
38,877
2,902
35,975
373
35,602
5,591
30,011
4,487
25,756
8,742
3,154
5,588
35,461
3,168
39,822
3,760
32,293
372
31,921
11,149
20,772
7,108
23,224
4,656
1,556
3,100
36,062
377
35,685
44,577
(8,892)
(8,533)
25,795
(43,220)
(17,283)
(25,937)
39,065
4,216
34,849
376
34,473
7,073
27,400
2,803
23,657
6,546
2,123
4,423
37,841
4,503
33,338
387
32,951
6,467
26,484
1,770
23,448
4,806
1,516
3,290
37,319
4,841
32,478
387
32,091
21,555
10,536
5,349
24,375
(8,490)
(3,308)
(5,182)
(217)
(216)
(217)
(245)
(532)
(688)
(829)
(760)
5,461
6,117
5,371
2,855
(26,469)
3,735
2,461
(5,942)
$ 0.28
0.27
0.08
17.39
13.55
16.62
15.30
11.81
0.31
0.30
0.08
16.45
12.33
14.45
14.84
11.33
0.27
0.27
0.08
15.57
11.98
14.10
14.70
11.19
0.15
(1.53)
0.14
0.08
13.99
12.25
13.49
14.56
11.04
(1.53)
0.08
13.40
9.52
12.82
14.51
11.00
0.22
0.22
0.08
11.75
7.68
11.53
16.42
12.35
0.15
0.15
0.08
11.49
8.48
8.89
16.29
12.21
(0.35)
(0.35)
0.08
11.84
9.44
10.93
16.23
12.13
$3,167,640
2,453,186
2,807,461
2,732,721
2,308,387
367,081
3,192,954
2,433,632
2,795,071
2,761,915
2,351,409
363,413
3,244,775
2,409,037
2,827,171
2,818,247
2,423,297
361,224
3,228,463
2,382,861
2,790,745
2,803,245
2,439,895
359,362
3,314,433
2,446,096
2,864,243
2,823,856
2,520,361
349,371
3,314,887
2,432,528
2,855,083
2,822,388
2,550,689
344,007
3,313,764
2,438,471
2,863,866
2,811,673
2,572,379
342,352
3,302,072
2,430,893
2,846,972
2,779,511
2,569,271
348,194
0.68%
7.31%
11.68%
0.76%
8.29%
11.43%
0.66%
7.42%
11.09%
0.36%
4.01%
10.89%
(3.18%)
(36.95%)
10.97%
0.45%
5.30%
10.32%
0.30%
3.55%
10.22%
(0.72%)
(8.39%)
10.14%
9.73%
9.47%
9.16%
8.96%
9.04%
8.41%
8.31%
8.23%
7.46%
89.77%
7.19%
88.11%
6.93%
85.48%
6.76%
85.00%
6.81%
86.62%
6.46%
86.19%
6.36%
86.73%
6.29%
87.46%
121.62%
5.04%
1.97%
118.87%
4.84%
1.95%
116.67%
5.10%
2.09%
114.38%
4.69%
2.08%
113.64%
5.01%
1.95%
111.93%
4.86%
2.03%
111.33%
4.68%
2.19%
110.81%
4.59%
2.17%
total loans
5.00%
Nonperforming loans as a percent of
3.09%
total loans – non-covered
4.70%
3.09%
4.97%
5.22%
4.50%
6.70%
6.27%
5.57%
2.91%
2.97%
2.76%
5.05%
4.47%
3.83%
Nonperforming assets as a percent of
total assets
Nonperforming assets as a percent of
total assets – non-covered
Net charge-offs as a percent of average
total loans
Net charge-offs as a percent of average
total loans – non-covered
4.79%
5.25%
5.18%
5.35%
6.24%
7.82%
7.86%
7.56%
2.78%
2.86%
2.66%
2.79%
3.64%
4.93%
4.51%
4.02%
1.31%
1.33%
0.75%
1.32%
7.76%
1.80%
0.96%
1.68%
0.74%
0.87%
0.74%
0.51%
8.09%
1.57%
0.79%
1.49%
90
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2013 and 2012
($ in thousands)
Assets
Cash and due from banks, noninterest-bearing
Due from banks, interest-bearing
Federal funds sold
Total cash and cash equivalents
Securities available for sale
Securities held to maturity (fair values of $56,700 in 2013 and $61,496 in 2012)
Presold mortgages in process of settlement
Loans – non-covered
Loans – covered by FDIC loss share agreement
Total loans
Allowance for loan losses – non-covered
Allowance for loan losses – covered
Total allowance for loan losses
Net loans
Loans held for sale
Premises and equipment
Accrued interest receivable
FDIC indemnification asset
Goodwill
Other intangible assets
Foreclosed real estate – non-covered
Foreclosed real estate – covered
Bank-owned life insurance
Other assets
Total assets
Liabilities
Deposits: Noninterest-bearing checking accounts
Interest-bearing checking accounts
Money market accounts
Savings accounts
Time deposits of $100,000 or more
Other time deposits
Total deposits
Borrowings
Accrued interest payable
Other liabilities
Total liabilities
Commitments and contingencies (see Note 13)
Shareholders’ Equity
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Series B issued & outstanding: 63,500 in 2013 and 2012
Series C, convertible, issued & outstanding: 728,706 in 2013 and 2012
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 19,679,659 shares in 2013 and 19,669,302 shares in 2012
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
91
2013
2012
$ 83,881
136,644
2,749
223,274
96,588
144,919
―
241,507
173,041
53,995
5,422
2,252,885
210,309
2,463,194
(44,263)
(4,242)
(48,505)
2,414,689
―
77,448
9,649
48,622
65,835
2,834
12,251
24,497
44,040
29,473
$ 3,185,070
$ 482,650
557,413
551,335
169,023
564,527
426,071
2,751,019
46,394
879
14,856
2,813,148
167,352
56,064
8,490
2,094,143
282,314
2,376,457
(41,643)
(4,759)
(46,402)
2,330,055
30,393
74,371
10,201
102,559
65,835
3,108
26,285
47,290
27,857
53,543
3,244,910
413,195
519,573
556,354
158,578
664,330
509,330
2,821,360
46,394
1,299
19,740
2,888,793
63,500
7,287
63,500
7,287
132,099
167,136
1,900
371,922
$ 3,185,070
131,877
153,629
(176)
356,117
3,244,910
First Bancorp and Subsidiaries
Consolidated Statements of Income (Loss)
Years Ended December 31, 2013, 2012 and 2011
($ in thousands, except per share data)
Interest Income
Interest and fees on loans
Interest on investment securities:
Taxable interest income
Tax-exempt interest income
Other, principally overnight investments
Total interest income
Interest Expense
Savings, checking and money market accounts
Time deposits of $100,000 or more
Other time deposits
Securities sold under agreements to repurchase
Borrowings
Total interest expense
Net interest income
Provision for loan losses – non-covered
Provision for loan losses – covered
Total provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Service charges on deposit accounts
Other service charges, commissions and fees
Fees from presold mortgage loans
Commissions from sales of insurance and financial products
Bank-owned life insurance income
Gain from acquisition
Foreclosed property gains (losses) – non-covered
Foreclosed property gains (losses) – covered
FDIC indemnification asset income (expense), net
Securities gains
Other gains (losses)
Total noninterest income
Noninterest Expenses
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Intangibles amortization
Acquisition expenses
Other operating expenses
Total noninterest expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Accretion of preferred stock discount
Net income (loss) available to common shareholders
Earnings (loss) per common share: Basic
Earnings (loss) per common share: Diluted
Dividends declared per common share
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
92
2013
2012
2011
$ 141,616
145,554
147,652
3,410
1,899
586
147,511
1,493
5,825
2,642
─
1,025
10,985
136,526
18,266
12,350
30,616
105,910
12,752
9,318
2,907
2,132
1,120
─
1,333
367
(6,824)
532
(148)
23,489
45,120
9,644
54,764
7,123
4,364
860
─
29,508
96,619
32,780
12,081
4,352
1,958
656
152,520
2,836
8,132
4,486
4
1,862
17,320
135,200
69,993
9,679
79,672
55,528
11,865
8,831
2,378
1,832
591
─
(15,325)
(13,035)
4,077
638
(463)
1,389
41,336
12,007
53,343
6,954
4,800
897
─
31,281
97,275
(40,358)
(16,952)
5,680
2,000
436
155,768
4,212
10,103
7,036
184
2,030
23,565
132,203
28,525
12,776
41,301
90,902
11,981
8,067
1,609
1,512
45
10,196
(3,355)
(24,492)
20,481
74
98
26,216
39,822
11,616
51,438
6,574
4,326
902
636
32,230
96,106
21,012
7,370
20,699
(23,406)
13,642
(895)
−
(2,809)
−
$ 19,804
(26,215)
$ 1.01
0.98
(1.54)
(1.54)
$ 0.32
0.32
(3,234)
(2,932)
7,476
0.44
0.44
0.32
19,675,597
20,404,303
17,049,513
17,049,513
16,856,072
16,883,244
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2013, 2012 and 2011
($ in thousands)
2013
2012
2011
Net income (loss)
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, pretax
Tax (expense) benefit
Reclassification to realized gains
Tax expense
Postretirement plans:
Net gain (loss) arising during period
Tax (expense) benefit
Amortization of unrecognized net actuarial (gain) loss
Tax expense (benefit)
Amortization of prior service cost and transition obligation
Tax expense
Other comprehensive income (loss)
$ 20,699
(23,406)
13,642
(4,779)
1,865
(532)
207
8,765
(3,419)
(51)
20
─
─
2,076
32
(12)
(638)
249
13,975
(5,542)
545
(212)
179
(70)
8,506
1,492
(583)
(74)
29
(7,798)
3,080
393
(155)
32
(13)
(3,597)
Comprehensive income (loss)
$ 22,775
(14,900)
10,045
See accompanying notes to consolidated financial statements.
93
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2013, 2012 and 2011
(In thousands)
Preferred
Stock
Preferred
Stock
Discount
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Share-
holders’
Equity
Balances, January 1, 2011
$ 65,000
(2,932)
16,801 $ 104,207
183,413
(5,085)
344,603
(65,000)
63,500
Net income
Preferred stock redeemed (Series A)
Preferred stock issued (Series B)
Common stock issued under
stock option plans
Common stock issued into
dividend reinvestment plan
Repurchases of common stock
Repurchase of outstanding common
stock warrants
Cash dividends declared ($0.32 per
share)
Preferred dividends
Accretion of preferred stock
discount
Stock-based compensation
Other comprehensive (loss)
13,642
(5,398)
(3,234)
(2,932)
2
71
(20)
30
851
(228)
(924)
2,932
56
905
(3,597)
13,642
(65,000)
63,500
30
851
(228)
(924)
(5,398)
(3,234)
––
905
(3,597)
Balances, December 31, 2011
63,500
−
16,910
104,841
185,491
(8,682)
345,150
7,287
Net income (loss)
Preferred stock issued (Series C)
Common stock issued
Common stock issued into
dividend reinvestment plan
Repurchases of common stock
Cash dividends declared ($0.32 per
share)
Preferred dividends
Stock-based compensation
Other comprehensive income
(23,406)
(5,647)
(2,809)
2,656
26,392
31
−
335
(2)
72
311
(23,406)
7,287
26,392
335
(2)
(5,647)
(2,809)
311
8,506
8,506
Balances, December 31, 2012
70,787
−
19,669
131,877
153,629
(176)
356,117
Net income
Cash dividends declared ($0.32 per
share)
Preferred dividends
Stock-based compensation
Other comprehensive income
20,699
(6,297)
(895)
11
222
Balances, December 31, 2013
$ 70,787
−
19,680 $ 132,099
167,136
See accompanying notes to consolidated financial statements.
20,699
(6,297)
(895)
222
2,076
371,922
2,076
1,900
94
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2013, 2012 and 2011
($ in thousands)
Cash Flows From Operating Activities
Net income (loss)
Reconciliation of net income (loss) to net cash provided by operating activities:
Provision for loan losses
Net security premium amortization
Purchase accounting accretion and amortization, net
Gain from acquisition
Foreclosed property (gains) losses and write-downs, net
Gain on securities available for sale
Other losses (gains)
Decrease (increase) in net deferred loan costs
Depreciation of premises and equipment
Stock-based compensation expense
Amortization of intangible assets
Originations of presold mortgages in process of settlement
Proceeds from sales of presold mortgages in process of settlement
Decrease in accrued interest receivable
Decrease (increase) in other assets
Decrease in accrued interest payable
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities
Purchases of securities available for sale
Purchases of securities held to maturity
Proceeds from sales of securities available for sale
Proceeds from maturities/issuer calls of securities available for sale
Proceeds from maturities/issuer calls of securities held to maturity
Purchase of bank-owned life insurance
Net (increase) decrease in loans
Proceeds from FDIC loss share agreements
Proceeds from sales of foreclosed real estate
Purchases of premises and equipment
Proceeds from loans held for sale
Net cash received in acquisition
Net cash provided by investing activities
Cash Flows From Financing Activities
Net increase (decrease) in deposits and repurchase agreements
Repayments of borrowings, net
Cash dividends paid – common stock
Cash dividends paid – preferred stock
Proceeds from issuance of preferred stock
Proceeds from issuance of common stock
Redemption of preferred stock
Repurchase of common stock
Repurchase of common stock warrants
Net cash used by financing activities
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
2013
2012
2011
$ 20,699
(23,406)
13,642
30,616
2,667
(19,843)
—
(1,700)
(532)
148
396
4,623
222
860
(103,877)
106,787
552
26,564
(447)
4,145
71,880
(65,733)
—
12,908
39,921
1,837
(15,000)
(101,444)
49,572
60,564
(6,293)
30,393
38,315
45,040
(127,646)
—
(6,297)
(1,210)
—
—
—
—
—
(135,153)
(18,233)
241,507
79,672
1,917
(16,117)
—
28,360
(638)
463
(44)
4,557
311
897
(96,750)
94,350
1,578
(29,952)
(577)
(2,940)
41,681
(92,058)
—
9,641
96,040
1,690
(25,000)
(89,718)
29,796
74,972
(8,953)
—
9,312
5,722
39,888
(87,500)
(5,426)
(3,037)
7,287
26,727
—
(2)
—
(22,063)
25,340
216,167
41,301
1,373
(11,628)
(10,196)
27,847
(74)
(143)
(307)
4,388
905
902
(76,095)
73,967
1,800
(30,096)
(210)
(330)
37,046
(75,689)
(4,332)
2,518
75,615
1,053
—
11,912
69,339
43,414
(6,606)
—
54,037
171,261
(127,253)
(66,881)
(5,390)
(2,847)
63,500
881
(65,000)
(228)
(924)
(204,142)
4,165
212,002
Cash and Cash Equivalents, End of Year
$ 223,274
241,507
216,167
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest
Cash paid during the period for income taxes
Non-cash investing and financing transactions:
Foreclosed loans transferred to foreclosed real estate
Loans transferred to loans held-for-sale (at liquidation value)
Unrealized gain (loss) on securities available for sale, net of taxes
See accompanying notes to consolidated financial statements.
95
$ 11,405
1,082
17,893
14,292
23,775
14,893
22,037
—
(3,240)
53,521
30,393
(369)
76,242
—
864
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 1. Summary of Significant Accounting Policies
(a) 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 two wholly owned subsidiaries
that are fully consolidated - First Bank Insurance Services, Inc. (First Bank Insurance) and First Troy SPE, LLC. All
significant intercompany accounts and transactions have been eliminated. Subsequent events have been
evaluated through the date of filing this Form 10-K.
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. The Company is also
the parent company for a series of statutory trusts that were formed at various times since 2002 for the purpose
of issuing trust preferred debt securities. The trusts are not consolidated for financial reporting purposes;
however, notes issued by the Company to the trusts in return for the proceeds from the issuance of the trust
preferred securities are included in the consolidated financial statements and have terms that are substantially
the same as the corresponding trust preferred securities. The trust preferred securities qualify as capital for
regulatory capital adequacy requirements. First Bank Insurance is an agent for property and casualty insurance
policies. First Troy SPE, LLC was formed in order to hold and dispose of certain real estate foreclosed upon by
the Bank.
The preparation of financial statements in conformity with generally accepted accounting principles in the
United States of America 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 loan losses, the valuation of other
real estate, the accounting and impairment testing related to intangible assets, and the fair value and discount
accretion of loans acquired in FDIC-assisted transactions.
(b) Cash and Cash Equivalents − The Company considers all highly liquid assets such as cash on hand,
noninterest-bearing and interest-bearing amounts due from banks and federal funds sold to be “cash
equivalents.”
(c) Securities − Debt securities that the Company has the positive intent and ability to hold to maturity are
classified as “held to maturity” and carried at amortized cost. Securities not classified as held to maturity are
classified as “available for sale” and carried at fair value, with unrealized gains and losses being reported as
other comprehensive income or loss and reported as a separate component of shareholders’ equity.
A decline in the market value of any available for sale or held to maturity security below cost that is deemed to
be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Any equity security that is in an unrealized loss
position for twelve consecutive months is presumed to be other than temporarily impaired and an impairment
charge is recorded unless the amount of the charge is insignificant.
Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification
method. Premiums and discounts are amortized into income on a level yield basis, with premiums being
96
amortized to the earliest call date and discounts being accreted to the stated maturity date.
(d) 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, which range from 2 to 40 years or, in the case of leasehold improvements, over the term of the
lease, if shorter. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on
dispositions are included in current operations.
(e) Loans – Loans are stated at the principal amount outstanding less any partial charge-offs plus deferred
origination costs, net of nonrefundable loan fees. Interest on loans is accrued on the unpaid principal balance
outstanding. Net deferred loan origination costs/fees are capitalized and recognized as a yield adjustment over
the life of the related loan.
The Company does not hold any interest-only strips, loans, other receivables, or retained interests in
securitizations that can be contractually prepaid or otherwise settled in a way that it would not recover
substantially all of its recorded investment.
Purchased loans acquired in a business combination, which include loans that were purchased in the 2009
Cooperative Bank acquisition and the 2011 Bank of Asheville acquisition, are recorded at estimated fair value on
their purchase date. The purchaser cannot carry over any related allowance for loan losses.
The Company follows specific accounting guidance related to purchased impaired loans when purchased loans
have evidence of credit deterioration since origination and it is probable at the date of acquisition that the
Company will not collect all contractually required principal and interest payments. Evidence of credit quality
deterioration as of the purchase date may include statistics such as past due and nonaccrual status. The
accounting guidance permits the use of the cost recovery method of income recognition for those purchased
impaired loans for which the timing and amount of cash flows expected to be collected cannot be reasonably
estimated. Under the cost recovery method of income recognition, all cash receipts are initially applied to
principal, with interest income being recorded only after the carrying value of the loan has been reduced to
zero. Substantially all of the Company’s purchased impaired loans to date have had uncertain cash flows and
thus are accounted for under the cost recovery method of income recognition.
For nonimpaired purchased loans, the Company accretes any fair value discount over the life of the loan in a
manner consistent with the guidance for accounting for loan origination fees and costs.
A loan is placed on nonaccrual status when, in management’s judgment, the collection of interest appears
doubtful. The accrual of interest is discontinued on all loans that become 90 days or more past due with respect
to principal or interest. The past due status of loans is based on the contractual payment terms. While a loan is
on nonaccrual status, the Company’s policy is that all cash receipts are applied to principal. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts
previously charged off. Further cash receipts are recorded as interest income to the extent that any interest has
been foregone. Loans are removed from nonaccrual status when they become current as to both principal and
interest, when concern no longer exists as to the collectability of principal or interest, and generally six months
of satisfactory payment performance. In some cases, where borrowers are experiencing financial difficulties,
loans may be restructured to provide terms significantly different from the originally contracted terms. The
nonaccrual policy discussed above applies to all loan classifications.
A loan is considered to be impaired when, based on current information and events, it is probable the Company
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired
loans are measured using either 1) an estimate of the cash flows that the Company expects to receive from the
borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value
97
of the collateral. Unless restructured, while a loan is considered to be impaired, the Company’s policy is that
interest accrual is discontinued and all cash receipts are applied to principal. Once the recorded principal
balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts previously
charged off. Further cash receipts are recorded as interest income to the extent that any interest has been
foregone. Impaired loans that are restructured are returned to accruing status in accordance with the
restructured terms if the Company believes that the borrower will be able to meet the obligations of the
restructured loan terms, and the loan has provided generally six months of satisfactory payment performance.
The impairment policy discussed above applies to all loan classifications.
(f) Presold Mortgages in Process of Settlement and Loans Held for Sale − 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. The gain
generally represents the portion of the proceeds attributed to service release premiums received from the
investors and the realization of origination fees received from borrowers that were deferred as part of the
carrying amount of the loan. 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 the lower of cost or
market.
Periodically, the Company originates commercial loans and decides to sell them in the secondary market. The
Company carries these loans at the lower of cost or fair value at each reporting date. There were no such loans
held for sale as of December 31, 2013 or 2012.
As of December 31, 2012, the Company held $30.4 million in loans classified as held for sale because the
Company had solicited and received bids to sell approximately $68 million of loans to an unaffiliated third-party
investor, and it was the Company’s intent to accept one of the offers received. As of December 31, 2012, these
loans were reclassified out of the loans held for investment category and segregated on the balance sheet as
held for sale. These loans are carried at their liquidation value based on the bid received that the Company
accepted, with the remaining difference of approximately $37.6 million being charged-off through the allowance
for loan losses. The completion of the loan sale occurred in January 2013 with the proceeds received being
substantially the same as the amount held for sale at December 31, 2012.
(g) Allowance for Loan Losses − The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged-off against the allowance for loan losses when management believes
that the collectability of the principal is unlikely. The provision for loan losses charged to operations is an
amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb
losses inherent in the portfolio. Management’s determination of the adequacy of the allowance is based on
several factors, including:
1. Risk grades assigned to the loans in the portfolio,
2. Specific reserves for larger loans with concerns regarding repayment ability,
3. Current economic conditions, including the local, state, and national economic outlook; interest rate
risk; trends in loan volume, mix and size of loans; levels and trends of delinquencies,
4. Historical loan loss experience, and
5. An assessment of the risk characteristics of the Company’s loan portfolio, including industry
concentrations, payment structures, and credit administration practices.
While management uses the best information available to make evaluations, future adjustments may be
98
necessary if economic and other conditions differ substantially from the assumptions used.
For loans covered under loss share agreements, subsequent decreases to the expected cash flows will generally
result in additional provisions for loan losses. Subsequent increases in expected cash flows will result in a
reversal of the allowance for loan losses to the extent of prior allowance recognition.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the
Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance
based on the examiners’ judgment about information available to them at the time of their examinations.
(h) Foreclosed Real Estate − Foreclosed real estate 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
(generally the loan balance plus additional costs incurred for improvements to the property) or the estimated
fair value of the property less estimated selling costs (also see Note 14). 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 taxes, insurance and maintenance, less related revenues during the holding period, are
recorded as expense. In December 2012, the Company recorded a write-down of $10.6 million related to its
non-covered foreclosed properties. This write-down reduced the carrying value of these properties by
approximately 29% beyond their standard carrying value as described above. This write down was recorded
because of management’s intent to dispose of these properties in an expedited manner and accept sales prices
lower than normal practice.
(i) FDIC Indemnification Asset – The FDIC indemnification asset relates to loss share agreements with the FDIC,
whereby the FDIC has agreed to reimburse to the Company a percentage of the losses related to loans and other
real estate that the Company assumed in the acquisition of two failed banks. This indemnification asset is
measured separately from the loan portfolio and other real estate because it is not contractually embedded in
the loans and is not transferable with the loans should the Company choose to dispose of them. The carrying
value of this receivable at each period end is the sum of: 1) actual claims that have been submitted to the FDIC
for reimbursement that have not yet been received and 2) the Company’s estimated amount of loan and other
real estate losses covered by the agreements multiplied by the FDIC reimbursement percentage. At December
31, 2013 and 2012, the amount of loss claims that had been incurred but not yet reimbursed by the FDIC was
$12.6 million and $33.0 million, respectively.
(j) 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. The Company’s investment tax
credits, which are low income housing tax credits and state historic tax credits, are recorded in the period that
they are reflected in the Company’s tax returns.
(k) Intangible Assets − Business combinations are accounted for using the purchase method of accounting.
Identifiable intangible assets are recognized separately and are amortized over their estimated useful lives,
which for the Company has generally been seven 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 as discussed in Note 1(q), is subject
to fair value impairment tests on at least an annual basis.
99
(l) 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.”
(m) Other Investments – The Company accounts for investments in limited partnerships, limited liability
companies (“LLCs”), and other privately held companies using either the cost or the equity method of
accounting. The accounting treatment depends upon the Company’s percentage ownership and degree of
management influence.
Under the cost method of accounting, the Company records an investment in stock at cost and generally
recognizes cash dividends received as income. If cash dividends received exceed the Company’s relative
ownership of the investee’s earnings since the investment date, these payments are considered a return of
investment and reduce the cost of the investment.
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, LLCs, and other companies are privately held, 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, 2013 and 2012, the Company’s investments in limited partnerships, LLCs and other privately
held companies totaled $2.3 million and $2.4 million, respectively, and were included in other assets.
(n) Stock Option Plan − At December 31, 2013, the Company had three equity-based employee compensation
plans, which are described more fully in Note 15. The Company accounts for these plans under the recognition
and measurement principles of relevant accounting guidance.
(o) Per Share Amounts − Basic Earnings Per Common Share is calculated by dividing net income (loss) available
to common shareholders by the weighted average number of common shares outstanding during the period.
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. Currently, the Company’s potentially dilutive
common stock issuances relate to stock option grants under the Company’s equity-based plans and the
Company’s Series C Preferred stock, which is convertible into common stock on a one-for-one ratio.
In computing Diluted Earnings Per Common Share, adjustments are made to the computation of Basic Earnings
Per Common shares, as follows. As it relates to stock options, it is assumed that all dilutive stock options are
exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises
used by the Company to buy back stock in the open market at the average market price in effect during the
reporting period. The difference between the number of shares assumed to be exercised and the number of
shares bought back is included in the calculation of dilutive securities. As it relates to the Series C Preferred
Stock, it is assumed that the preferred stock was converted to common stock during the reporting period.
100
Dividends on the preferred stock are added back to net income and the shares assumed to be converted are
included in the number of shares outstanding.
If any of the potentially dilutive common stock issuances have an anti-dilutive effect, which is the case when a
net loss is reported, the potentially dilutive common stock issuance is disregarded.
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted
Earnings Per Common Share:
($ in thousands,
except per share
amounts)
Income
(Numer-
ator)
2013
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2012
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer
-ator)
2011
Shares
(Denom-
inator)
Per
Share
Amount
For the Years Ended December 31,
Basic EPS
Net income (loss)
available to common
shareholders
Effect of dilutive
securities
Diluted EPS per
common share
$ 19,804
19,675,597
$ 1.01
$ (26,215)
17,049,513
$ (1.54)
$ 7,476
16,856,072
$ 0.44
233
728,706
−
−
−
27,172
$ 20,037
20,404,303
$ 0.98
$ (26,215)
17,049,513
$ (1.54)
$ 7,476
16,883,244
$ 0.44
For the year ended December 31, 2013, there were 388,813 options that were anti-dilutive because the exercise
price exceeded the average market price for the year, and thus are not included in the calculation to determine
the effect of dilutive securities. Also, for the year ended December 31, 2013, the Company excluded 75,000
options that had an exercise price below the average market price for the year, but had performance vesting
requirements that the Company has concluded are not probable to vest. For the year ended December 31,
2012, all potentially dilutive common stock issuances were disregarded for the purpose of calculating diluted
earnings per common share because the Company recorded a net loss and their impact would have been anti-
dilutive. For the year ended December 31, 2011, there were 396,669 options that were anti-dilutive because
the exercise price exceeded the average market price for the year, and thus are not included in the calculation
to determine the effect of dilutive securities.
In addition, the warrant for 616,308 shares issued to the Treasury in 2009 and repurchased by the Company in
2011 was anti-dilutive during 2011 – see Note 19 for additional information.
(p) Fair Value of Financial Instruments − Relevant accounting guidance requires that the Company disclose
estimated fair values for its financial instruments. Fair value methods and assumptions are set forth below for
the Company’s financial instruments.
Cash and Amounts Due from Banks, Federal Funds Sold, Presold Mortgages in Process of Settlement, Accrued
Interest Receivable, and Accrued Interest Payable − The carrying amounts approximate their fair value because
of the short maturity of these financial instruments.
Available for Sale and Held to Maturity Securities − Fair values are provided by a third-party and are based on
quoted market prices, where available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments or matrix pricing.
Loans − For nonimpaired loans, fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, financial and agricultural, real estate
construction, real estate mortgages and installment loans to individuals. Each loan category is further
101
segmented into fixed and variable interest rate terms. The fair value for each category is determined by
discounting scheduled future cash flows using current interest rates offered on loans with similar risk
characteristics. Fair values for impaired loans are primarily based on estimated proceeds expected upon
liquidation of the collateral.
Loans held for sale – The carrying value of loans held for sale approximates fair value at December 31, 2012 as
these loans were discounted to liquidation value in connection with an offer to purchase received prior to
December 31, 2012.
FDIC Indemnification Asset – Fair value is equal to the FDIC reimbursement rate of the expected losses to be
incurred and reimbursed by the FDIC and then discounted over the estimated period of receipt.
Bank-Owned Life Insurance – The carrying value of life insurance approximates fair value because this
investment is carried at cash surrender value, as determined by the issuer.
Deposits − The fair value of deposits with no stated maturity, such as noninterest-bearing checking accounts,
savings accounts, interest-bearing checking accounts, and money market accounts, is equal to the amount
payable on demand as of the valuation date. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates currently offered in the
marketplace for deposits of similar remaining maturities .
Borrowings − The fair value of borrowings is based on a review of the fair value of similar debt that is traded in
the open markets.
Commitments to Extend Credit and Standby Letters of Credit − At December 31, 2013 and 2012, the Company’s
off-balance sheet financial instruments had no carrying value. The large majority of commitments to extend
credit and standby letters of credit are at variable rates and/or have relatively short terms to maturity.
Therefore, the fair value for these financial instruments is considered to be immaterial.
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 assets and other assets such as foreclosed properties, 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.
(q) Impairment − Goodwill is evaluated for impairment on at least an annual basis by comparing the fair value of
the reporting units to their related carrying value. If the carrying value of a reporting unit exceeds its fair value,
the Company determines whether the implied fair value of the goodwill, using various valuation techniques,
exceeds the carrying value of the goodwill. 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.
102
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.
(r) Comprehensive Income (Loss) − Comprehensive income (loss) is defined as the change in equity during a
period for non-owner transactions and is divided into net income (loss) and other comprehensive income (loss).
Other comprehensive income (loss) includes revenues, expenses, gains, and losses that are excluded from
earnings under current accounting standards. The components of accumulated other comprehensive income
(loss) for the Company are as follows:
($ in thousands)
Unrealized gain (loss) on securities available for sale
Deferred tax asset (liability)
Net unrealized gain (loss) on securities available for sale
December 31,
2013
$ (2,021)
789
(1,232)
December 31,
2012
3,290
(1,283)
2,007
December 31,
2011
3,896
(1,520)
2,376
Additional pension asset (liability)
Deferred tax asset (liability)
Net additional pension asset (liability)
5,135
(2,003)
3,132
(3,579)
1,396
(2,183)
(18,278)
7,220
(11,058)
Total accumulated other comprehensive income (loss)
$ 1,900
(176)
(8,682)
The following table discloses the changes in accumulated other comprehensive income (loss) for the year ended
December 31, 2013 (all amounts are net of tax).
($ in thousands)
Beginning balance at January 1, 2013
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Net current-period other comprehensive income (loss)
Unrealized Gain
(Loss) on
Securities
Available for Sale
$ 2,007
(3,239)
−
(3,239)
Additional
Pension Asset
(Liability)
(2,183)
−
5,315
5,315
Total
(176)
(3,239)
5,315
2,076
Ending balance at December 31, 2013
$ (1,232)
3,132
1,900
(s) Segment Reporting − Accounting standards require management to report selected financial and descriptive
information about reportable operating segments. 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 primarily
within the banking segment, and the financial statements presented herein reflect the results of that segment.
The Company has no foreign operations or customers.
(t) Reclassifications − Certain amounts for prior years have been reclassified to conform to the 2013
presentation. The reclassifications had no effect on net income or shareholders’ equity as previously presented,
nor did they materially impact trends in financial information.
(u) Recent Accounting Pronouncements − In June 2011, the Financial Accounting Standards Board (FASB)
103
amended the Comprehensive Income topic. The amendment eliminated the option to present other
comprehensive income as a part of the statement of changes in stockholders’ equity and required consecutive
presentation of the statement of net income and other comprehensive income. The amendments were
applicable to the Company commencing on January 1, 2012 and were consistent with the way the Company had
been presenting other comprehensive income. In December 2011, the topic was further amended to defer the
effective date of presenting reclassification adjustments from other comprehensive income to net income on
the face of the financial statements while the FASB redeliberated the presentation requirements for the
reclassification adjustments. In February 2013, the FASB further amended the Comprehensive Income topic
clarifying the conclusions from such redeliberations. Specifically, the amendments do not change the current
requirements for reporting net income or other comprehensive income in financial statements. However, the
amendments do require an entity to provide information about the amounts reclassified out of accumulated
other comprehensive income by component. In addition, in certain circumstances an entity is required to
present, either on the face of the statement where net income is presented or in the notes, significant amounts
reclassified out of accumulated other comprehensive income by the respective line items of net income. The
amendments were effective for the Company on a prospective basis for reporting periods beginning after
December 15, 2012. These amendments did not have a material effect on the Company’s financial statements.
In July 2012, the Intangibles Topic was further amended to permit an entity to consider qualitative factors to
determine whether it is more likely than not that indefinite-lived intangible assets are impaired. If it is
determined to be more likely than not that indefinite-lived intangible assets are impaired, then the entity is
required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative
impairment test by comparing the fair value with the carrying amount. The amendments were effective for
annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The
amendments did not have a material effect on the Company’s financial statements.
In October 2012, the Business Combinations topic was amended to address the subsequent accounting for an
indemnification asset resulting from a government-assisted acquisition of a financial institution. The guidance
indicates that when a reporting entity records an indemnification asset as a result of a government-assisted
acquisition of a financial institution involving an indemnification agreement, the indemnification asset should be
subsequently measured on the same basis as the asset subject to indemnification. Any amortization of changes
in value should be limited to any contractual limitations on the amount and the term of the indemnification
agreement. The amendments should be applied prospectively to any new indemnification assets acquired and
to changes in expected cash flows of existing indemnification assets occurring on or after the date of adoption.
Prior periods would not be adjusted. The amendments were effective for 2013 and did not have a material
effect on the Company’s financial statements.
In July 2013, the FASB issued guidance to eliminate the diversity in practice regarding presentation of
unrecognized tax benefits in the statement of financial position. Under the clarified guidance, an unrecognized
tax benefit, or a portion of an unrecognized tax benefit, will be presented in the financial statements as a
reduction to a deferred tax asset unless certain criteria are met. The requirements should be applied
prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is
permitted. The amendments will be effective for the Company for reporting periods beginning after December
15, 2013. The Company does not expect these amendments to have a material effect on its financial
statements.
In January 2014, the FASB amended the Investments—Equity Method and Joint Ventures topic to address
accounting for investments in qualified affordable housing projects. If certain conditions are met, the
amendments permit reporting entities to make an accounting policy election to account for their investments in
qualified affordable housing projects by amortizing the initial cost of the investment in proportion to the tax
credits and other tax benefits received and recognizing the net investment performance in the income
statement as a component of income tax expense (benefit). If those conditions are not met, the investment
104
should be accounted for as an equity method investment or a cost method investment in accordance with
existing accounting guidance. The amendments will be effective for the Company for interim and annual
reporting periods beginning after December 15, 2014 and should be applied retrospectively for all periods
presented. Early adoption is permitted. The Company does not expect these amendments to have a material
effect on its financial statements.
In January 2014, the FASB amended the Receivables – Troubled Debt Restructurings by Creditors subtopic to
address the reclassification of consumer mortgage loans collateralized by residential real estate upon
foreclosure. The amendments clarify the criteria for concluding that an in substance repossession or foreclosure
has occurred, and a creditor is considered to have received physical possession of residential real estate
property collateralizing a consumer mortgage loan. The amendments will be effective for the Company for
interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either
a modified retrospective transition method or a prospective transition method when adopting this update. Early
adoption is permitted. The Company does not expect these amendments to have a material effect on its
financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies
are not expected to have a material impact on the Company’s financial position, results of operations or cash
flows.
Note 2. Acquisitions
The Company completed the acquisitions described below in 2011, 2012, and 2013. The results of each
acquired company/branch are included in the Company’s results beginning on its respective acquisition date.
(1) On January 21, 2011, the Bank entered into a loss share purchase and assumption agreement with the
FDIC, as receiver for The Bank of Asheville, Asheville, North Carolina. Earlier that day, the North Carolina
Commissioner of Banks issued an order for the closure of The Bank of Asheville and appointed the FDIC as
receiver. According to the terms of the agreement, First Bank acquired substantially all of the assets and
liabilities of The Bank of Asheville. All deposits were assumed by First Bank with no losses to any depositor.
The Bank of Asheville operated through five branches in Asheville, North Carolina with total assets of
approximately $198 million and 50 employees.
Substantially all of the loans and foreclosed real estate purchased are covered by loss share agreements
between the FDIC and First Bank, which afford First Bank significant loss protection. Under the loss share
agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses. The term for loss sharing
on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is
five years in respect to losses and eight years in respect to loss recoveries. The reimbursable losses from the
FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction.
New loans made after that date are not covered by the loss share agreements.
First Bank received a $23.9 million discount on the assets acquired and paid no deposit premium. The
acquisition was accounted for under the purchase method of accounting in accordance with relevant accounting
guidance. The statement of net assets acquired as of January 21, 2011 and the resulting gain are presented in
the following table. The purchased assets and assumed liabilities were recorded at their respective acquisition
date fair values, and identifiable intangible assets were recorded at fair value. The Company recorded an
estimated receivable from the FDIC in the amount of $42.2 million, which represented the fair value of the
FDIC’s portion of the losses that are expected to be incurred and reimbursed to the Company.
105
An acquisition gain totaling $10.2 million resulted from the acquisition and is included as a component of
noninterest income in the statement of income (loss). The amount of the gain is equal to the amount by which
the fair value of assets purchased exceeded the fair value of liabilities assumed.
The statement of net assets acquired as of January 21, 2011 and the resulting gain that was recorded are
presented in the following table.
($ in thousands)
Assets
Cash and cash equivalents
Securities
Loans
Core deposit intangible
FDIC indemnification asset
Foreclosed properties
Other assets
Total
Liabilities
Deposits
Borrowings
Other
Total
Excess of liabilities received over assets
Less: Asset discount
Cash received/receivable from FDIC at closing
Total gain recorded
As
Recorded by
The Bank of
Asheville
$ 27,297
4,461
153,994
−
−
3,501
1,146
190,399
$ 192,284
4,004
111
196,399
$ (6,000)
(23,940)
29,940
Fair
Value
Adjustments
As
Recorded by
the Company
–
–
(51,726) (a)
277 (b)
42,218 (c)
(2,159) (d)
(370) (e)
(11,760)
460 (f)
77 (g)
1,447 (h)
1,984
27,297
4,461
102,268
277
42,218
1,342
776
178,639
192,744
4,081
1,558
198,383
(13,744)
(19,744)
29,940
$ 10,196
Explanation of Fair Value Adjustments
(a) This estimated adjustment is necessary as of the acquisition date to write down The Bank of Asheville’s
book value of loans to the estimated fair value as a result of future expected loan losses.
(b) This fair value adjustment represents the value of the core deposit base assumed in the acquisition
based on a study performed by an independent consulting firm. This amount was recorded by the
Company as an identifiable intangible asset and will be amortized as an expense on a straight-line basis
over the average life of the core deposit base, which is estimated to be seven years.
(c) This adjustment is the estimated fair value of the amount that the Company expects to receive from the
FDIC under its loss share agreements as a result of future loan losses.
(d) This is the estimated adjustment necessary to write down The Bank of Asheville’s book value of
foreclosed real estate properties to their estimated fair value as of the acquisition date.
(e) This is an immaterial adjustment made to reflect fair value.
(f) This fair value adjustment was recorded because the weighted average interest rate of The Bank of
Asheville’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition.
This amount will be amortized to reduce interest expense on a declining basis over the life of the
portfolio of approximately 48 months.
106
(g) This fair value adjustment was recorded because the interest rates of The Bank of Asheville’s fixed rate
borrowings exceeded current interest rates on similar borrowings. This amount was realized shortly
after the acquisition by prepaying the borrowings at a premium and thus there will be no future
amortization related to this adjustment.
(h) This adjustment relates primarily to the estimate of what the Company will owe to the FDIC at the
conclusion of the loss share agreements based on a pre-established formula set forth in those
agreements that is based on total expected losses in relation to the amount of the discount bid.
The operating results of the Company for the year ended December 31, 2011 include the operating results of the
acquired assets and assumed liabilities for the period subsequent to the acquisition date of January 21, 2011.
Due primarily to the significant amount of fair value adjustments and the FDIC loss share agreements now in
place, historical results of The Bank of Asheville are not believed to be relevant to the Company’s results, and
thus no pro forma information is presented.
(2) On August 24, 2012, the Company completed the purchase of a branch of Gateway Bank & Trust Co.
located in Wilmington, North Carolina. The Company assumed the branch’s $9 million in deposits. No loans
were acquired in this transaction. The Company also did not purchase the branch building, but instead
transferred the acquired accounts to one of the Company’s nearby existing branches. The primary reason for
this acquisition was to increase the Company’s presence in Wilmington, North Carolina, where the Company
already has five branches. The Company paid a deposit premium for the branch of approximately $107,000,
which is the amount of the identifiable intangible asset associated with the fair value of the core deposit base.
The intangible asset is being amortized as expense on a straight-line basis over a seven year period. This
branch’s operations are included in the accompanying Consolidated Statements of Income (Loss) beginning on
the acquisition date of August 24, 2012. Historical pro forma information is not presented due to the
immateriality of the transaction.
(3) On March 22, 2013, the Company completed the purchase of two branches from Four Oaks Bank & Trust
Company located in Southern Pines and Rockingham, North Carolina. The Company acquired $57 million in
deposits and $16 million in loans in the acquisition. The Company purchased the Rockingham branch building,
but did not purchase the Southern Pines branch building and instead transferred the acquired accounts to one
of the Company’s nearby existing branches. The primary reason for this acquisition was to increase the
Company’s presence in existing market areas. The Company paid a deposit premium for the branches of
approximately $586,000, which is the amount of the identifiable intangible asset associated with the fair value
of the core deposit base. The intangible asset is being amortized as expense on a straight-line basis over a seven
year period. The operations of the two branches are included in the accompanying Consolidated Statements of
Income (Loss) beginning on the acquisition date of March 22, 2013. Historical pro forma information is not
presented due to the immateriality of the transaction.
107
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2013 and 2012 are
summarized as follows:
($ in thousands)
Securities available for sale:
Government-sponsored
enterprise securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total available for sale
Securities held to maturity:
State and local governments
2013
2012
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
$ 18,432
148,646
3,999
3,984
$ 175,061
18,245
147,187
3,598
4,011
173,041
32
1,415
44
40
1,531
(219)
(2,874)
(445)
(13)
(3,551)
11,500
143,539
3,998
5,026
164,063
11,596
146,926
3,813
5,017
167,352
96
3,717
75
16
3,904
─
(330)
(260)
(25)
(615)
$ 53,995
56,700
2,709
(4)
56,064
61,496
5,432
─
Included in mortgage-backed securities at December 31, 2013 were collateralized mortgage obligations with an
amortized cost of $192,000 and a fair value of $200,000. Included in mortgage-backed securities at December
31, 2012 were collateralized mortgage obligations with an amortized cost of $381,000 and a fair value of
$396,000. All of the Company’s mortgage-backed securities, including the collateralized mortgage obligations,
were issued by government-sponsored corporations.
The Company owned Federal Home Loan Bank (FHLB) stock with a cost and fair value of $3,894,000 at
December 31, 2013 and $4,934,000 at December 31, 2012, which is included in equity securities above and
serves as part of the collateral for the Company’s line of credit with the FHLB (see Note 10 for additional
discussion). The investment in this stock is a requirement for membership in the FHLB system. Periodically the
FHLB recalculates the Company’s required level of holdings, and the Company either buys more stock or the
FHLB redeems a portion of the stock at cost.
The following table presents information regarding securities with unrealized losses at December 31, 2013:
($ in thousands)
Securities in an Unrealized
Loss Position for
Less than 12 Months
Securities in an Unrealized
Loss Position for
More than 12 Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Equity securities
State and local governments
Total temporarily impaired securities
$ 12,212
64,937
−
−
992
$ 78,141
219
1,675
−
−
4
1,898
–
17,979
555
22
–
18,556
–
1,199
445
13
–
1,657
12,212
82,916
555
22
992
96,697
219
2,874
445
13
4
3,555
108
The following table presents information regarding securities with unrealized losses at December 31, 2012:
($ in thousands)
Securities in an Unrealized
Loss Position for
Less than 12 Months
Securities in an Unrealized
Loss Position for
More than 12 Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Equity securities
State and local governments
Total temporarily impaired securities
$ −
26,330
−
−
−
$ 26,330
−
330
−
−
−
330
–
−
740
30
–
770
–
−
260
25
–
285
−
26,330
740
30
−
27,100
−
330
260
25
−
615
In the above tables, all of the non-equity securities that were in an unrealized loss position at December 31,
2013 and 2012 are bonds that the Company has determined are in a loss position due to interest rate factors,
the overall economic downturn in the financial sector, and the broader economy in general. The Company has
evaluated the collectability of each of these bonds and has concluded that there is no other-than-temporary
impairment. The Company does not intend to sell these securities, and it is more likely than not that the
Company will not be required to sell these securities before recovery of the amortized cost.
At December 31, 2013, the Company’s $3.6 million investment in corporate bonds was comprised of the
following:
($ in thousands)
Issuer
First Citizens Bancorp (South Carolina) Bond
First Citizens Bancorp (South Carolina) Trust Preferred Security
Total investment in corporate bonds
S&P Issuer
Ratings
Not Rated
Not Rated
Maturity
Date
4/1/15
6/15/34
Amortized
Cost
$ 2,999
1,000
$ 3,999
Market Value
3,043
555
3,598
The Company has concluded that each of the equity securities in an unrealized loss position at December 31,
2013 and 2012 was in such a position due to temporary fluctuations in the market prices of the securities. The
Company’s policy is to record an impairment charge for any of these equity securities that remains in an
unrealized loss position for twelve consecutive months unless the amount is insignificant.
The aggregate carrying amount of cost-method investments was $3,894,000 and $4,934,000 at December 31,
2013 and 2012, respectively, which was the Federal Home Loan Bank stock discussed above. The Company
determined that none of its cost-method investments were impaired at either year end.
109
The book values and approximate fair values of investment securities at December 31, 2013, by contractual
maturity, are summarized in the table below. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)
Debt securities
Due within one year
Due after one year but within five years
Due after five years but within ten years
Due after ten years
Mortgage-backed securities
Total debt securities
Equity securities
Total securities
Securities Available for Sale
Amortized
Cost
Fair
Value
Securities Held to Maturity
Amortized
Cost
Fair
Value
$ −
17,499
3,932
1,000
148,646
171,077
3,984
$ 175,061
−
17,412
3,876
555
147,187
169,030
4,011
173,041
$ −
5,422
35,346
13,227
̶
53,995
̶
$ 53,995
−
5,822
37,153
13,725
̶
56,700
̶
56,700
At December 31, 2013 and 2012, investment securities with carrying values of $79,838,000 and $78,519,000,
respectively, were pledged as collateral for public deposits.
The Company recorded $12,908,000, $9,641,000, and $2,518,000 in sales of securities in 2013, 2012, and 2011,
respectively, which resulted in net gains of $525,000, $439,000, and $8,000 in 2013, 2012, and 2011,
respectively. During the twelve months ended December 31, 2013, 2012, and 2011, the Company recorded net
gains of $7,000, $200,000, and $71,000 respectively, related to the call of several municipal and corporate bond
securities. Also, during the twelve months ended December 31, 2013, 2012, and 2011, the Company recorded
net losses of $0, $1,000, and $5,000 respectively, related to write-downs of the Company's equity portfolio.
110
Note 4. Loans and Asset Quality Information
The loans and foreclosed real estate that were acquired in FDIC-assisted transactions are covered by loss share
agreements between the FDIC and the Company’s banking subsidiary, First Bank, which afford First Bank
significant loss protection - see Note 2 to the financial statements included in the Company’s 2011 Annual
Report on Form 10-K for detailed information regarding these transactions. Because of the loss protection
provided by the FDIC, the risk of the loans and foreclosed real estate that are covered by loss share agreements
are significantly different from those assets not covered under the loss share agreements. Accordingly, the
Company presents separately loans subject to the loss share agreements as “covered loans” in the information
below and loans that are not subject to the loss share agreements as “non-covered loans.”
The following is a summary of the major categories of total loans outstanding:
($ in thousands)
All loans (non-covered and covered):
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
December 31, 2013
December 31, 2012
Amount
Percentage
Amount
Percentage
$ 168,469
7%
$ 160,790
305,246
12%
298,458
family) first mortgages
838,862
34%
815,281
Real estate – mortgage – home equity
loans / lines of credit
227,907
9%
238,925
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs
Total loans
855,249
66,533
2,462,266
928
$ 2,463,194
35%
3%
100%
789,746
71,933
2,375,133
1,324
$ 2,376,457
7%
13%
34%
10%
33%
3%
100%
As of December 31, 2013 and 2012, net loans include an unamortized premium of $98,000 and $485,000,
respectively, related to acquired loans.
At December 31, 2012, the Company also had $30 million classified as “loans held for sale” that are not included
in the loan balances disclosed above or in the disclosures presented in the remainder of Note 4. In the fourth
quarter of 2012, the Company identified approximately $68 million of non-covered higher-risk loans that it
targeted for sale to a third-party investor. Based on an offer to purchase these loans received prior to year-end,
the Company wrote the loans down by approximately $38 million to their estimated liquidation value of
approximately $30 million and reclassified them as “loans held for sale.” The sale of the loans was completed in
January 2013 with the Company receiving sales proceeds of approximately $30 million.
Loans in the amount of $1.8 billion were pledged as collateral for certain borrowings as of both December 31,
2013 and December 31, 2012 (see Note 10).
The loans above also include loans to executive officers and directors serving the Company at December 31,
2013 and to their associates, totaling approximately $5.9 million and $6.1 million at December 31, 2013 and
2012, respectively. During 2013, additions to such loans were approximately $0.9 million and repayments
totaled approximately $1.1 million. These loans were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with other non-related
borrowers. Management does not believe these loans involve more than the normal risk of collectability or
present other unfavorable features.
111
The following is a summary of the major categories of non-covered loans outstanding:
($ in thousands)
Non-covered loans:
December 31, 2013
December 31, 2012
Amount
Percentage
Amount
Percentage
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
$ 164,195
7%
$ 155,273
273,412
12%
251,569
family) first mortgages
730,712
32%
679,401
Real estate – mortgage – home equity
loans / lines of credit
213,016
10%
219,443
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs
Total non-covered loans
804,621
66,001
2,251,957
928
$ 2,252,885
36%
3%
100%
715,973
71,160
2,092,819
1,324
$ 2,094,143
7%
12%
33%
11%
34%
3%
100%
The carrying amount of the covered loans at December 31, 2013 consisted of impaired and nonimpaired
purchased loans (as determined on the date of acquisition), as follows:
($ in thousands)
Covered loans:
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
family) first mortgages
Real estate – mortgage – home equity loans
/ lines of credit
Real estate – mortgage – commercial and
other
Installment loans to individuals
Total
Impaired
Purchased
Loans –
Carrying
Value
$ 75
325
575
14
Impaired
Purchased
Loans –
Unpaid
Principal
Balance
Nonimpaired
Purchased
Loans –
Carrying
Value
Nonimpaired
Purchased
Loans -
Unpaid
Principal
Balance
Total
Covered
Loans –
Carrying
Value
Total
Covered
Loans –
Unpaid
Principal
Balance
136
564
4,199
5,268
4,274
5,404
31,509
47,792
31,834
48,356
1,500
107,575
126,882
108,150
128,382
21
14,877
18,318
14,891
18,339
2,153
−
$ 3,142
4,042
−
6,263
48,475
532
207,167
62,630
607
261,497
50,628
532
210,309
66,672
607
267,760
112
The carrying amount of the covered loans at December 31, 2012 consisted of impaired and nonimpaired
purchased loans (as determined on the date of acquisition), as follows:
($ in thousands)
Covered loans:
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
family) first mortgages
Real estate – mortgage – home equity loans
/ lines of credit
Real estate – mortgage – commercial and
other
Installment loans to individuals
Total
Impaired
Purchased
Loans –
Carrying
Value
Impaired
Purchased
Loans –
Unpaid
Principal
Balance
Nonimpaired
Purchased
Loans –
Carrying
Value
Nonimpaired
Purchased
Loans -
Unpaid
Principal
Balance
Total
Covered
Loans –
Carrying
Value
Total
Covered
Loans –
Unpaid
Principal
Balance
$ 71
148
5,446
7,009
5,517
7,157
1,575
2,594
45,314
82,676
46,889
85,270
794
16
1,902
135,086
161,416
135,880
163,318
56
19,466
24,431
19,482
24,487
2,369
−
$ 4,825
4,115
−
8,815
71,404
773
277,489
94,502
828
370,862
73,773
773
282,314
98,617
828
379,677
The following table presents information regarding covered purchased nonimpaired loans since December 31,
2011. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or
beyond.
($ in thousands)
Carrying amount of nonimpaired covered loans at December 31, 2011
Principal repayments
Transfers to foreclosed real estate
Loan charge-offs
Accretion of loan discount
Carrying amount of nonimpaired covered loans at December 31, 2012
Principal repayments
Transfers to foreclosed real estate
Loan charge-offs
Accretion of loan discount
Carrying amount of nonimpaired covered loans at December 31, 2013
$ 353,370
(51,582)
(30,181)
(10,584)
16,466
277,489
(63,588)
(13,977)
(12,957)
20,200
$ 207,167
As reflected in the table above, the Company accreted $20,200,000 and $16,466,000 of the loan discount on
purchased nonimpaired loans into interest income during 2013 and 2012, respectively. As of December 31,
2013, there was remaining loan discount of $31,569,000 related to purchased accruing loans. If these loans
continue to be repaid by the borrowers, the Company will accrete the remaining loan discount into interest
income over the estimate lives of the respective loans, which are generally consistent with the terms of the
respective loss share agreements. In such circumstances, a corresponding entry to reduce the indemnification
asset will be recorded amounting to 80% of the loan discount accretion, which reduces noninterest income. At
December 31, 2013, the Company also had $8,038,000 of loan discount related to purchased nonperforming
loans. It is not expected that a significant amount of this discount will be accreted, as it represents estimated
losses on these loans. An additional $15,797,000 in partial charge-offs have been recorded on purchased loans
outstanding at December 31, 2013.
113
The following table presents information regarding all purchased impaired loans since December 31, 2011,
substantially all of which are covered loans. The Company has applied the cost recovery method to all
purchased impaired loans at their respective acquisition dates due to the uncertainty as to the timing of
expected cash flows, as reflected in the following table.
($ in thousands)
Purchased Impaired Loans
Balance at December 31, 2011
Change due to payments received
Transfer to foreclosed real estate
Change due to loan charge-off
Other
Balance at December 31, 2012
Change due to payments received
Transfer to foreclosed real estate
Change due to loan charge-off
Other
Balance at December 31, 2013
Fair Market
Value
Adjustment –
Write Down
(Nonaccretable
Difference)
9,532
44
(3,487)
(531)
(1,568)
3,990
(31)
(784)
(54)
−
3,121
Contractual
Principal
Receivable
$ 18,316
(355)
(7,636)
(359)
(1,151)
8,815
(301)
(2,100)
(150)
(1)
$ 6,263
Carrying
Amount
8,784
(399)
(4,149)
172
417
4,825
(270)
(1,316)
(96)
(1)
3,142
Each of the purchased impaired loans is on nonaccrual status and considered to be impaired. Because of the
uncertainty of the expected cash flows, the Company is accounting for each purchased impaired loan under the
cost recovery method, in which all cash payments are applied to principal. Thus, there is no accretable yield
associated with the above loans. During 2013 and 2012, the Company received $62,000 and $0, respectively, in
payments that exceeded the initial carrying amount of the purchased impaired loans, which is included in the
loan discount accretion amount discussed previously.
Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and
still accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are
summarized as follows:
ASSET QUALITY DATA ($ in thousands)
Non-covered nonperforming assets
Nonaccrual loans
Restructured loans – accruing
Accruing loans > 90 days past due
Total non-covered nonperforming loans
Nonperforming loans held for sale
Foreclosed real estate
Total non-covered nonperforming assets
Covered nonperforming assets
Nonaccrual loans (1)
Restructured loans – accruing
Accruing loans > 90 days past due
Total covered nonperforming loans
Foreclosed real estate
Total covered nonperforming assets
December 31,
2013
December 31,
2012
$ 41,938
27,776
−
69,714
−
12,251
$ 81,965
$ 37,217
8,909
−
46,126
24,497
$ 70,623
33,034
24,848
−
57,882
21,938
26,285
106,105
33,491
15,465
−
48,956
47,290
96,246
Total nonperforming assets
$ 152,588
202,351
_________________________________________________________________________________________________________
(1) At December 31, 2013 and December 31, 2012, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $60.4
million and $64.4 million, respectively.
114
If the nonaccrual and restructured loans as of December 31, 2013, 2012 and 2011 had been current in
accordance with their original terms and had been outstanding throughout the period (or since origination if
held for part of the period), gross interest income in the amounts of approximately $5,262,000, $7,689,000, and
$8,724,000 for nonaccrual loans and $2,674,000, $2,392,000, and $1,873,000 for restructured loans would have
been recorded for 2013, 2012, and 2011, respectively. Interest income on such loans that was actually collected
and included in net income in 2013, 2012 and 2011 amounted to approximately $1,414,000, $2,824,000, and
$2,578,000 for nonaccrual loans (prior to their being placed on nonaccrual status), and $1,681,000, $1,179,000,
and $1,351,000 for restructured loans, respectively. At December 31, 2013 and 2012, we had no commitments
to lend additional funds to debtors whose loans were nonperforming.
The remaining tables in this note present information derived from the Company’s allowance for loan loss
model. Relevant accounting guidance requires certain disclosures to be disaggregated based on how the
Company develops its allowance for loan losses and manages its credit exposure. This model combines loan
types in a different manner than the tables previously presented.
The following table presents the Company’s nonaccrual loans as of December 31, 2013.
($ in thousands)
Commercial, financial, and agricultural:
Commercial – unsecured
Commercial – secured
Secured by inventory and accounts receivable
Real estate – construction, land development & other land loans
Real estate – residential, farmland and multi-family
Real estate – home equity lines of credit
Real estate – commercial
Consumer
Total
Non-covered
Covered
Total
$ 222
2,662
545
8,055
17,814
2,200
10,115
325
$ 41,938
38
114
782
13,502
12,344
335
10,099
3
37,217
260
2,776
1,327
21,557
30,158
2,535
20,214
328
79,155
The following table presents the Company’s nonaccrual loans as of December 31, 2012.
($ in thousands)
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
Real estate – construction, land development & other land loans
Real estate – residential, farmland and multi-family
Real estate – home equity lines of credit
Real estate - commercial
Consumer
Total
Non-covered
Covered
Total
$ 307
2,398
17
6,354
9,629
1,622
9,885
2,822
$ 33,034
150
3
59
11,698
10,712
465
10,342
62
33,491
457
2,401
76
18,052
20,341
2,087
20,227
2,884
66,525
115
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2013.
($ in thousands)
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
Real estate – construction, land development & other
land loans
30-59
Days Past
Due
$ 347
1,233
438
2,304
Real estate – residential, farmland, and multi-family
11,682
Real estate – home equity lines of credit
Real estate - commercial
Consumer
Total non-covered
Unamortized net deferred loan costs
Total non-covered loans
1,465
3,196
494
$ 21,159
60-89 Days
Past Due
Nonaccrual
Loans
Current
Total Loans
Receivable
94
462
767
222
2,662
545
36,352
117,923
19,426
37,015
122,280
21,176
1,391
2,631
305
214
187
6,051
8,055
232,920
244,670
17,814
837,260
869,387
2,200
194,157
198,127
10,115
696,081
709,606
325
41,938
48,690
2,182,809
49,696
2,251,957
928
$ 2,252,885
Covered loans
Total loans
$ 5,179
768
37,217
167,145
210,309
$ 26,338
6,819
79,155
2,349,954
2,463,194
The Company had no non-covered or covered loans that were past due greater than 90 days and accruing
interest at December 31, 2013.
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2012.
($ in thousands)
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
Real estate – construction, land development & other
land loans
30-59
Days Past
Due
$ 91
1,020
52
60-89 Days
Past Due
Nonaccrual
Loans
Current
Total Loans
Receivable
10
220
4
307
2,398
17
35,278
110,074
21,270
35,686
113,712
21,343
490
263
6,354
211,001
218,108
Real estate – residential, farmland, and multi-family
9,673
2,553
9,629
797,584
819,439
Real estate – home equity lines of credit
Real estate - commercial
Consumer
Total non-covered
Unamortized net deferred loan costs
Total non-covered loans
976
4,326
462
$ 17,090
320
1,131
219
4,720
1,622
197,962
200,880
9,885
612,598
627,940
2,822
33,034
52,208
2,037,975
55,711
2,092,819
1,324
$ 2,094,143
Covered loans
Total loans
$ 6,564
3,417
33,491
238,842
282,314
$ 23,654
8,137
66,525
2,276,817
2,376,457
The Company had no non-covered or covered loans that were past due greater than 90 days and accruing
interest at December 31, 2012.
116
The following table presents the activity in the allowance for loan losses for non-covered loans for the year
ended December 31, 2013.
($ in thousands)
Real Estate –
Construction,
Land
Development, &
Other Land
Loans
Real Estate –
Residential,
Farmland,
and Multi-
family
Real
Estate –
Home
Equity
Lines of
Credit
Commercial,
Financial, and
Agricultural
As of and for the year ended December 31, 2013
Real Estate –
Commercial
and Other
Consumer
Unallo-
cated
Total
Beginning
balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 4,687
(4,418)
299
6,864
$ 7,432
12,856
(2,739)
743
2,106
12,966
14,082
(3,732)
753
4,039
15,142
1,884
(1,314)
87
1,181
1,838
5,247
(4,346)
1,381
3,242
5,524
1,939
(2,174)
474
1,274
1,513
948
(660)
−
(440)
(152)
41,643
(19,383)
3,737
18,266
44,263
Ending balances as of December 31, 2013: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 202
544
1,162
1
649
1
−
2,559
$ 7,230
12,422
13,980
1,837
4,875
1,512
(152)
41,704
$ −
−
−
−
−
−
−
−
Loans receivable as of December 31, 2013:
Ending balance –
total
$ 180,471
244,670
869,387 198,127
709,606
49,696
−
2,251,957
Ending balances as of December 31, 2013: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 582
8,027
19,111
22
16,894
13
−
44,649
$ 179,889
236,643
850,276 198,105
692,712
49,683
−
2,207,308
$ −
−
−
−
−
−
−
−
117
The following table presents the activity in the allowance for loan losses for non-covered loans for the year
ended December 31, 2012.
($ in thousands)
Real Estate –
Construction,
Land
Development, &
Other Land
Loans
Real Estate –
Residential,
Farmland,
and Multi-
family
Real
Estate –
Home
Equity
Lines of
Credit
Commercial,
Financial, and
Agricultural
As of and for the year ended December 31, 2012
Real Estate –
Commercial
and Other
Consumer
Unallo-
cated
Total
Beginning
balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 3,780
(4,912)
354
5,465
$ 4,687
11,306
(19,312)
986
19,876
12,856
13,532
(20,879)
430
20,999
14,082
1,690
(3,287)
209
3,272
1,884
3,414
(16,616)
333
18,116
5,247
1,872
(1,539)
273
1,333
1,939
16
−
−
932
948
35,610
(66,545)
2,585
69,993
41,643
Ending balances as of December 31, 2012: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 2
504
1,419
3
1,036
−
−
2,964
$ 4,685
12,352
12,663
1,881
4,211
1,939
948
38,679
$ −
−
−
−
−
−
−
−
Loans receivable as of December 31, 2012:
Ending balance –
total
$ 170,741
218,108
819,439 200,880
627,940
55,711
−
2,092,819
Ending balances as of December 31, 2012: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 10
5,949
18,618
43
17,524
−
−
42,144
$ 170,731
212,159
800,821 200,837
610,416
55,711
−
2,050,675
$ −
−
−
−
−
−
−
−
118
The following table presents the activity in the allowance for loan losses for covered loans for the year ended
December 31, 2013.
($ in thousands)
Covered Loans
As of and for the year ended December 31, 2013
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 4,759
(13,053)
186
12,350
$ 4,242
Ending balances as of December 31, 2013: Allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 3,133
1,109
25
Loans receivable as of December 31, 2013:
Ending balance – total
$ 210,309
Ending balances as of December 31, 2013: Loans
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 46,126
164,183
3,142
The following table presents the activity in the allowance for loan losses for covered loans for the year ended
December 31, 2012.
($ in thousands)
Covered Loans
As of and for the year ended December 31, 2012
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 5,808
(10,728)
−
9,679
$ 4,759
Ending balances as of December 31, 2012: Allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 3,509
1,250
17
Loans receivable as of December 31, 2012:
Ending balance – total
$ 282,314
Ending balances as of December 31, 2012: Loans
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 48,956
233,358
4,825
119
−
−
−
−
−
−
−
−
−
−
−
−
334
−
5,005
2,329
−
9,981
−
17,649
39,215
56,864
72
1,081
80
The following table presents loans individually evaluated for impairment by class of loans as of December 31,
2013.
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
($ in thousands)
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
Real estate – construction, land development & other
land loans
Real estate – residential, farmland, and multi-family
Real estate – home equity lines of credit
$ −
−
−
6,398
3,883
−
−
−
−
6,907
4,429
−
Real estate – commercial
7,324
9,008
Consumer
Total non-covered impaired loans with no allowance
−
$ 17,605
−
20,344
Total covered impaired loans with no allowance
$ 29,058
48,785
Total impaired loans with no allowance recorded
$ 46,663
69,129
Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
$ 115
392
75
115
394
75
63
64
75
Real estate – construction, land development & other
land loans
1,629
2,148
544
2,339
Real estate – residential, farmland, and multi-family
15,228
15,642
1,162
13,417
Real estate – home equity lines of credit
Real estate – commercial
22
22
9,570
10,873
Consumer
Total non-covered impaired loans with allowance
13
$ 27,044
35
29,304
1
649
1
2,559
637
5,914
466
24,006
Total covered impaired loans with allowance
$ 17,068
22,367
3,133
14,343
Total impaired loans with an allowance recorded
$ 44,112
51,671
5,692
38,349
Interest income recorded on non-covered and covered impaired loans during the year ended December 31,
2013 was insignificant.
120
The following table presents loans individually evaluated for impairment by class of loans as of December 31,
2012.
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
($ in thousands)
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial – unsecured
Commercial - secured
Secured by inventory and accounts receivable
Real estate – construction, land development & other
land loans
Real estate – residential, farmland, and multi-family
Real estate – home equity lines of credit
$ −
−
−
4,276
1,597
−
−
−
−
4,305
1,618
−
Real estate – commercial
7,985
8,660
Consumer
Total non-covered impaired loans with no allowance
−
$ 13,858
−
14,583
Total covered impaired loans with no allowance
$ 35,196
71,413
Total impaired loans with no allowance recorded
$ 49,054
85,996
Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
$ −
10
−
−
10
−
−
−
−
−
−
−
−
−
−
−
−
−
2
−
−
87
5
8,600
2,692
64
16,414
2
27,864
39,372
67,236
137
1,428
340
Real estate – construction, land development & other
land loans
1,673
2,889
504
7,563
Real estate – residential, farmland, and multi-family
17,021
18,866
1,419
16,855
Real estate – home equity lines of credit
Real estate – commercial
43
293
9,539
11,328
Consumer
Total non-covered impaired loans with allowance
−
$ 28,286
31
33,417
3
1,036
−
2,964
1,799
7,975
1,737
37,834
Total covered impaired loans with allowance
$ 13,760
18,271
3,509
15,401
Total impaired loans with an allowance recorded
$ 42,046
51,688
6,473
53,235
Interest income recorded on non-covered and covered impaired loans during the year ended December 31,
2012 is considered insignificant.
121
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 monthly 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:
Numerical Risk Grade
Description
Pass:
Weak Pass:
Watch or Standard:
Special Mention:
Classified:
1
2
3
4
9
5
6
7
8
Cash secured loans.
Non-cash secured loans that have no minor or major exceptions to the lending guidelines.
Non-cash secured loans that have no major exceptions to the lending guidelines.
Non-cash secured loans that have minor or major exceptions to the lending guidelines, but
the exceptions are properly mitigated.
Loans that meet the guidelines for a Risk Graded 5 loan, except the collateral coverage is
sufficient to satisfy the debt with no risk of loss under reasonable circumstances. This
category also includes all loans to insiders and any other loan that management elects to
monitor on the watch list.
Existing loans with major exceptions that cannot be mitigated.
Loans that have a well-defined weakness that may jeopardize the liquidation of the debt if
deficiencies are not corrected.
Loans that have a well-defined weakness that make the collection or liquidation
improbable.
Loans that are considered uncollectible and are in the process of being charged-off.
122
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2013.
($ in thousands)
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts
receivable
Real estate – construction, land
development & other land loans
Real estate – residential, farmland,
and multi-family
Real estate – home equity lines of
credit
Credit Quality Indicator (Grouped by Internally Assigned Grade)
Special
Mention
Loans
(Grade 5)
Classified
Loans
(Grades
6, 7, & 8)
Watch or
Standard
Loans
(Grade 9)
Weak Pass
(Grade 4)
Nonaccrual
Loans
Total
Pass (Grades
1, 2, & 3)
$ 8,495
31,494
24,415
77,441
4,098
12,800
7
100
−
1,509
5,597
2,022
2,367
4,986
1,711
222
2,662
37,015
122,280
545
21,176
31,221
181,050
2,365
11,646
10,333
8,055
244,670
227,053
540,349
5,062
41,583
37,526
17,814
869,387
120,205
63,400
1,499
5,699
5,124
2,200
198,127
Real estate - commercial
115,397
533,680
10,014
24,557
15,843
10,115
709,606
Consumer
Total
25,703
$ 563,666
21,790
1,454,925
54
19,101
829
93,442
995
78,885
Unamortized net deferred loan costs
Total non-covered loans
325
41,938
49,696
2,251,957
928
$ 2,252,885
Total covered loans
$ 25,078
92,147
−
8,857
47,010
37,217
210,309
Total loans
$ 588,744
1,547,072
19,101
102,299
125,895
79,155
2,463,194
At December 31, 2013, there was an insignificant amount of loans that were graded “8” with an accruing status.
123
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2012.
($ in thousands)
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts
receivable
Real estate – construction, land
development & other land loans
Real estate – residential, farmland,
and multi-family
Real estate – home equity lines of
credit
Credit Quality Indicator (Grouped by Internally Assigned Grade)
Special
Mention
Loans
(Grade 5)
Classified
Loans
(Grades
6, 7, & 8)
Watch or
Standard
Loans
(Grade 9)
Weak Pass
(Grade 4)
Nonaccrual
Loans
Total
Pass (Grades
1, 2, & 3)
$ 10,283
32,196
24,031
72,838
10
1,454
2,344
18,126
248
472
3,676
491
583
1,150
117
307
2,398
35,686
113,712
17
21,343
31,582
163,588
3,830
9,045
3,709
6,354
218,108
249,313
499,922
7,154
29,091
24,330
9,629
819,439
125,310
66,412
2,160
3,526
Real estate - commercial
123,814
449,316
21,801
14,050
Consumer
Total
Unamortized net deferred loan costs
Total non-covered loans
27,826
$ 602,668
23,403
1,317,636
77
36,734
954
61,305
1,850
9,074
629
41,442
1,622
200,880
9,885
627,940
2,822
33,034
55,711
2,092,819
1,324
$ 2,094,143
Total covered loans
$ 42,935
124,451
−
7,569
73,868
33,491
282,314
Total loans
$ 645,603
1,442,087
36,734
68,874
115,310
66,525
2,376,457
At December 31, 2012, there was an insignificant amount of loans that were graded “8” with an accruing status.
Troubled Debt Restructurings
The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing
financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate
reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other
actions intended to minimize potential losses.
The vast majority of the Company’s troubled debt restructurings modified during the year ended December 31,
2013 and 2012 related to interest rate reductions combined with restructured amortization schedules. The
Company does not generally grant principal forgiveness.
All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for
determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as
either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are
nonaccrual are reported within the nonaccrual loan totals presented previously.
124
The following table presents information related to loans modified in a troubled debt restructuring during the
years ended December 31, 2013 and 2012.
($ in thousands)
Non-covered TDRs – Accruing
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Real estate – commercial
Consumer
Non-covered TDRs – Nonaccrual
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Real estate – commercial
Total non-covered TDRs arising during period
Total covered TDRs arising during period– Accruing
Total covered TDRs arising during period – Nonaccrual
For the year ended December 31, 2013
Number of
Contracts
Pre-Modification
Restructured
Balances
Post-Modification
Restructured
Balances
1
6
3
10
8
1
3
9
1
42
10
1
$ 66
391
$ 66
391
1,786
1,256
5,721
14
800
878
398
1,786
1,258
5,721
14
800
878
398
11,310
11,312
$ 1,758
187
$ 1,811
167
Total TDRs arising during period
53
$ 13,255
$ 13,290
($ in thousands)
Non-covered TDRs – Accruing
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Real estate – commercial
Non-covered TDRs - Nonaccrual
Commercial, financial, and agricultural:
Commercial – secured
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Real estate – home equity lines of credit
Real estate – commercial
Total non-covered TDRs arising during period
Total covered TDRs arising during period– Accruing
Total covered TDRs arising during period – Nonaccrual
For the year ended December 31, 2012
Number of
Contracts
Pre-Modification
Restructured
Balances
Post-Modification
Restructured
Balances
2
8
−
$ 642
1,653
−
$ 642
1,653
−
1
2
17
1
5
36
6
4
11
332
3,736
123
1,082
7,579
11
332
3,736
123
1,082
7,579
$ 7,526
1,230
$ 7,526
1,231
Total TDRs arising during period
46
$ 16,335
$ 16,336
As part of a routine regulatory exam that concluded in the third quarter of 2012, the Company reclassified
approximately $30 million of performing loans to TDR status during the second and third quarters of 2012.
Because these loans were restructured prior to January 1, 2012 they are not included in the tables above. Also,
in connection with an anticipated planned asset disposition, the Company recorded $6 million in charge-offs to
write-down the TDRs to their estimated liquidation value at December 31, 2012, and reclassified approximately
$5 million of TDRs to the “nonperforming loans held for sale” category as of December 31, 2012.
125
Accruing restructured loans that were modified in the previous 12 months and that defaulted during the years
ended December 31, 2013 and 2012 are presented in the table below. The Company considers a loan to have
defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to
nonaccrual status, or has been transferred to foreclosed real estate.
($ in thousands)
Non-covered accruing TDRs that subsequently defaulted
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Total non-covered TDRs that subsequently defaulted
Total accruing covered TDRs that subsequently defaulted
Total accruing TDRs that subsequently defaulted
Note 5. Premises and Equipment
For the year ended
December, 2013
For the year ended
December 31, 2012
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
1
1
2
1
3
$ 342
252
$ 594
$ 3,501
$ 4,095
−
−
−
3
3
$ −
−
$ −
$ 440
$ 440
Premises and equipment at December 31, 2013 and 2012 consisted of the following:
($ in thousands)
2013
2012
Land
Buildings
Furniture and equipment
Leasehold improvements
Total cost
Less accumulated depreciation and amortization
Net book value of premises and equipment
Note 6. FDIC Indemnification Asset
$ 23,893
64,518
35,281
1,882
125,574
(48,126)
$ 77,448
23,359
58,601
34,179
1,980
118,119
(43,748)
74,371
As discussed in Note 1(i), the FDIC indemnification asset is the estimated amount that the Company will receive
from the FDIC under loss share agreements associated with two FDIC-assisted failed bank acquisitions. See
unaudited additional information regarding the FDIC indemnification asset in the “FDIC Indemnification Asset”
section of the Management’s Discussion and Analysis included in the Company’s Form 10-K.
At December 31, 2013 and 2012, the FDIC indemnification asset was comprised of the following components:
($ in thousands)
Receivable related to loss claims incurred, not yet reimbursed
Receivable related to estimated future claims on loans
Receivable related to estimated future claims on foreclosed real estate
FDIC indemnification asset
2013
$ 12,649
33,398
2,575
$ 48,622
2012
33,040
62,044
7,475
102,559
126
The following presents a rollforward of the FDIC indemnification asset since January 1, 2011.
($ in thousands)
Balance at January 1, 2011
Increase related to acquisition of The Bank of Asheville
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2011
Increase related to unfavorable changes in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2012
Increase related to unfavorable changes in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2013
$ 123,719
42,218
29,814
5,725
(69,339)
(9,278)
(1,182)
$ 121,677
16,984
6,947
(29,796)
(13,173)
(80)
$ 102,559
9,312
5,352
(49,572)
(16,160)
(2,869)
$ 48,622
Note 7. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible
assets as of December 31, 2013 and December 31, 2012 and the carrying amount of unamortized intangible
assets as of those same dates. In 2013, the Company recorded a core deposit premium intangible of $586,000 in
connection with the acquisition of two branches, which is being amortized on a straight-line basis over the
estimated life of the related deposits of seven years. In 2012, the Company recorded a core deposit premium
intangible of $107,000 in connection with a branch acquisition, which is being amortized on a straight-line basis
over the estimated life of the related deposits of seven years.
($ in thousands)
Amortized intangible assets:
Customer lists
Core deposit premiums
Total
Unamortized intangible assets:
Goodwill
December 31, 2013
December 31, 2012
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$ 678
8,560
$ 9,238
462
5,942
6,404
$ 678
7,974
$ 8,652
417
5,128
5,545
$ 65,835
$ 65,835
Amortization expense totaled $860,000, $897,000 and $902,000 for the years ended December 31, 2013, 2012
and 2011, respectively.
Goodwill is evaluated for impairment on at least an annual basis – see Note 1(q). For each of the years
presented, the Company’s evaluation indicated that there was no goodwill impairment.
127
The following table presents the estimated amortization expense for intangible assets for each of the five
calendar years ending December 31, 2018 and the estimated amount amortizable thereafter. These estimates
are subject to change in future periods to the extent management determines it is necessary to make
adjustments to the carrying value or estimated useful lives of amortized intangible assets.
($ in thousands)
Estimated
Amortization Expense
2014
2015
2016
2017
2018
Thereafter
Total
$ 777
721
654
404
129
149
$ 2,834
Note 8. Income Taxes
Total income taxes for the years ended December 31, 2013, 2012 and 2011 were allocated as follows:
(In thousands)
2013
2012
2011
Allocated to net income
Allocated to stockholders’ equity, for unrealized holding gain (loss) on
debt and equity securities for financial reporting purposes
Allocated to stockholders’ equity, for tax expense (benefit) of pension liabilities
Total income tax expense (benefit)
$ 12,081
(16,952)
7,370
(2,072)
3,399
(237)
5,824
$ 13,408 (11,365) 5,012
554
(2,912)
The components of income tax expense (benefit) for the years ended December 31, 2013, 2012 and 2011 are as
follows:
(In thousands)
Current - Federal
- State
Deferred - Federal
- State
Total
2013
2012
2011
$ 9,812
(467)
168
2,568
$ 12,081
(8,401)
(43)
(5,914)
(2,594)
(16,952)
9,204
2,094
(3,234)
(694)
7,370
128
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax
assets (liabilities) at December 31, 2013 and 2012 are presented below:
(In thousands)
2013
2012
Deferred tax assets:
Allowance for loan losses
Excess book over tax SERP retirement plan cost
Deferred compensation
Federal & state net operating loss carryforwards
Accruals, book versus tax
Pension liability adjustments
Foreclosed real estate
Basis differences in assets acquired in FDIC transactions
Nonqualified stock options
Nonaccrual loan interest
Unrealized gain on securities available for sale
All other
Gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Loan fees
Excess tax over book pension cost
Depreciable basis of fixed assets
Amortizable basis of intangible assets
Unrealized gain on securities available for sale
Pension liability adjustments
FHLB stock dividends
Basis differences in assets acquired in FDIC transactions
All other
Gross deferred tax liabilities
Net deferred tax asset - included in other assets
$ 18,459
2,572
94
10,901
1,604
̶
2,781
̶
522
̶
789
855
38,577
(109)
38,468
(1,536)
(806)
(1,835)
(9,732)
̶
(2,003)
(423)
(7,163)
(48)
(23,546)
$ 14,922
18,228
2,553
128
961
1,403
1,396
6,813
1,058
554
420
̶
732
34,246
(112)
34,134
(1,427)
(451)
(2,308)
(9,119)
(1,283)
̶
(437)
̶
(124)
(15,149)
18,985
A portion of the annual change in the net deferred tax asset relates to unrealized gains and losses on securities
available for sale. The related 2013 and 2012 deferred tax expense (benefit) of approximately ($2,072,000) and
($237,000), respectively, has been recorded directly to shareholders’ equity. Additionally, a portion of the
annual change in the net deferred tax asset relates to pension adjustments. The related 2013 and 2012
deferred tax expense (benefit) of $3,399,000 and $5,824,000, respectively, has been recorded directly to
shareholders’ equity. The balance of the 2013 decrease in the net deferred tax asset of ($2,736,000) is reflected
as a deferred income tax expense, and the balance of the 2012 increase in the net deferred tax asset of
$8,508,000 is reflected as a deferred income tax benefit in the consolidated statement of income (loss).
The valuation allowances for 2013 and 2012 relate 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’s tax returns are subject to income tax audit by federal and state agencies beginning with the year
2010.
Retained earnings at December 31, 2013 and 2012 includes approximately $6,869,000 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,
129
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.
The following is a reconcilement of federal income tax expense at the statutory rate of 35% to the income tax
provision reported in the financial statements.
(In thousands)
2013
2012
2011
Tax provision at statutory rate
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income
Low income housing tax credits
Non-deductible interest expense
State income taxes, net of federal benefit
Change in valuation allowance
Other, net
Total
$ 11,473
(14,125)
(818)
(150)
15
1,366
(3)
198
$ 12,081
(831)
(181)
23
(1,714)
31
(155)
(16,952)
7,354
(852)
(163)
33
910
(5)
93
7,370
Note 9. Time Deposits and Related Party Deposits
At December 31, 2013, the scheduled maturities of time deposits were as follows:
($ in thousands)
2014
2015
2016
2017
2018
Thereafter
$ 740,020
118,125
79,513
32,302
18,248
2,390
$ 990,598
For the years ended December 31, 2013, 2012, and 2011, the Company recorded amortization of deposit
premiums amounting to $30,000, $85,000 and $337,000, respectively, which reduced interest expense. The
deposit premiums related to the Company’s acquisitions are discussed in Note 2. The Company has $7,000
remaining in unamortized deposit premiums at December 31, 2013.
Deposits received from executive officers and directors and their associates totaled approximately $29,128,000
and $30,542,000 at December 31, 2013 and 2012, respectively. These deposit accounts have substantially the
same terms, including interest rates, as those prevailing at the time for comparable transactions with other non-
related depositors.
130
Note 10. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31,
2013 and 2012:
Description - 2013
Due date
Call Feature
Trust Preferred Securities
1/23/34
Quarterly by Company
beginning 1/23/09
2013
Amount
$ 20,620,000
Trust Preferred Securities
6/15/36
Quarterly by Company
beginning 6/15/11
25,774,000
Total borrowings / weighted average rate as of December 31, 2013
$ 46,394,000
Description - 2012
Due date
Call Feature
Trust Preferred Securities
1/23/34
Quarterly by Company
beginning 1/23/09
2012
Amount
$ 20,620,000
Trust Preferred Securities
6/15/36
Quarterly by Company
beginning 6/15/11
25,774,000
Total borrowings / weighted average rate as of December 31, 2012
$ 46,394,000
Interest Rate
2.95% at 12/31/13
adjustable rate
3 month LIBOR + 2.70%
1.64% at 12/31/13
adjustable rate
3 month LIBOR + 1.39%
2.22%
Interest Rate
3.01% at 12/31/12
adjustable rate
3 month LIBOR + 2.70%
1.70% at 12/31/12
adjustable rate
3 month LIBOR + 1.39%
2.28%
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 are 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 are 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%.
At December 31, 2013, the Company had three sources of readily available borrowing capacity – 1) an
approximately $312 million line of credit with the FHLB, of which none was outstanding at December 31, 2013
or 2012, 2) a $50 million overnight federal funds line of credit with a correspondent bank, of which none was
outstanding at December 31, 2013 or 2012, and 3) an approximately $85 million line of credit through the
Federal Reserve Bank of Richmond’s (FRB) discount window, of which none was outstanding at December 31,
2013 or 2012.
In December 2012, the Company repaid its remaining $65 million in FHLB advances prior to their maturity dates,
which resulted in $0.5 million in prepayment penalties that are included in “Other gains (losses)” in the
Consolidated Statement of Income (Loss) for 2012.
The Company’s line of credit with the FHLB totaling approximately $312 million can be structured as either
131
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. The borrowing capacity
was reduced by $193 million and $143 million at December 31, 2013 and 2012, as a result of the Company
pledging letters of credit for public deposits at each of those dates. Accordingly, the Company’s unused FHLB
line of credit was $119 million at December 31, 2013.
The Company’s correspondent bank relationship allows the Company to purchase up to $50 million in federal
funds on an overnight, unsecured basis (federal funds purchased). The Company had no borrowings
outstanding under this line at December 31, 2013 or 2012.
The Company has a line of credit with the FRB discount window. This line is secured by a blanket lien on a
portion of the Company’s commercial and consumer loan portfolio (excluding real estate). Based on the
collateral owned by the Company as of December 31, 2013, the available line of credit was approximately $85
million. The Company had no borrowings outstanding under this line of credit at December 31, 2013 or 2012.
Note 11. Leases
Certain bank premises are leased under operating lease agreements. Generally, operating leases contain
renewal options on substantially the same basis as current rental terms. Rent expense charged to operations
under all operating lease agreements was $1.1 million in 2013, $1.3 million in 2012, and $1.2 million in 2011.
Future obligations for minimum rentals under noncancelable operating leases at December 31, 2013 are as
follows:
($ in thousands)
Year ending December 31:
2014
2015
2016
2017
2018
Thereafter
Total
$ 958
741
608
515
424
1,160
$ 4,406
132
Note 12. Employee Benefit Plans
401(k) Plan. The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Internal
Revenue Code. Employees who have completed three months service are eligible to participate in the plan.
New employees, who have met the service requirement, are automatically enrolled in the plan at a 2% deferral
rate, which can be modified by the employee at any time. An eligible employee may contribute up to 15% of
annual salary to the plan. The Company contributes an amount equal to the sum of 1) 100% of the employee’s
salary contributed up to 3% and 2) 50% of the employee’s salary contributed between 3% and 5%. Company
contributions are 100% vested immediately. The Company’s matching contribution expense was $1.4 million,
$1.2 million, and $1.2 million, for the years ended December 31, 2013, 2012, and 2011, respectively. Although
discretionary contributions by the Company are permitted by the plan, the Company did not make any such
contributions in 2013, 2012 or 2011. The Company’s matching and discretionary contributions are made in the
form of Company stock, which can be transferred by the employee into other investment options offered by the
plan at any time. Employees are not permitted to invest their own contributions in Company stock.
Pension Plan. Historically, the Company offered a noncontributory defined benefit retirement plan (the
“Pension Plan”) that qualified under Section 401(a) of the Internal Revenue Code. 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 (5 highest consecutive calendar years’ earnings out of the last 10 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.
During the second quarter of 2009, the Company amended the Pension Plan to limit eligibility to employees
hired prior to June 19, 2009. Effective December 31, 2012, the Company froze the Pension Plan for all
participants. Although no previously accrued benefits were lost, employees no longer accrue benefits for
service subsequent to 2012. The Company made the decision to freeze the Pension Plan because of the
uncertainty of future costs and to have a uniform set of benefits for all employees. The freezing of the Pension
Plan resulted in an immediate $6.6 million reduction in its benefit obligation, which is referred to as a
“curtailment gain” in the table below. The curtailment gain reduced the difference between the assets of the
Pension Plan and its benefit obligation, and therefore had the effect of lowering the corresponding liability of
the plan and lowering the amount of accumulated other comprehensive loss, which resulted in an increase in
shareholders’ equity.
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 in 2013 and contributed $2,500,000 to the Plan in both of the years ended December 31, 2012
and 2011. The Company expects that it will contribute $2,000,000 to the Pension Plan in 2014.
133
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as
computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between
the two amounts representing the funded status of the Pension Plan as of the end of the respective year.
($ in thousands)
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Curtailment gain
Benefit obligation at end of year
Change in plan assets
Plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Plan assets at end of year
2013
2012
2011
$ 32,272
−
1,284
(2,343)
(665)
−
30,548
30,124
6,874
−
(665)
36,333
40,084
1,835
1,451
(4,006)
(503)
(6,589)
32,272
24,466
3,661
2,500
(503)
30,124
31,140
1,782
1,638
6,004
(480)
−
40,084
22,431
15
2,500
(480)
24,466
Funded status at end of year
$ 5,785
(2,148)
(15,618)
The accumulated benefit obligation related to the Pension Plan was $30,548,000, $32,272,000, and $29,641,000
at December 31, 2013, 2012, and 2011, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets
at December 31, 2013 and 2012 as it relates to the Pension Plan, excluding the related deferred tax assets.
($ in thousands)
Other assets
Other liabilities
2013
2012
$ 5,785
−
$ 5,785
1,232
(3,380)
(2,148)
The following table presents information regarding the amounts recognized in accumulated other
comprehensive income (AOCI) at December 31, 2013 and 2012, as it relates to the Pension Plan.
($ in thousands)
2013
2012
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
Net amount recognized as increase (decrease) to AOCI
$ 3,579
−
3,579
(1,396)
$ 2,183
(3,380)
−
(3,380)
1,317
(2,063)
134
The following table reconciles the beginning and ending balances of accumulated other comprehensive income
(AOCI) at December 31, 2013 and 2012, as it relates to the Pension Plan:
($ in thousands)
2013
2012
Accumulated other comprehensive loss at beginning of fiscal year
Net gain (loss) arising during period
Prior service cost
Transition Obligation
Amortization of unrecognized actuarial loss
Amortization of prior service cost and transition obligation
Tax (expense) benefit of changes during the year, net
Accumulated other comprehensive gain (loss) at end of fiscal year
$ (2,063)
6,910
̶
̶
49
̶
(2,713)
$ 2,183
(9,855)
12,288
32
30
545
14
(5,117)
(2,063)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the
Pension Plan:
($ in thousands)
2013
2012
Prepaid pension cost as of beginning of fiscal year
Net periodic pension income (cost) for fiscal year
Actual employer contributions
Effect of curtailment
Prepaid pension asset as of end of fiscal year
$ 1,232
974
̶
̶
$ 2,206
671
(1,876)
2,500
(63)
1,232
Net pension (income) cost for the Pension Plan included the following components for the years ended
December 31, 2013, 2012, and 2011:
($ in thousands)
2013
2012
2011
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Expected return on plan assets
Net amortization and deferral
Net periodic pension (income) cost
$ ̶
1,284
(2,307)
49
$ (974)
1,835
1,451
(1,969)
559
1,876
1,782
1,638
(1,716)
395
2,099
The following table is an estimate of the benefits that will be paid in accordance with the Pension Plan during
the indicated time periods:
($ in thousands)
Year ending December 31, 2014
Year ending December 31, 2015
Year ending December 31, 2016
Year ending December 31, 2017
Year ending December 31, 2018
Years ending December 31, 2019-2023
Estimated
benefit
payments
$ 866
966
1,127
1,225
1,350
8,248
For each of the years ended December 31, 2013, 2012, and 2011, the Company used an expected long-term
rate-of-return-on-assets assumption of 7.75%. The Company arrived at this rate based primarily on a third-party
investment consulting firm’s historical analysis of investment returns, which indicated that the mix of the
Pension Plan’s assets (generally 75% equities and 25% fixed income) can be expected to return approximately
7.75% on a long term basis.
135
Funds in the Pension Plan are invested in a mix of investment types in accordance with the Pension Plan’s
investment policy, which is intended to provide an average annual rate of return of 7% to 10%, while
maintaining proper diversification. Except for Company stock, all of the Pension Plan’s assets are invested in an
unaffiliated bank money market account or mutual funds. The investment policy of the Pension Plan does not
permit the use of derivatives, except to the extent that derivatives are used by any of the mutual funds invested
in by the Pension Plan. The following table presents the targeted mix of the Pension Plan’s assets as of
December 31, 2013, as set out by the Plan’s investment policy:
Investment type
Fixed income investments
Cash/money market account
US government bond fund
US corporate bond fund
US corporate high yield bond fund
Equity investments
Large cap value fund
Large cap growth fund
Mid cap equity fund
Small cap growth fund
Foreign equity fund
Company stock
Targeted %
of Total Assets
Acceptable Range % of
Total Assets
2%
10%
10%
5%
20%
20%
10%
8%
10%
5%
1%-5%
10%-20%
5%-15%
0%-10%
20%-30%
20%-30%
5%-15%
5%-15%
5%-15%
0%-10%
The Pension Plan’s investment strategy contains certain investment objectives and risks for each permitted
investment category. To ensure that risk and return characteristics are consistently followed, the Pension Plan’s
investments are reviewed at least semi-annually and rebalanced within the acceptable range. Performance
measurement of the investments employs the use of certain investment category and peer group benchmarks.
The investment category benchmarks as of December 31, 2013 are as follows:
Investment Category
Investment Category Benchmark
Range of Acceptable Deviation
from Investment Category
Benchmark
Fixed income investments
Cash/money market account
US government bond fund
US corporate bond fund
US corporate high yield bond fund
Equity investments
Large cap value fund
Large cap growth fund
Mid cap equity fund
Small cap growth fund
Foreign equity fund
Company stock
Citigroup Treasury Bill Index – 3 month
Barclays Intermediate Government Bond Index
Barclays Aggregate Index
Barclays High Yield Index
Russell 1000 Value Index
Russell 1000 Growth Index
Russell Mid Cap Index
Russell 2000 Growth Index
MSCI EAFE Index
Russell 2000 Index
0-50 basis points
0-200 basis points
0-200 basis points
0-200 basis points
0-300 basis points
0-300 basis points
0-300 basis points
0-300 basis points
0-300 basis points
0-300 basis points
Each of the investment fund’s average annualized return over a three-year period should be within the range of
acceptable deviation from the benchmarked index shown above. In addition to the investment category
benchmarks, the Pension Plan also utilizes certain Peer Group benchmarks, based on Morningstar percentile
rankings for each investment category. Funds are generally considered to be underperformers if their category
ranking is below the 75th percentile for the trailing one-year period; the 50th percentile for the trailing three-year
period; and the 25th percentile for the trailing five-year period.
The Pension Plan invests in various investment securities which are exposed to various risks such as interest rate,
market, and credit risks. All of these risks are monitored and managed by the Company. No significant
136
concentration of risk exists within the plan assets at December 31, 2013.
The fair values of the Company’s pension plan assets at December 31, 2013, by asset category, are as follows:
($ in thousands)
Total Fair Value
at December
31, 2013
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fixed income investments
Money market funds
US government bond fund
US corporate bond fund
US corporate high yield bond fund
Equity investments
Large cap value fund
Large cap growth fund
Small cap growth fund
Mid cap growth fund
Foreign equity fund
Company stock
Total
$ 292
3,257
3,231
1,688
7,512
7,740
3,142
3,783
3,696
1,992
$ 36,333
−
3,257
3,231
1,688
7,512
7,740
3,142
3,783
3,696
1,992
36,041
292
−
−
−
−
−
−
−
−
−
−
−
−
−
292
−
−
−
−
−
−
−
The fair values of the Company’s pension plan assets at December 31, 2012, by asset category, are as follows:
($ in thousands)
Total Fair Value
at December
31, 2012
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fixed income investments
Money market funds
US government bond fund
US corporate bond fund
US corporate high yield bond fund
Equity investments
Large cap value fund
Large cap growth fund
Small cap growth fund
Mid cap growth fund
Foreign equity fund
Company stock
Total
$ 441
2,995
3,008
1,563
6,101
6,020
2,514
3,153
3,147
1,182
$ 30,124
−
2,995
3,008
1,563
6,101
6,020
2,514
3,153
3,147
1,182
29,683
441
−
−
−
−
−
−
−
−
−
−
−
−
−
441
−
−
−
−
−
−
−
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, 2013 and 2012.
- Money market fund: valued on the active market on which it is traded; at amortized cost, which
approximates fair value.
- Mutual funds, common stocks: valued at the closing price reported on the active market on which
the individual securities are traded.
137
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 qualified Pension Plan (described
above), and (ii) 50% of the participant’s primary social security benefit. Final average compensation means the
average of the 5 highest consecutive calendar years of earnings during the last 10 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. Although no previously accrued
benefits were lost, participants no longer accrue benefits for service subsequent to 2012. The freezing of the
SERP resulted in an immediate $0.5 million reduction in its benefit obligation, which is referred to as a
“curtailment gain” in the table below. The curtailment gain reduced the liability of the plan and lowered the
amount of accumulated other comprehensive loss, which resulted in an increase in shareholders’ equity.
The following table reconciles the beginning and ending balances of the SERP’s benefit obligation, as computed
by the Company’s independent actuarial consultants:
($ in thousands)
Change in benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Curtailment gain
Projected benefit obligation at end of year
Plan assets
Funded status at end of year
2013
2012
2011
$ 6,813
304
203
(1,856)
(172)
̶
5,292
─
$ (5,292)
8,064
303
280
(1,201)
(146)
(487)
6,813
─
(6,813)
7,433
292
351
93
(105)
−
8,064
─
(8,064)
The accumulated benefit obligation related to the SERP was $5,292,000, $6,813,000, and $7,199,000 at
December 31, 2013, 2012, and 2011, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets
at December 31, 2013 and 2012 as it relates to the SERP, excluding the related deferred tax assets.
($ in thousands)
Other assets – prepaid pension asset (liability)
Other assets (liabilities)
2013
2012
$ (6,848)
1,556
$ (5,292)
(6,614)
(199)
(6,813)
138
The following table presents information regarding the amounts recognized in AOCI at December 31, 2013 and
2012.
($ in thousands)
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
Net amount recognized as increase (decrease) to AOCI
2013
2012
$ 1,556
−
1,556
(607)
$ 949
(199)
−
(199)
79
(120)
The following table reconciles the beginning and ending balances of accumulated other comprehensive income
(AOCI) at December 31, 2013 and 2012, as it relates to the SERP:
($ in thousands)
2013
2012
Accumulated other comprehensive loss at beginning of fiscal year
Net gain (loss) arising during period
Prior service cost
Amortization of unrecognized actuarial loss
Amortization of prior service cost and transition obligation
Tax expense related to changes during the year, net
Accumulated other comprehensive income (loss) at end of fiscal year
$ (120)
1,856
−
(101)
−
(686)
$ 949
(1,203)
1,687
83
−
19
(706)
(120)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the
SERP:
($ in thousands)
Prepaid pension cost (liability) as of beginning of fiscal year
Net periodic pension cost for fiscal year
Benefits paid
Effect of curtailment
Prepaid pension cost (liability) as of end of fiscal year
2013
2012
$ (6,614)
(406)
172
̶
$ (6,848)
(6,075)
(602)
146
(83)
(6,614)
Net pension cost for the SERP included the following components for the years ended December 31, 2013, 2012,
and 2011:
($ in thousands)
2013
2012
2011
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Net amortization and deferral
Net periodic pension cost
$ 304
203
(101)
$ 406
303
280
19
602
292
351
30
673
139
The following table is an estimate of the benefits that will be paid in accordance with the SERP during the
indicated time periods:
($ in thousands)
Year ending December 31, 2014
Year ending December 31, 2015
Year ending December 31, 2016
Year ending December 31, 2017
Year ending December 31, 2018
Years ending December 31, 2019-2023
Estimated
benefit
payments
$ 237
288
341
350
397
2,140
The following assumptions were used in determining the actuarial information for the Pension Plan and the
SERP for the years ended December 31, 2013, 2012, and 2011:
Discount rate used to determine net periodic
pension cost
Discount rate used to calculate end of year
liability disclosures
Expected long-term rate of return on assets
Rate of compensation increase
2013
Pension
Plan
SERP
3.97%
3.97%
4.78%
7.75%
n/a
4.78%
n/a
n/a
2012
2011
Pension
Plan
4.39%
3.97%
7.75%
3.50%
SERP
4.39%
3.97%
n/a
3.50%
Pension
Plan
5.59%
4.39%
7.75%
5.00%
SERP
5.59%
4.39%
n/a
5.00%
The Company’s discount rate policy is based on a calculation of the Company’s expected pension payments, with
those payments discounted using the Citigroup Pension Index yield curve.
Note 13. Commitments, Contingencies, and Concentrations of Credit Risk
See Note 11 with respect to future obligations under noncancelable operating leases.
In the normal course of the Company’s business, there are various outstanding commitments and contingent
liabilities such as commitments to extend credit that are not reflected in the financial statements. The following
table presents the Company’s outstanding loan commitments at December 31, 2013.
($ in millions)
Type of Commitment
Outstanding closed-end loan commitments
Unfunded commitments on revolving lines of
credit, credit cards and home equity loans
Total
Fixed Rate
$ 57
69
$ 126
Variable Rate
99
187
286
Total
156
256
412
At December 31, 2013 and 2012, the Company had $14.5 million and $12.8 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 guarantee 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 payment of the guarantees would generally be triggered by a continued
nonpayment of an obligation owed by the customer to the supplier. The maximum potential amount of future
payments (undiscounted) the Company could be required to make under the guarantees in the event of
nonperformance by the parties to whom credit or financial guarantees have been extended is represented by
the contractual amount of the standby letter of credit. In the event that the Company is required to honor a
standby letter of credit, a note, already executed with the customer, is triggered which provides repayment
140
terms and any collateral. Over the past two years, the Company has only had to honor an insignificant amount
of standby letters of credit, which have been or are being repaid by the borrower without any loss to the
Company. Management expects any draws under existing commitments to be funded through normal
operations.
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.
The Bank grants primarily commercial and installment loans to customers throughout its market area, which
consists of Anson, Beaufort, Bladen, Brunswick, Buncombe, Cabarrus, Carteret, Chatham, Columbus, Dare,
Davidson, Duplin, Guilford, Harnett, Iredell, Lee, Mecklenburg, Montgomery, Moore, New Hanover, Onslow,
Randolph, Richmond, Robeson, Rockingham, Rowan, Scotland, Stanly and Wake Counties in North Carolina,
Chesterfield, Dillon, Florence and Horry Counties in South Carolina, and Montgomery, Pulaski, Roanoke,
Washington and Wythe Counties in Virginia. The real estate loan portfolio can be affected by the condition of
the local real estate market. The commercial and installment loan portfolios can be affected by local economic
conditions.
The Company’s loan portfolio is not concentrated in loans to any single borrower or to a relatively small number
of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or
industries that would be similarly affected by economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers,
industries and geographic regions, the Company monitors exposure to credit risk that could arise from potential
concentrations of lending products and practices such as loans that subject borrowers to substantial payment
increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-
to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk
should economic conditions change over the course of a loan’s life. For example, the Company makes variable
rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon
payment loans). These loans are underwritten and monitored to manage the associated risks. The Company
has determined that there is no concentration of credit risk associated with its lending policies or practices.
The Company’s investment portfolio consists principally of obligations of government-sponsored enterprises,
mortgage-backed securities guaranteed by government-sponsored enterprises, corporate bonds, FHLB stock and
general obligation municipal securities. The following are the fair values at December 31, 2013 of available for
sale and held to maturity securities to any one issuer/guarantor that exceed $2.0 million, with such amounts
representing the maximum amount of credit risk that the Company would incur if the issuer did not repay the
obligation.
($ in thousands)
Issuer
Ginnie Mae - mortgage-backed securities
Small Business Administration
Federal Farm Credit bonds
Federal Home Loan Bank System - bonds
First Citizens Bancorp (South Carolina) – bond / trust preferred securities
Federal Home Loan Bank of Atlanta - common stock
Craven County, North Carolina municipal bond
Spartanburg, South Carolina Sanitary Sewer District municipal bond
South Carolina State municipal bond
Virginia State Housing Authority municipal bond
Amortized Cost
$ 80,994
65,750
9,432
9,000
3,999
3,894
3,621
3,286
2,142
2,130
Fair Value
80,713
64,476
9,267
8,978
3,598
3,894
3,823
3,444
2,255
2,254
The Company places its deposits and correspondent accounts with the Federal Home Loan Bank of Atlanta, the
Federal Reserve Bank, BB&T, and Bank of America and sells its federal funds to Bank of America. At December
141
31, 2013, the Company had deposits in the Federal Home Loan Bank of Atlanta totaling $1.8 million, deposits of
$126.5 million in the Federal Reserve Bank, deposits of $36.0 million in Bank of America, and deposits of $5
million with BB&T. None of the deposits held at the Federal Home Loan Bank of Atlanta or the Federal Reserve
Bank, are FDIC-insured, however the Federal Reserve Bank is a government entity and therefore risk of loss is
minimal. The deposits held at Bank of America and BB&T are FDIC-insured up to $250,000. The Company also
had $3.2 million in deposits with various holders through an internet-based CD marketplace, and all of these
deposits are 100% FDIC-insured.
Note 14. Fair Value of Financial Instruments
Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance
describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2013. The impaired loans shown below are those loans in
which the value is based on the underlying collateral value.
($ in thousands)
Description of Financial Instruments
Recurring
Securities available for sale:
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total available for sale securities
Nonrecurring
Impaired loans – covered
Impaired loans – non-covered
Foreclosed real estate – covered
Foreclosed real estate – non-covered
Fair Value at
December 31,
2013
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
18,245
147,187
3,598
4,011
173,041
—
—
—
—
—
—
—
—
—
15,284
13,020
24,497
12,251
$ 18,245
147,187
3,598
4,011
$ 173,041
$ 15,284
13,020
24,497
12,251
142
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2012. The impaired loans shown below are those loans in
which the value is based on the underlying collateral value.
($ in thousands)
Description of Financial Instruments
Recurring
Securities available for sale:
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total available for sale securities
Nonrecurring
Impaired loans – covered
Impaired loans – non-covered
Foreclosed real estate – covered
Foreclosed real estate – non-covered
Fair Value at
December 31,
2012
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 11,596
146,926
3,813
5,017
$ 167,352
$ 12,234
21,021
47,290
26,285
—
—
—
—
—
—
—
—
—
11,596
146,926
3,813
5,017
167,352
—
—
—
—
—
—
—
—
—
12,234
21,021
47,290
26,285
The following is a description of the valuation methodologies used for instruments measured at fair value.
Securities Available for Sale — When quoted market prices are available in an active market, the
securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available,
but fair values can be estimated by observing quoted prices of securities with similar characteristics, the
securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s
Level 2 securities are determined by our third-party securities portfolio manager using matrix pricing.
Matrix pricing is a mathematical technique widely used in the industry to value debt securities without
relying exclusively on quoted prices for the specific securities but rather by relying on the securities’
relationship to other benchmark quoted securities. For the Company, Level 2 securities include
mortgage-backed securities, collateralized mortgage obligations, government-sponsored enterprise
securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy.
The Company reviews the pricing methodologies utilized by the portfolio manager to ensure the fair
value determination is consistent with the applicable accounting guidance and that the investments are
properly classified in the fair value hierarchy. Further, the Company validates the fair values for a
sample of securities in the portfolio by comparing the fair values provided by the portfolio manager to
prices from other independent sources for the same or similar securities. The Company analyzes
unusual or significant variances and conducts additional research with the portfolio manager, if
necessary, and takes appropriate action based on its findings.
Impaired loans — Fair values for impaired loans in the above table are generally collateral dependent
and are estimated based on underlying collateral values securing the loans. Collateral may be in the
form of real estate or business assets including equipment, inventory and accounts receivable. The vast
majority of the collateral is real estate. The value of real estate collateral is determined using an income
or market valuation approach based on an appraisal conducted by an independent, licensed third party
appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed
significant, or the net book value on the applicable borrower’s financial statements if not considered
significant. Likewise, values for inventory and accounts receivable collateral are based on borrower
financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Any fair
143
value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated
Statements of Income (Loss).
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, based on a current appraisal that is
generally prepared using an income or market valuation approach and conducted by an independent,
licensed third party appraiser, adjusted for estimated selling costs (Level 3). At the time of foreclosure,
any excess of the loan balance over the fair value of the real estate held as collateral is treated as a
charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure,
any excess of the real estate recorded value over the fair value of the real estate is treated as a
foreclosed real estate write-down on the Consolidated Statements of Income (Loss). In December 2012,
the Company recorded a write-down of $10.6 million related to its non-covered foreclosed properties.
This write-down reduced the carrying value of these properties by approximately 29% beyond their
standard carrying value as described above. This write-down was recorded because of management’s
intent to dispose of these properties in an expedited manner and accept sales prices lower than prior
practice.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31,
2013, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description
Impaired loans – covered
Fair Value at
December 31,
2013
$ 15,284
Valuation
Technique
Appraised value
Impaired loans – non-covered
13,020
Appraised value
Foreclosed real estate – covered
24,497
Appraised value
Foreclosed real estate – non-covered
12,251
Appraised value
General Range
of Significant
Unobservable
Input Values
0-10%
0-37%
0-10%
0-40%
Significant Unobservable
Inputs
Discounts to reflect current
market conditions, ultimate
collectability, and estimated
costs to sell
Discounts to reflect current
market conditions, ultimate
collectability, and estimated
costs to sell
Discounts to reflect current
market conditions and
estimated costs to sell
Discounts to reflect current
market conditions,
abbreviated holding period
and estimated costs to sell
144
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31,
2012, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description
Impaired loans – covered
Fair Value at
December 31,
2012
$ 12,234
Valuation
Technique
Appraised value
Impaired loans – non-covered
21,021
Appraised value
Foreclosed real estate – covered
47,290
Appraised value
Foreclosed real estate – non-covered
26,285
Appraised value
General Range
of Significant
Unobservable
Input Values
0-10%
0-21%
0-10%
0-40%
Significant Unobservable
Inputs
Discounts to reflect current
market conditions, ultimate
collectability, and estimated
costs to sell
Discounts to reflect current
market conditions, ultimate
collectability, and estimated
costs to sell
Discounts to reflect current
market conditions and
estimated costs to sell
Discounts to reflect current
market conditions,
abbreviated holding period
and estimated costs to sell
Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or
change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities
measured on a recurring basis during the years ended December 31, 2013 or 2012.
For the years ended December 31, 2013 and 2012, the decrease in the fair value of securities available for sale
was $5,311,000 and $606,000, respectively, which is included in other comprehensive income (net of tax benefit
of $2,072,000 and $237,000, respectively). Fair value measurement methods at December 31, 2013 and 2012
are consistent with those used in prior reporting periods.
As discussed in Note 1(p), the Company is required to disclose estimated fair values for its financial instruments.
Fair value estimates as of December 31, 2013 and 2012 and limitations thereon are set forth below for the
Company’s financial instruments. See Note 1(p) for a discussion of fair value methods and assumptions, as well
as fair value information for off-balance sheet financial instruments.
145
($ in thousands)
Cash and due from banks,
noninterest-bearing
Due from banks, interest-
bearing
Federal funds sold
Securities available for sale
Securities held to maturity
Presold mortgages in process
of settlement
Total loans, net of allowance
Loans held for sale
Accrued interest receivable
FDIC indemnification asset
Bank-owned life insurance
Deposits
Borrowings
Accrued interest payable
Level in
Fair
Value
Hierarchy
December 31, 2013
December 31, 2012
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Level 1
$ 83,881
83,881
96,588
96,588
Level 1
Level 1
Level 2
Level 2
Level 1
Level 3
Level 2
Level 1
Level 3
Level 1
Level 2
Level 2
Level 2
136,644
2,749
173,041
53,995
5,422
2,414,689
−
9,649
48,622
44,040
2,751,019
46,394
879
136,644
2,749
173,041
56,700
5,422
2,352,834
−
9,649
47,032
44,040
2,752,375
34,795
879
144,919
−
167,352
56,064
8,490
2,330,055
30,393
10,201
102,559
27,857
2,821,360
46,394
1,299
144,919
−
167,352
61,496
8,490
2,276,175
30,393
10,201
100,396
27,857
2,823,989
20,981
1,299
Fair value estimates are made at a specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no
highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities
include net premises and equipment, intangible and other assets such as deferred income taxes, prepaid
expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income
tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of the estimates.
Note 15. Equity-Based Compensation Plans
At December 31, 2013, the Company had the following equity-based compensation plans: the First Bancorp 2007
Equity Plan, the First Bancorp 2004 Stock Option Plan, and the First Bancorp 1994 Stock Option Plan. The
Company’s shareholders approved all equity-based compensation plans. The First Bancorp 2007 Equity Plan
became effective upon the approval of shareholders on May 2, 2007. As of December 31, 2013, the First Bancorp
2007 Equity Plan was the only plan that had shares available for future grants.
The First Bancorp 2007 Equity Plan is intended to serve as a means to attract, retain and motivate key
employees and directors and to associate the interests of the plans’ participants with those of the Company and
its shareholders. The First Bancorp 2007 Equity Plan allows for both grants of stock options and other types of
equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock,
unrestricted stock, and performance units.
Recent equity grants to employees have either had performance vesting conditions, service vesting conditions,
146
or both. Compensation expense for these grants is recorded over the various service periods based on the
estimated number of equity grants that are probable to vest. No compensation cost is recognized for grants
that do not vest and any previously recognized compensation cost will be reversed. As it relates to director
equity grants, the Company grants common shares, valued at approximately $16,000 to each non-employee
director (currently 12 in total) in June of each year. Compensation expense associated with these director
grants is recognized on the date of grant since there are no vesting conditions.
Pursuant to an employment agreement, the Company granted the chief executive officer 75,000 non-qualified
stock options and 40,000 shares of restricted stock during the third quarter of 2012. The option award and the
restricted stock award will vest in full on December 31, 2014 and December 31, 2015, respectively, if the
Company achieves certain earnings targets for those years, and will be forfeited if the applicable targets are not
achieved. Compensation expense for this grant will be recorded over the various periods based on the
estimated number of options and restricted stock that are probable to vest. If the awards do not vest, no
compensation cost will be recognized and any previously recognized compensation cost will be reversed. Based
on current conditions, the Company has concluded that it is not probable that these awards will vest, and thus
no compensation expense has been recorded.
The Company granted long-term restricted shares of common stock to certain senior executives on February 23,
2012 with a two year minimum vesting period. The total compensation expense associated with this grant was
$58,900 and the grant will fully vest on February 23, 2014. The Company recorded $20,900 and $37,400 in
compensation expense related to this grant during 2013 and 2012, respectively, and expects to record the
remaining $600 in expense during the first quarter of 2014.
The Company granted long-term restricted shares of common stock to certain senior executives on February 24,
2011 with a two year minimum vesting period. The total compensation expense associated with the February
24, 2011 grant was $89,600 and the grant fully vested on February 24, 2013. The Company recorded $6,500,
$41,400, and $41,700 in compensation expense during 2013, 2012, and 2011, respectively.
The Company granted long-term restricted shares of common stock to certain senior executives on December
11, 2009 with a two year minimum vesting period. The total compensation expense associated with the
December 11, 2009 grant was $398,000 and the grant fully vested on December 11, 2011. The Company
recorded $298,000 in compensation expense related to this grant during 2011.
The Company also recorded compensation expense of $299,000 in 2011 related to the partial vesting of a June
17, 2008 grant of a combination of performance units and stock options.
Under the terms of the predecessor plans and the First Bancorp 2007 Equity Plan, stock options can have a term
of no longer than ten years, and all options granted thus far under these plans have had a term of ten years.
The Company’s awards, including restricted stock and stock options, provide for immediate vesting if there is a
change in control (as defined in the plans).
At December 31, 2013, there were 463,813 stock options outstanding related to the three First Bancorp plans,
with exercise prices ranging from $9.76 to $22.12. At December 31, 2013, there were 761,538 shares remaining
available for grant under the First Bancorp 2007 Equity Plan.
The Company issues new shares of common stock when options are exercised.
The Company measures the fair value of each option award on the date of grant using the Black-Scholes option-
pricing model. The Company determines the assumptions used in the Black-Scholes option pricing model as
follows: the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the
dividend yield is based on the Company’s dividend yield at the time of the grant (subject to adjustment if the
147
dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the
option); the volatility factor is based on the historical volatility of the Company’s stock (subject to adjustment if
future volatility is reasonably expected to differ from the past); and the weighted-average expected life is based
on the historical behavior of employees related to exercises, forfeitures and cancellations.
The Company’s equity grants for 2013 were the issuance of 13,164 shares of common stock to non-employee
directors on June 3, 2013 (1,097 shares per director), at a fair market value of $14.68 per share, which was the
closing price of the Company’s common stock on that date.
The Company’s equity grants for 2012 were the issuance of 1) 9,559 shares of long-term restricted stock to
certain senior executives on February 23, 2012, at a fair market value of $10.96 per share, which was the closing
price of the Company’s common stock on that date, 2) 25,452 shares of common stock to non-employee
directors on June 1, 2012 (1,818 shares per director), at a fair market value of $8.86 per share, which was the
closing price of the Company’s common stock on that date, 3) 40,000 shares of restricted stock to the chief
executive officer on August 28, 2012, at a fair market value of $9.76 per share, which was the closing price of the
Company’s common stock on that date, and 4) 75,000 stock options to the chief executive officer on August 28,
2012, at a fair value of $3.65 per share on the date of the grant using the Black-Scholes option pricing model
with the following assumptions:
Expected dividend yield
Risk-free interest rate
Expected life
Expected volatility
2012
3.28%
1.64%
10 years
41.82%
The Company recorded total stock-based compensation expense of $222,000, $311,000 and $905,000 for the
years ended December 31, 2013, 2012, and 2011, respectively. Of the $222,000 in expense that was recorded in
2013, approximately $193,000 related to the June 3, 2013 director grants, which is classified as “other operating
expenses” in the Consolidated Statements of Income (Loss). The remaining $29,000 in expense relates the
employee grants discussed above and is recorded as “salaries expense.” Stock based compensation is reflected
as an adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash
Flows. The Company recognized $87,000, $121,000, and $353,000 of income tax benefits related to stock based
compensation expense in the income statement for the years ended December 31, 2013, 2012, and 2011,
respectively.
As noted above, certain of the Company’s stock option 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 has
elected to recognize compensation expense for awards with graded vesting schedules on a straight-line basis
over the requisite service period for the entire award. Compensation expense is based on the estimated
number of stock options and awards that will ultimately vest. Over the past five years, there have only been
minimal amounts of forfeitures, and therefore the Company assumes that all awards granted without
performance conditions will become vested.
148
The following table presents information regarding the activity since December 31, 2010 related to all of the
Company’s stock options outstanding:
Options Outstanding
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Term (years)
Aggregate
Intrinsic
Value
Number of
Shares
Balance at December 31, 2010
642,397
$ 18.11
Granted
Exercised
Forfeited
Expired
−
(2,300)
−
(146,247)
−
13.30
−
15.47
$ 6,949
Balance at December 31, 2011
493,850
$ 18.92
Granted
Exercised
Forfeited
Expired
75,000
−
−
(47,237)
9.76
−
−
16.70
Balance at December 31, 2012
521,613
$ 17.80
Granted
Exercised
Forfeited
Expired
−
−
−
(57,800)
−
−
−
16.88
Outstanding at December 31, 2013
463,813
$ 17.92
3.2
$ 572,992
Exercisable at December 31, 2013
388,813
$ 19.49
2.2
$ 62,617
No stock options were exercised in 2012 or 2013. In 2011, the Company received $30,000 as a result of stock
option exercises. The Company recorded no tax benefits from the exercise of nonqualified stock options during
the years ended December 31, 2013, 2012, and 2011.
The following table summarizes information about the stock options outstanding at December 31, 2013:
Range of
Exercise Prices
$8.85 to $11.06
$11.06 to $13.27
$13.27 to $15.48
$15.48 to $17.70
$17.70 to $19.91
$19.91 to $22.12
Options Outstanding
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise
Price
Number
Outstanding
at 12/31/13
Options Exercisable
Number
Exercisable
at 12/31/13
Weighted-
Average
Exercise
Price
75,000
−
27,000
109,584
56,250
195,979
463,813
8.7
−
5.4
3.9
1.7
0.9
3.2
$ 9.76
−
14.35
16.60
19.65
21.77
$ 17.92
− $ −
−
−
14.35
27,000
16.60
109,584
19.65
56,250
21.77
195,979
388,813 $ 19.49
149
The following table presents information regarding the activity during 2011, 2012, and 2013 related to the
Company’s outstanding performance units and restricted stock:
Nonvested Performance Units
Long-Term Restricted Stock
Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Grant-Date
Fair Value
Number of
Units
Number of
Units
Nonvested at December 31, 2010
27,113
$ 16.53
29,267
$ 13.59
Granted during the period
Vested during the period
Forfeited or expired during the period
–
(27,022)
(91)
–
16.53
16.53
7,259
(29,267)
–
14.54
13.59
–
Nonvested at December 31, 2011
Granted during the period
Vested during the period
Forfeited or expired during the period
Nonvested at December 31, 2012
Granted during the period
Vested during the period
Forfeited or expired during the period
Nonvested at December 31, 2013
Note 16. Regulatory Restrictions
−
–
–
–
−
–
–
–
−
$ −
7,259
$ 14.54
–
–
–
49,559
–
(2,474)
9.99
–
12.55
$ −
54,344
$ 10.48
–
–
–
–
(6,163)
(2,807)
–
14.54
10.96
$ −
45,374
$ 9.90
The Company is regulated by the Federal Reserve Board and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Bank is regulated by the FDIC 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 pay dividends only out of
undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. As of December 31,
2013, the Bank had undivided profits of approximately $178,290,000 which were available for the payment of
dividends (subject to remaining in compliance with regulatory capital requirements). As of December 31, 2013,
approximately $234,038,000 of the Company’s investment in the Bank is restricted as to transfer to the
Company without obtaining prior regulatory approval.
The average reserve balance maintained by the Bank under the requirements of the Federal Reserve Board was
approximately $510,000 for the year ended December 31, 2013.
The Company and the Bank must comply with regulatory capital requirements established by the Federal
Reserve Board and FDIC. 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. These
150
capital standards require the Company and the Bank to maintain minimum ratios of “Tier 1” capital to total risk-
weighted assets (“Tier I Capital Ratio”) and total capital to risk-weighted assets of 4.00% and 8.00% (“Total
Capital Ratio”), respectively. Tier 1 capital is comprised of total shareholders’ equity, excluding unrealized gains
or losses from the securities available for sale, less intangible assets, and total capital is comprised of Tier 1
capital plus certain adjustments, the largest of which for the Company and the Bank is the allowance for loan
losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company and the Bank,
adjusted for their related risk levels using formulas set forth in Federal Reserve Board and FDIC regulations.
In addition to the risk-based capital requirements described above, the Company and the Bank are subject to a
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly
average total assets (“Leverage Ratio”) of 3.00% to 5.00%, depending upon the institution’s composite ratings as
determined by its regulators. The Federal Reserve Board has not advised the Company of any requirement
specifically applicable to it.
In addition to the minimum capital requirements described above, the regulatory framework for prompt
corrective action also contains specific capital guidelines applicable to banks for classification as “well
capitalized,” which are presented with the minimum ratios, the Company’s ratios and the Bank’s ratios as of
December 31, 2013 and 2012 in the following table. Based on the most recent notification from its regulators,
the Bank is well capitalized under the framework. There are no conditions or events since that notification that
management believes have changed the Company’s classification.
Also see Note 19 for discussion of preferred stock transactions that have affected the Company’s capital ratios.
($ in thousands)
As of December 31, 2013
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
As of December 31, 2012
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
(must equal or exceed)
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
(must equal or exceed)
$ 374,480
371,765
16.79%
16.69%
$ 178,270
178,128
8.00%
8.00%
$ N/A
222,661
N/A
10.00%
346,353
343,659
346,353
343,659
15.53%
15.42%
11.18%
11.10%
89,135
89,064
123,959
123,878
$ 359,554
358,098
16.67%
16.61%
$ 172,572
172,424
332,350
330,916
332,350
330,916
15.41%
15.35%
10.24%
10.20%
86,286
86,212
129,820
129,742
4.00%
4.00%
4.00%
4.00%
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
N/A
133,596
N/A
154,847
$ N/A
215,530
N/A
129,318
N/A
162,178
N/A
6.00%
N/A
5.00%
N/A
10.00%
N/A
6.00%
N/A
5.00%
151
Note 17. Supplementary Income Statement Information
Components of other noninterest income/expense exceeding 1% of total income for any of the years ended
December 31, 2013, 2012, and 2011 are as follows:
($ in thousands)
2013
2012
2011
Other service charges, commissions, and fees – debit card interchange income
Other service charges, commissions, and fees – other interchange income
$ 5,637
1,402
5,262
1,213
Other operating expenses – interchange expense
Other operating expenses – stationery and supplies
Other operating expenses – telephone expense
Other operating expenses – FDIC insurance expense
Other operating expenses – repossession and collection – non-covered
Other operating expenses – repossession and collection – covered, net of FDIC
reimbursement and rental income
Other operating expenses – outside consultants
Other operating expenses – legal and audit
Other operating expenses – severance pay
2,508
2,078
1,489
2,618
2,216
726
2,460
1,204
1,895
2,416
2,240
1,683
2,678
3,107
1,642
1,916
1,722
500
4,757
1,033
2,042
2,867
2,127
3,008
3,492
1,968
1,842
1,595
̶
Note 18. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS
($ in thousands)
Assets
Cash on deposit with bank subsidiary
Investment in wholly-owned subsidiaries, at equity
Premises and Equipment
Other assets
Total assets
Liabilities and shareholders’ equity
Trust preferred securities
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
As of December 31,
2013
2012
$ 4,208
414,212
7
1,659
$ 420,086
$ 46,394
1,770
48,164
371,922
$ 420,086
3,335
399,688
152
1,637
404,812
46,394
2,301
48,695
356,117
404,812
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Year Ended December 31,
2013
2012
2011
Dividends from wholly-owned subsidiaries
Earnings (losses) of wholly-owned subsidiaries, net of dividends
Interest expense
All other income and expenses, net
Net income (loss)
Preferred stock dividends and accretion
$ 10,500
12,102
(1,025)
(878)
20,699
(895)
10,000
(31,493)
(1,111)
(802)
(23,406)
(2,809)
9,500
5,862
(1,041)
(679)
13,642
(6,166)
Net income (loss) available to common shareholders
$ 19,804
(26,215)
7,476
152
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
2013
Year Ended December 31,
2012
2011
Operating Activities:
Net income (loss)
Equity in undistributed (earnings) losses of subsidiaries
Dividend from subsidiaries in excess of earnings
Decrease in other assets
Increase (decrease) in other liabilities
Total – operating activities
Investing Activities:
Downstream cash investment in subsidiary
Cash proceeds from dissolution of subsidiary
Total – investing activities
Financing Activities:
Payment of preferred and common cash dividends
Proceeds from issuance of preferred stock
Redemption of preferred stock
Proceeds from issuance of common stock
Repurchases of common stock
Repurchase of common stock warrants
Total - financing activities
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Note 19. Shareholders’ Equity Transactions
U.S. Treasury Capital Purchase Program
$ 20,699
(12,102)
─
─
(217)
8,380
─
─
─
(7,507)
─
─
─
─
─
(7,507)
873
3,335
$ 4,208
(23,406)
21,493
10,000
26
199
8,312
(33,850)
─
(33,850)
(8,463)
7,287
─
26,727
(2)
─
25,549
11
3,324
3,335
13,642
(5,862)
─
38
(62)
7,756
(16,250)
─
(16,250)
(8,237)
63,500
(65,000)
881
(228)
(924)
(10,008)
(18,502)
21,826
3,324
On January 9, 2009, the Company completed the sale of $65 million of Series A Preferred Stock to the United
States Treasury Department (Treasury) under the Treasury’s Capital Purchase Program. The program was
designed to attract broad participation by healthy banking institutions to help stabilize the financial system and
increase lending for the benefit of the U.S. economy.
Under the terms of the stock purchase agreement, the Treasury received (i) 65,000 shares of fixed rate
cumulative perpetual preferred stock with a liquidation value of $1,000 per share and (ii) a warrant to purchase
616,308 shares of the Company’s common stock, no par value, in exchange for $65 million. As discussed below,
the Company redeemed this preferred stock in the third quarter of 2011 and repurchased the common stock
warrant in the fourth quarter of 2011.
The Series A Preferred Stock qualified as Tier 1 capital and its terms required cumulative dividends at a rate of
5% for the first five years, and 9% thereafter.
The warrant had a 10-year term and became immediately exercisable upon its issuance, with an exercise price
equal to $15.82 per share.
153
The Company allocated the $65 million in proceeds to the preferred stock and the common stock warrant based
on their relative fair values. To determine the fair value of the preferred stock, the Company used a discounted
cash flow model that assumed redemption of the preferred stock at the end of year five. The discount rate
utilized was 13% and the estimated fair value was determined to be $36.2 million. The fair value of the common
stock warrant was estimated to be $2.8 million using the Black-Scholes option pricing model with the following
assumptions:
Expected dividend yield
Risk-free interest rate
Expected life
Expected volatility
Weighted average fair value
4.83%
2.48%
10 years
35.00%
$ 4.47
The aggregate fair value result for both the preferred stock and the common stock warrant was determined to
be $39.0 million, with 7% of this aggregate total attributable to the warrant and 93% attributable to the
preferred stock. Therefore, the $65 million issuance was allocated with $60.4 million being assigned to the
preferred stock and $4.6 million being assigned to the common stock warrant.
The $4.6 million difference between the $65 million face value of the preferred stock and the $60.4 million
allocated to it upon issuance was recorded as a discount on the preferred stock. Until the Company redeemed
the preferred stock in the third quarter of 2011 (discussed below), the $4.6 million discount was being accreted,
using the effective interest method, as a reduction in net income available to common shareholders over a five-
year period at approximately $0.8 million to $1.0 million per year.
On September 1, 2011, the Company redeemed the 65,000 shares of outstanding Series A preferred stock from
the U.S. Treasury for a redemption price of $65 million, plus unpaid dividends. The Company funded the
majority of this transaction by simultaneously issuing Series B Preferred Stock to the Treasury as part of the
Small Business Lending Fund (see below).
Due to the redemption of the preferred stock, the Company accreted the remaining discount of $2.3 million
during the third quarter of 2011, which resulted in total discount accretion for 2011 of $2.9 million. Preferred
stock discount accretion is deducted from net income in computing “Net income available to common
shareholders.”
In November 2011, the Company repurchased the outstanding common stock warrant from the Treasury for
$1.50 per common share, or a total of $924,000.
Small Business Lending Fund
On September 1, 2011, the Company completed the sale of $63.5 million of Series B Preferred Stock to the
Secretary of the Treasury under the Small Business Lending Fund (SBLF). The fund was established under the
Small Business Jobs Act of 2010 that was created to encourage lending to small businesses by providing capital
to qualified community banks with assets less than $10 billion.
Under the terms of the stock purchase agreement, the Treasury received 63,500 shares of non-cumulative
perpetual preferred stock with a liquidation value of $1,000 per share, in exchange for $63.5 million.
The Series B Preferred Stock qualifies as Tier 1 capital. The dividend rate, as a percentage of the liquidation
amount, fluctuated on a quarterly basis during the first 10 quarters during which the Series B Preferred Stock
was outstanding, based upon changes in the level of “Qualified Small Business Lending” or “QSBL”. For the first
nine quarters after issuance, the dividend rate could range from one percent (1%) to five percent (5%) per
annum based upon the increase in QSBL as compared to the baseline. For the tenth calendar quarter through
four and one half years after issuance, the dividend rate will be fixed at between one percent (1%) and seven
154
percent (7%) based upon the level of QSBL compared to the baseline. After four and one half years from the
issuance, the dividend rate will increase to nine percent (9%). For quarters subsequent to the issuance in 2011,
the Company has been able to continually increase its level of small business level and as a result, the dividend
rate has steadily decreased from 5.0% in 2011 and the first half of 2012 to 1.0% throughout most of 2013. The
Company expects its dividend rate to remain at an annualized rate of 1.0% until 2016, unless the Series B
Preferred Stock is redeemed at an earlier date. Subject to regulatory approval, the Company is generally
permitted to redeem the Series B Preferred Shares at par plus unpaid dividends
There was no discount recorded related to the SBLF preferred stock (because no warrants were issued in
connection with this preferred stock issuance), and therefore there will be no future amounts recorded for
preferred stock discount accretion.
For the twelve months ended December 31, 2013 and 2012, the Company accrued approximately $662,000 and
$2,751,000, respectively, in preferred dividend payments for the Series B Preferred Stock. This amount is
deducted from net income in computing “Net income available to common shareholders.”
Stock Issuance
On December 21, 2012, the Company issued 2,656,294 shares of its common stock and 728,706 shares of the
Company’s Series C Preferred Stock to certain accredited investors, each at the price of $10.00 per share,
pursuant to a private placement transaction. Net proceeds from this sale of common and preferred stock were
$33.8 million and were used to strengthen and remove risk from the Company’s balance sheet in anticipation of
a planned disposition of certain higher-risk loans and write-down of foreclosed real estate.
The Series C Preferred Stock qualifies as Tier 1 capital and is Convertible Perpetual Preferred Stock, with
dividend rights equal to the Company’s Common Stock. Each share of Series C Preferred Stock will automatically
convert into one share of Common Stock on the date the holder of Series C Preferred Stock transfers any shares
of Series C Preferred Stock to a non-affiliate of the holder in certain permissible transfers. The Series C Preferred
Stock is non-voting, except in limited circumstances.
The Series C Preferred Stock pays a dividend per share equal to that of the Company’s common stock. During
2013 and 2012, the Company accrued approximately $233,000 and $58,000, respectively, in preferred dividend
payments for the Series C Preferred Stock.
155
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
First Bancorp
Southern Pines, North Carolina
We have audited the accompanying consolidated balance sheets of First Bancorp and subsidiaries (the
“Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income (loss),
comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of First Bancorp and subsidiaries as of December 31, 2013 and 2012, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2013, in
conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 1992, and our report dated March 17, 2014 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Elliott Davis, PLLC
Charlotte, North Carolina
March 17, 2014
156
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
First Bancorp
Southern Pines, North Carolina
We have audited the internal control over financial reporting of First Bancorp and subsidiaries (the “Company”) as of
December 31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 1992 (the “COSO criteria”). 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 Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). 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, 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.
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 (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (b) 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 (c) 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.
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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2013, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of the Company as of December 31, 2013 and 2012 and the related consolidated
statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2013 and our report dated March 17, 2014 expressed an unqualified opinion thereon.
Charlotte, North Carolina
March 17, 2014
/s/ Elliott Davis, PLLC
157
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with
the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, which are our controls and other procedures that are
designed to ensure that information required to be disclosed in our periodic reports with the SEC is recorded,
processed, summarized and reported within the required time periods. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be
disclosed is communicated to our management to allow timely decisions regarding required disclosure. Based
on the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls
and procedures are effective in allowing timely decisions regarding disclosure to be made about material
information required to be included in our periodic reports with the SEC.
Management’s Report On Internal Control Over Financial Reporting
Management of First Bancorp and its subsidiaries (the “Company”) is responsible for establishing and
maintaining effective internal control over financial reporting. 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 U.S. generally accepted accounting
principles.
Under the supervision and with the participation of management, including the principal executive officer and
principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (1992). Based on this evaluation under the
framework in Internal Control – Integrated Framework, management of the Company has concluded the
Company maintained effective internal control over financial reporting, as such term is defined in Securities
Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2013.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control over financial reporting is a process that involves
human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting can also be circumvented by collusion or improper
management override. Because of such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of the consolidated financial
statements and other financial information contained in this report. The accompanying consolidated financial
statements were prepared in conformity with U.S. generally accepted accounting principles and include, as
necessary, best estimates and judgments by management.
158
Elliott Davis, PLLC, an independent, registered public accounting firm, has audited the Company’s consolidated
financial statements as of and for the year ended December 31, 2013, and audited the Company’s effectiveness
of internal control over financial reporting as of December 31, 2013, as stated in their report, which is included
in Item 8 hereof.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during, or subsequent to,
the fourth quarter of 2013 that were reasonably likely to materially affect our internal control over financial
reporting.
Item 9B. Other Information
On March 11, 2014, pursuant to the recommendation of the Compensation Committee, the Board of Directors
of the Company adopted an amendment to the Company’s Senior Management Supplemental Executive
Retirement Plan (the “SERP”) changing the normal retirement age under such SERP. The amendment provides
that the normal retirement age for purposes of receiving benefits available under the SERP shall be a
participant’s 65th birthday, except that effective March 31, 2014, a participant who, as of any determination date
following March 31, 2014, is an executive officer of the Company and has earned at least 40 years of service
with the Company, shall be automatically deemed to have met the normal retirement age requirements as of
the date such conditions are attained. The amendment is attached as Exhibit 10.aa.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Incorporated herein by reference is the information under the captions “Directors, Nominees and Executive
Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance Policies and
Practices” and “Board Committees, Attendance and Compensation” from the Company’s definitive proxy
statement to be filed pursuant to Regulation 14A.
Item 11. Executive Compensation
Incorporated herein by reference is the information under the captions “Executive Compensation” and “Board
Committees, Attendance and Compensation” from the Company’s definitive proxy statement to be filed
pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Incorporated herein by reference is the information under the captions “Principal Holders of First Bancorp
Voting Securities” and “Directors, Nominees and Executive Officers” from the Company’s definitive proxy
statement to be filed pursuant to Regulation 14A.
See also “Additional Information Regarding the Registrant’s Equity Compensation Plans” in Item 5 of this report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated herein by reference is the information under the caption “Certain Transactions” and “Corporate
Governance Policies and Practices” from the Company’s definitive proxy statement to be filed pursuant to
Regulation 14A.
159
Item 14. Principal Accountant Fees and Services
Incorporated herein by reference is the information under the caption “Audit Committee Report” from the
Company’s definitive proxy statement to be filed pursuant to Regulation 14A.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1.
Financial Statements - See Item 8 and the Cross Reference Index on page 3 for information concerning
the Company’s consolidated financial statements and report of independent auditors.
2.
Financial Statement Schedules - not applicable
3.
Exhibits
The following exhibits are filed with this report or, as noted, are incorporated by reference.
Management contracts, compensatory plans and arrangements are marked with an asterisk (*).
3.a
Articles of Incorporation of the Company and amendments thereto were filed as Exhibits 3.a.i through
3.a.v to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and
are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed
as Exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and are
incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as
Exhibit 3.1.b to the Company’s Registration Statement on Form S-3D filed on June 29, 2010, and are
incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and are
incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and are
incorporated herein by reference.
3.b
Amended and Restated Bylaws of the Company were filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K filed on November 23, 2009, and are incorporated herein by reference.
4.a
Form of Common Stock Certificate was filed as Exhibit 4 to the Company’s Quarterly Report on Form 10-
Q for the quarter ended June 30, 1999, and is incorporated herein by reference.
4.b Form of Certificate for Series B Preferred Stock was filed as Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed on September 6, 2011, and is incorporated herein by reference.
4.c
Form of Certificate for Series C Preferred Stock was filed as Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed on December 26, 2012, and is incorporated herein by reference.
10
Material Contracts
10.a
First Bancorp Annual Incentive Plan was filed as Exhibit 10(a) to the Form 8-K filed on February 2, 2007
and is incorporated herein by reference. (*)
10.b
Indemnification Agreement between the Company and its Directors and Officers was filed as Exhibit
10(t) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by
reference.
160
10.c
First Bancorp Senior Management Supplemental Executive Retirement Plan was filed as Exhibit 10.1 to
the Company's Form 8-K filed on December 22, 2006, and is incorporated herein by reference. (*)
10.d
First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(f) to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, and is incorporated herein by reference. (*)
10.e
First Bancorp 2004 Stock Option Plan was filed as Exhibit B to the Registrant's Form Def 14A filed on
March 30, 2004 and is incorporated herein by reference. (*)
10.f
First Bancorp 2007 Equity Plan was filed as Appendix B to the Registrant's Form Def 14A filed on March
27, 2007 and is incorporated herein by reference. (*)
10.g
Employment Agreement between the Company and Anna G. Hollers dated August 17, 1998 was filed as
Exhibit 10(m) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference (Commission File Number 000-15572). (*)
10.h
10.i
10.j
Employment Agreement between the Company and Eric P. Credle dated August 17, 1998 was filed as
Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and
is incorporated herein by reference (Commission File Number 333-71431).(*)
Employment Agreement between the Company and John F. Burns dated September 14, 2000 was filed
as Exhibit 10.w to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and is incorporated herein by reference. (*)
Employment Agreement between the Company and R. Walton Brown dated January 15, 2003 was filed
as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
and is incorporated herein by reference. (*)
10.k Amendment to the employment agreement between the Company and R. Walton Brown dated March
8, 2005 was filed as Exhibit 10.n to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 and is incorporated herein by reference. (*)
10.l
First Bancorp Long Term Care Insurance Plan was filed as Exhibit 10(o) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004, and is incorporated by reference. (*)
10.m Advances and Security Agreement with the Federal Home Loan Bank of Atlanta dated February 15, 2005
was attached as Exhibit 99(a) to the Form 8-K filed on February 22, 2005, and is incorporated herein by
reference.
10.n Form of Stock Option and Performance Unit Award Agreement was filed as Exhibit 10 to the Company’s
Form 8-K filed on June 23, 2008 and is incorporated herein by reference. (*)
10.o
Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. (*)
10.p
Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of
Cooperative Bank, Federal Deposit Insurance Corporation and First Bank dated as of June 19, 2009 was
filed as Exhibit 10.1 to the Company’s Form 8-K filed on June 24, 2009, and is incorporated herein by
reference.
161
10.q
10.r
10.s
10.t
10.u
10.v
10.w
10.x
Form of Restricted Stock Award Agreement under the First Bancorp 2007 Equity Plan was filed as Exhibit
10.u to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 and is
incorporated herein by reference. (*)
First Bancorp Employees’ Pension Plan, including amendments, was filed as Exhibit 10.v to the
Company's Annual Report on Form 10-K for the year ended December 31, 2009 and is incorporated
herein by reference. (*)
Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of The
Bank of Asheville, Federal Deposit Insurance Corporation and First Bank, dated as of January 21, 2011,
was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2011, and is
incorporated herein by reference.
Securities Purchase Agreement, dated September 1, 2011, between First Bancorp and the Secretary of
the Treasury, with respect to the issuance and sale of Series B Preferred Stock, was filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on September 6, 2011, and is incorporated herein by
reference.
Repurchase Letter Agreement, dated September 1, 2011, between First Bancorp and the United States
Department of the Treasury, with respect to the repurchase and redemption of the Series A Preferred
Stock, was filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 6, 2011
and is incorporated herein by reference.
Employment Agreement between the Company and Richard H. Moore dated August 28, 2012 was filed
as Exhibit 10.a to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2012 and is incorporated herein by reference. (*)
Purchase and Assumption Agreement among Four Oaks Bank & Trust Company and Four Oaks Fincorp,
Inc. and First Bank, dated as of September 26, 2012 was filed as Exhibit 10.b to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2012 and is incorporated herein by
reference.
Securities Purchase Agreement, dated December 21, 2012, between First Bancorp and Purchasers, with
respect to the issuance and sale of common stock and the issuance and sale of Series C Preferred Stock,
was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012 and
is incorporated herein by reference.
10.y
Loan Purchase Agreement By and Between First Bank and Violet Portfolio, LLC dated as of January 23,
2013 was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 24, 2013,
and is incorporated herein by reference.
10.z
Employment Agreement between the Company and Michael G. Mayer dated March 10, 2014. (*)
10.aa Amendment to the First Bancorp Senior Management Supplemental Executive Retirement Plan dated
12
21
March 11, 2014. (*)
Computation of Ratio of Earnings to Fixed Charges.
List of Subsidiaries of Registrant was filed as Exhibit 21 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2010 and is incorporated herein by reference.
162
23
Consent of Independent Registered Public Accounting Firm, Elliott Davis, PLLC
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-
Oxley Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-
Oxley Act of 2002.
32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2
101
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
The following financial information from the Company’s Annual Report on Form 10-K for the year ended
December 31, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of
Comprehensive Income (Loss), (iv) the Consolidated Statements of Shareholders’ Equity, (v) the
Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. (1)
______________
(b)
Exhibits - see (a)(3) above
(c)
No financial statement schedules are filed herewith.
Copies of exhibits are available upon written request to: First Bancorp, Anna G. Hollers, Executive Vice
President, P.O. Box 508, Troy, NC 27371
______________________________________________________________________________________
(1) As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of
Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to liability under those sections.
163
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, FIRST BANCORP has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Southern Pines, and State of North Carolina, on the 17th day of March 2014.
SIGNATURES
First Bancorp
By: /s/ Richard H. Moore
Richard H. Moore
President, Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the
Company by the following persons and in the capacities and on the dates indicated.
Executive Officers
/s/ Richard H. Moore
Richard H. Moore
President, Chief Executive Officer and Treasurer
/s/ Anna G. Hollers
Anna G. Hollers
Executive Vice President
Chief Operating Officer / Secretary
March 17, 2014
Board of Directors
/s/ Mary Clara Capel
Mary Clara Capel
Chairman of the Board
Director
March 17, 2014
/s/ Daniel T. Blue, Jr.
Daniel T. Blue, Jr.
Director
March 17, 2014
/s/ Jack D. Briggs
Jack D. Briggs
Director
March 17, 2014
/s/ David L. Burns
David L. Burns
Director
March 17, 2014
s/ James C. Crawford, III
James C. Crawford, III
Director
March 17, 2014
164
/s/ Eric P. Credle
Eric P. Credle
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
March 17, 2014
/s/ George R. Perkins, Jr.
George R. Perkins, Jr.
Director
March 17, 2014
/s/ Thomas F. Phillips
Thomas F. Phillips
Director
March 17, 2014
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
March 17, 2014
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
March 17, 2014
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
March 17, 2014
/s/ James G. Hudson, Jr.
James G. Hudson, Jr.
Director
March 17, 2014
/s/ Richard H. Moore
Richard H. Moore
Director
March 17, 2014
/s/ John C. Willis
John C. Willis
Director
March 17, 2014
165
S H A R E H O L D E R I N F O R M A T I O N
C O R P O R AT E O F F I C E
S H A R E H O L D E R S E R V I C E S
300 SW Broad Street
Southern Pines, NC 28387
Customer Service: 866-792-4357
www.LocalFirstBank.com
I N D E P E N D E N T A U D I T O R S
Elliott Davis, PLLC
Charlotte, NC
C O R P O R AT E C O U N S E L
Robinson, Bradshaw & Hinson, PA
Charlotte, NC
T R A N S F E R A G E N T
Registrar & Transfer Co., Inc.
10 Commerce Drive
Cranford, NJ 07016-3572
800-368-5948
www.rtco.com
S H A R E H O L D E R S ’ M E E T I N G
The Annual Meeting will be held on May 8, 2014 at
3:00 PM at the James H. Garner Conference Center in
Troy, North Carolina.
C O M M O N S T O C K I N F O R M AT I O N
First Bancorp’s common stock is traded on the
NASDAQ Global Select Market under the symbol
FBNC. There were 19,679,659 shares outstanding as of
December 31, 2013 with 2,400 shareholders of record and
approximately 3,200 additional shareholders that held
their shares in “street name.”
D I R E C T D E P O S I T
With direct deposit, shareholders may enjoy the
convenience of having dividends directly deposited into
their checking or savings account. There is no cost for
this service. Shareholders may obtain further information
about direct deposit by calling us toll-free at
866-792-4357 and asking for Shareholder Services.
First Bancorp offers online access to your First Bancorp
Stock Account, including your account balance, certificate
history, dividend reinvestment plan information and more.
At www.LocalFirstBank.com, choose About Us, then click
on Investor Relations to open the Corporate Profile page.
Then select “Shareholder access to Transfer Agent” from
the sidebar.
First Bancorp offers online access to all financial
publications, including annual reports and quarterly
reports filed with the Securities and Exchange
Commission. At www.LocalFirstBank.com, choose About
Us, then click on Investor Relations to open the Corporate
Profile page. SEC Filings are accessible from the left
sidebar menu.
For more information or shareholder assistance,
call us toll-free at 866-792-4357 and ask for Shareholder
Services.
C O P I E S O F F O R M 1 0 - K
Copies of the First Bancorp Annual Report on Form 10-K
filed with the Securities and Exchange Commission may
be obtained at no cost by contacting:
Investor Relations
Elizabeth Bostian
300 SW Broad Street
Southern Pines, NC 28387
866-792-4357
(Ask for Shareholder Services)
or
by visiting our corporate website at
www.LocalFirstBank.com
D I V I D E N D R E I N V E S T M E N T
Registered holders of First Bancorp stock are eligible to
participate in the Company’s Dividend Reinvestment Plan,
a convenient and economical way to purchase additional
shares of First Bancorp common stock without payment
of brokerage commissions. For an information folder and
authorization form, or to receive additional information on
this plan, contact:
Investor Relations
Elizabeth Bostian
866-792-4357
(Ask for Shareholder Services)
or
Registrar & Transfer Co., Inc.
Dividend Reinvestment Section
10 Commerce Drive
Cranford, NJ 07016-3572
800-368-5948 or info@rtco.com
F I R S T B A N C O R P
3 0 0 SW B R O A D S T R E E T
S O U T H E R N PI N E S , N C 2 8 3 8 7
L O C A L F I R S T B A N K :
L O C A L F I R S T B A N K . C O M